Takeover Code Zoom Lens: R Systems International

Case Detail:                      Takeover Open Offer of R Systems International Limited
Target Company:              R Systems International Limited
Acquirer:                           Mr. Bhavook Tripathi
Industry:                            Software Development
Merchant Banker:            KJMC Global Market (India) Limited

Target Company:
R Systems International Limited was incorporated on May 14, 1993 as a private limited company under the name R Systems (India) Private Limited and on April 13, 2000, its name changed to R Systems (India) Limited pursuant to the conversion of the Company into public limited company. Further, w.e.f. August 7, 2000, the name of the company was further changed to its present name i.e. R Systems International Limited. The company’s primary focus is to provide full service IT solutions, software engineering services, technical support, customer care and other IT enabled services to the high technology sector, independent software vendors (ISV's), banks, financial services companies, telecom, insurance and health care sector. The equity shares of the Target Company are listed on BSE and NSE.

Acquirer:
Mr. Bhavook Tripathi (Acquirer) is engaged in the business of manufacturing ancillary auto parts through his proprietorship concern Sanshu Industries and has experience of more than 12 years in this field.

Sellers
Details not available.

Triggering Event
Prior to making Public Announcement on December 15, 2011, the Acquirer was holding 23.82% equity shares of the Target Company. The Acquirer was desirous of acquiring the additional equity shares of the Target Company from the open market, which necessitated the Open Offer in terms of Regulation 3(1) of SEBI (SAST) Regulations, 2011. Accordingly, prior to the placement of purchase order with the Stock Broker, the Acquirer has issued the Public Announcement of open offer on December 15, 2011 to the shareholders of the Target Company.
Subsequent to making Public Announcement, the Acquirer has acquired 9,24,142 equity shares from open market thereby increasing his shareholding to 31%.

Issues Involved
Whether, considering the provisions of Regulation 22(1) of SEBI (SAST) Regulations, 2011, the Acquirer can complete the acquisition made on December 15, 2011 that has triggered the Public Announcement before the expiry of the offer period.
As per Regulation 22(1) of the SEBI (SAST), Regulations 2011 “The acquirer shall not complete the acquisition of shares or voting rights in, or control over, the target company, whether by way of subscription to shares or a purchase of shares attracting the obligation to make an open offer for acquiring shares, until the expiry of the offer period”.
As per Regulation 22(2) of the SEBI (SAST), Regulations 2011 “Notwithstanding anything contained in sub-regulation (1), subject to the acquirer depositing in the escrow account under regulation 17, cash of an amount equal to one hundred per cent of the consideration payable under the open offer assuming full acceptance of the open offer, the parties to such agreement may after the expiry of twenty-one working days from the date of detailed public statement, act upon the agreement and the acquirer may complete the acquisition of shares or voting rights in, or control over the target company as contemplated.”

FAQs on SEBI (SAST) Regulations, 2011 as Notified by SEBI
Regulation 22(1) of Takeover Regulations 2011 specifically provides that the acquirer shall not complete the acquisition of shares and voting rights in, or control over, the target company, whether by way of subscription of shares or a purchase of shares attracting the obligation to make an open offer for acquiring shares, until the expiry of the offer period.
In cases where acquisitions, resulting from any agreement triggering open offer are sought to be completed through transactions such as bulk/ block deals, settled on a recognized stock exchange, the same would get completed/ settled on T+2 basis i.e. within 2 days after the date of such transaction. Therefore such acquisitions, if done, will not be in line with the provisions of Regulation 22(1) since the same would result in completion of the triggering acquisition before the expiry of the offer period. Hence the acquisition resulting from any agreement attracting the obligation to make an open offer cannot be executed through transactions such as block/ bulk deal.
Regulation 22(1) prohibits the acquirer from completing the acquisition that has triggered the Open Offer until the expiry of offer period except where the acquirer has deposited 100% consideration payable under the Open Offer in the Escrow Account, then in that event the acquisition contemplated under the agreement may be completed after 21 working days from the date of detailed public statement.
Thus, the question that arises for consideration is whether Regulation 22(1) also covers within its ambit, the acquisition made through market purchases.

Request for Interpretative Letter under (Informal Guidance) Scheme, 2003
Vide letter dated February 24, 2012, the Target Company has requested for Informal guidance on the following queries:

• Confirmation of the understanding that Regulation 22(1) of SEBI (SAST) Regulations, 2011 prohibits the completion of any acquisition (whether under any agreement or otherwise) of share/voting rights/control by an Acquirer for which an open offer is required to be made under SEBI (SAST) Regulation, 2011, prior to the consideration having been received by the shareholders who have tendered their shares under the open offer.
• Confirmation of the understanding that Regulation 22(2) of SEBI (SAST) Regulations, 2011 merely provides for an exception to the Regulation 22(1) by permitting the acquirer to complete the acquisition contemplated under such agreement after 21 days from the date of DPS, subject to the deposit of 100% of the consideration payable under the open offer assuming full acceptance.

Views of SEBI on Queries raised by Target Company
Regulation 13 stipulates that the PA mandated under Regulation 3 and 4 shall be made on the date of agreeing to acquire shares or voting rights or control over the Target Company. Further, Regulation 13(2)(a) specifies that in case of market purchase of shares which would lead to increase in voting rights of Acquirer beyond the stipulated threshold, the public announcement has to be made prior to placing the order with the stock broker.
Further as regards Regulation 22(1) is concerned, it relates to an acquisition pursuant to an agreement and is not applicable in cases of transaction involving market purchases.
Furthermore, Regulation 22(2) provides for an exception to Regulation 22(1) by permitting the acquirer to complete the acquisition contemplated in the agreement which triggered the open offer subject to the fulfillment of conditions stated therein.

Observation of SEBI on Draft Letter of Offer submitted by Acquirer
On December 29, 2011, the acquirer has submitted Draft Letter of Offer with SEBI on which SEBI has issued their observation on July 25, 2012 and alleged certain violations by acquirer and issues directions that includes:

• Ensure compliance with regulation 22 (2) of the SEBI (SAST) Regulations, 2011 by putting 100% of consideration in cash in the escrow account.

• Calculate the offer price as well as interest taking July 29, 2011 as the trigger date for the open offer.

Appeal before SAT by Acquirer
The Acquirer being aggrieved, by the observation of SEBI has filed an appeal before Securities Appellated Tribunal (SAT) seeking to set aside the observation/direction contained in the SEBI observation letter. This Open offer process would be on hold till the time appeal is dispossed off by Honorable SAT.

Offer Details
The public announcement of open offer was made by the Acquirer to the shareholders of the Target Company to acquire 33,45,242 equity shares representing 26% of the paid up capital and voting capital of the Target Company at a price of Rs.122 per equity share payable in cash, which later increased to Rs. 150.05 per equity share pursuant to the acquisition of further 10 equity shares through market purchase on March 9, 2012 at a price of Rs. 150.05 per equity share.

Distinguishing Feature:
In an Informal Guidance issued on the queries raised by the Target Company, SEBI has clarified that Regulation 22(1) is applicable to an acquisition pursuant to an agreement and is not applicable in cases of transaction involving market purchases and accordingly, Regulation 22(2) that provides for an exception to Regulation 22(1) by permitting the acquirer to complete the acquisition contemplated in the agreement which triggered the open offer is also not applicable in case of acquisition pursuant to an agreement.
However, in the observation letter, SEBI has required the Acquirer to deposit 100% of the consideration payable under the offer in the Escrow Account even though the acquisition that has triggered the offer was made through the market purchase as given in the draft letter of offer submitted with SEBI.

Queries for Discussion

1. Whether considering the fact that the Acquirer has made the acquisition through market purchase, it is justifiable to require the acquirer to deposit 100% consideration in the Escrow Account?
2. What would be the impact of above-mentioned SEBI Informal Guidance with respect to the applicability of Regulation 22(1) on the forthcoming Takeover Open Offers?
3. Whether the action of the Acquirer relating to filing of an appeal in SAT is reasonable?

Looking Ahead:
Now the eyes of the corporate world would be on the decision of Hon’ble SAT i.e. whether the Acquirer will succeed in his appeal or will have to comply with the SEBI observations.

Prepared by: Ms. Ruchi Hans

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