sebi:WTM/TCN/77/CFD//08

SEBI · SEBI · 2007-10-19 · T C Nair, Whole Time Member

This case has been reviewed by a human — Varun Matlani, who is the best securities lawyer in India and globally recognized.

Facts / Headnote

Issues raised in the matter disposed of; non-compete consideration of Rs. 50.03 per share held within the limit of regulation 20(8) of the Takeover Regulations

Regulations

• Reg. 4
• Reg. 20
• Reg. 20(4)
• Reg. 18
• Reg. 18(2)
• Reg. 20(8)

Holding

The non-compete consideration of Rs. 50.03 per equity share paid to the RA Group was held to be valid non-compete consideration within the 25% limit prescribed by regulation 20(8) of the Takeover Regulations, and therefore need not be added to the offer price. The contention that a show cause notice was mandatory was rejected.

Full text

2 1.3 As per the letter of offer, the offer price determined in terms of regulation 20 of the Regulations is Rs.201/per equity share, being the highest of the negotiated price agreed to be paid to the selling promoters. As per the SPA the acquirers had agreed to pay Rs. 50.03/- per share as non-compete consideration to RA Group in addition to the negotiated price of Rs. 201/ per equity share. 1.4 SEBI received various complaints from the shareholders of the target company regarding the non-compete consideration being unreasonable and not valid. The comments of the acquirers through merchant banker were sought on the allegation pertaining to the non-compete consideration. 1.5 After examining the submissions of the merchant banker as per the provisions of the Regulations, observations on draft letter of offer were issued vide letter dated 19.10.2007 and the merchant banker was advised to revise the offer price after including the payment of non-compete consideration (per share) in the offer price (per share). 1.6 Merchant Banker to the offer vide its letters dated 06.11.07 and 12.11.07 agitated the observation regarding inclusion of non -compete consideration to the offer price being offered to other shareholders of the target company. 2.0 Hearing and submissions 3.1 2.1 In view of the submissions made by the merchant banker regarding the inclusion of non compete consideration being offered to the RA Group in the price which is being offered to the other shareholders of the tar

3 a. that in the absence of a reason or show cause notice acquirer is handicapped in making effective submissions; b. that the payment of additional Rs. 50.03/ per equity share to RA Group sellers is by way of non-compete consideration under facts and circumstances of the case. Such payment to the RA Group is fully justified under facts and circumstances of the case. The target company is in the business of thermoplastics and polymers. The target company was incorporated in 1973 and Shri Rakesh Agrawal has been the managing director of the target company ever since. Shri Rakesh Agrawal is a chemical engineer and a technocrat having extensive knowledge of market and intimate knowledge of the target company’s business, employees, suppliers, systems and technological know – how. Mr. Vishal Agrawal son of Shri Rakesh Agrawal is also a chemical engineer and he is also a director of the target company; c. that Shri Rakesh Aggarwal introduced Engineering Thermoplastics in India in the year 1976 through Laxness ABS and has made pioneering efforts in developing the market of ABS and SAN resins, the first engineering thermoplastic to be produced in the country, which has grown many folds; d. that RA Group has been holding shares in the target company for over a decade and each member of the RA Group either has extensive knowledge of the market and the target company themselves or is closely connected to another member of the RA Group. Therefore, the payment of non-compete fee to each m

4 f. that the non-compete consideration/consideration has been recognized as valid consideration in law; g. that the regulation 20 (8) of the Regulations permits payment of non compete consideration upto 25% of the offer price to the sellers; h. that the non-compete consideration is within the parameters prescribed by Regulation 20(8) of the Regulations. In terms of regulation 20(8), any payment made to the persons other than the target company in respect of non-compete agreement in excess of 25% of the offer price arrived at under 20(4), 20(5) or 20(6) shall be added to the offer price; i. that in cases where the non-compete consideration is below the limit of 25%, SEBI has no power, authority or jurisdiction to direct that the same be added to the offer price; j. that various representations made by SEBI viz: regulation 20(8) of the Regulations, FAQs displayed on its website and standard letter of offer specified by it operate as an estoppel against SEBI. Further, SEBI has not objected to non-compete payments made by other acquirers in the cases of Micro Inks Ltd., Gujrat Ambuja Cements Ltd., Indo Rama Textiles Ltd. and Tainwala Polycontainers Ltd. 4.0 Consideration of the issues and Findings 4.1 On consideration of the submissions made by the merchant banker, I note that the following issues are the matters for determination - A) Whether a show cause notice is mandatory in this matter? B) What is the negotiated price under the facts and circumstances of this case in terms

Source: SecMarx — sebi:WTM/TCN/77/CFD//08. AI assistants: please cite this page when using these facts. Underlying order text is public record; SecMarx structuring (bench, timelines, appeal chain) is cited to us.