In this article, we analyse the key takeaways from SEBI’s order dated June 19, 2024 in relation to Burman Group’s open offer for Religare Enterprises Limited (“REL”), which sets out certain key principles in relation to the role of a target company in an open offer.

In September, 2023, the Burman group (i.e. public shareholders of REL) (“Acquirer”) acquired more than 5% shares of REL on the floor of the stock exchanges, which triggered an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SEBI SAST Regulations”).

Completion of the underlying transaction and the open offer was subject to approval of regulatory authorities (i.e. RBI, IRDAI and SEBI) for change in control and management of REL. The Acquirer submitted applications to the regulatory authorities to obtain the approvals.

As part of the open offer process, SEBI obtained inputs from the regulatory authorities on the status of regulatory approvals. SEBI then advised the Acquirer that REL should submit the applications to the regulatory authorities, instead of the Acquirer (as the target company was required to submit the applications under the relevant regulations). However, REL’s board refused to submit the regulatory applications to SEBI inter alia on the grounds that:

• in their view, the Acquirer was not ‘fit and proper’ to acquire control of REL; and
• SEBI’s direction was without jurisdiction and conflicted with the right of the board of directors of REL and the relevant regulatory authorities to exercise their powers.

Thereafter, SEBI issued an interim order cum show cause notice dated June 19, 2024 (“SEBI Order”) directing REL and its board to: (a) submit the applications to the regulatory authorities within certain prescribed timelines; and (b) facilitate the Acquirer with the open offer and constitute a committee of independent directors for the open offer as per Regulation 26(6) of the SEBI SAST Regulations, if not already constituted.

Pursuant to the SEBI Order, SEBI also issued a show cause notice to REL and its directors for violation of provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”) and the SEBI SAST Regulations.

The key takeaways from the SEBI Order are as follows:

• The right of public shareholders of the target company to tender shares in an open offer is sacrosanct and should not be interfered with, especially in a hostile takeover.
• The target company and its board of directors have an obligation to ensure that the objects of the SEBI SAST Regulations are complied with by all the parties.
• The absence of an explicit provision under the SEBI SAST Regulations cannot be said to confer a discretionary power on the target company / its management to submit an application to regulatory authorities.
• The target company can only place the recommendation of the Committee of Independent Directors before the shareholders but cannot take decisions on behalf of the shareholders.
• Any act or omision on part of the target company to impede the acquirer’s obligation to complete the open offer and / or preventing the shareholders from deciding their rights to tender their shares in an open offer goes against the spirit of SEBI LODR Regulations.
• SEBI is within its powers under the SEBI Act, 1992 in directing REL to submit the application in the interest of the shareholders. SEBI has not interfered with the jurisdiction of the regulatory authorities as the respective authorities will continue to have the discretion to accept or reject the application.

Under the SEBI SAST Regulations, the target company and its board of directors have a limited role to play in an open offer.

The key obligations of the target company and the board of directors under the SEBI SAST Regulations inter alia are to: (i) conduct the business of the target company in the ordinary course of business consistent with past practice, (ii) obtain shareholder approval for matters set out in Regulation 26(2) of the SEBI SAST Regulations; (iii) constitute a committee of independent directors to provide recommendations on the open offer; and (iv) provide information and co-operation to acquirers making competing offers.

However, as per the SEBI Order, the target company and its directors have an implicit obligation to ensure that all parties comply with the objects of the SEBI SAST Regulations, and the right of public shareholders to tender their shares in the open offer is protected.

The SEBI Order is especially relevant in case of hostile takeovers where the existing management may not be in favour of facilitating the open offer process. It also aligns with the principle of free transferability of shares of a listed company, i.e. the board or management of a listed entity do not have a discretionary right to restrict any person from acquiring shares of a listed company or hinder the exit of public shareholders.

However, in the absence of any specific provisions in the SEBI SAST Regulations imposing such obligations, the scope and extent of the target company’s responsibility in facilitating an open offer remains unclear. Listed entities and its directors could potentially be held liable for not fulfilling their obligations under the SEBI LODR Regulations and/ or under SEBI SAST Regulations for not co-operating fully with the acquirer in the open offer process. Accordingly, it will now be increasingly important for target company boards to have independent legal advice to understand their role and responsibilities in case of open offers, especially where a hostile open offer or a competing open offer is involved.