sebi: RBI appeals to Sebi to request an open offer exemption for ARC transactions
According to the current takeover code, “programmed commercial banks” and “public financial institutions” are exempt from making an open offer to minority investors if they end up acquiring shares in a company by invoking a pledge. The central bank wants the same provision to be extended to ARCs, which buy out bad loans.
Emails sent to Sebi and RBI went unanswered.
“Sebi has sought the advice of his advisory committee on the matter,” said one person quoted above. “Essentially, CRAs will need to be included in the definition of public financial institutions if they are to avail themselves of such an exemption.”
ARCs acquire loans qualified as non-performing assets from banks.
Banks sell bad loans to an ARC for a lower price and reduce losses. In this process, any collateral that has been pledged in favor of the bank will be transferred to the CRA. If the collateral exceeds 25% of the company’s total equity, such pledge invocation will require the CRA to make an open offer to minority investors.
Sebi’s OPA code is triggered when an entity acquires more than 25% of the capital of a listed company. At this point, the acquirer must declare an open offer and purchase at least 26% additional shares from public shareholders.
“Open offers increase costs significantly, especially in the case of bad debts, because the risk of business failure is significantly higher,” said another person cited above. “In addition, the open offer implies that the ARC has taken control of the business while the ARCs are just strategic investors who do not get involved in the management of the business.”
Until 2019, the open offer exemption was available to all categories of investors undertaking debt restructuring, said a senior lawyer, a member of one of Sebi’s advisory boards.
“In 2019, Sebi changed the rules because RBI dissolved all debt restructuring programs and instead all liquidation was done through the Insolvency and Bankruptcy Code (IBC) “said the lawyer. “Sebi aligned its rules with the RBI in removing open offer exemptions from all debt restructurings.”
Market participants say the requirement for an open bid also slows down the resolution process, as many minority shareholders would see it as their last chance to profit from the shares of a company that is very likely to be liquidated.
In 2018, the RBI revised the bad debt resolution standards. Until then, banks were allowed to restructure the debts of companies by converting their debt into equity. In February 2018, the central bank phased out debt restructuring programs and required banks to return all bad loans to the IBC process after a specific time frame. The RBI circular prompted Sebi to revise its rules, market participants said.
RBI is considering easier rules for CRAs. Earlier this month, a panel of experts led by former RBI executive director Sudarshan Sen submitted its report to the central bank aimed at streamlining the regulation of these financial institutions.