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The Curious Case Of Fresenius Kabi!

Published on Sat, Jun 22,2013 | 14:50, Updated at Mon, Jun 24 at 16:48Source : CNBC-TV18 |   Watch Video :

Last year, in May, the foreign parent of Fresenius Kabi, an Indian oncology drugs company, announced its intention to sell up to 15% promoter stake and reduce its shareholding to 75% via one or more OFS. This in order to meet the 25% minimum public shareholding norm. Subsequently, in October, the promoter’s stake was reduced to 81%, via a 9% OFS to handful of foreign institutional investors. But 6 months later, Fresenius Kabi’s promoter changed its mind! The company informed the exchanges that the promoter had now decided to delist the company to acquire all 19% of the public shareholding via a voluntary delisting offer. the promoter set a floor price of Rs130 and the Fresenius Kabi India board approved the delisting offer. On May 25th, the company informed the exchanges that it had received via postal ballot the requisite shareholder approval for the delisting.

10 days later the delisting plan was stymied! On June 4th, SEBI, in an interim order, imposed sanctions on over a hundred listed companies that had not complied with the 25% minimum public shareholding norm. Fresenius Kabi was on that list – and as a consequence its promoters are now barred from buying or selling any shares till SEBI’s final order is out. That puts paid to the delisting process, at least for now. And so earlier this week Fresenius Kabi approached the Securities Appellate Tribunal seeking relief.

May 2012
Foreign parent(Fresenius Kabi (Singapore) Pte) to sell up to 15%
Via one or more OFS
To reduce stake to 75%
And meet 25% Minimum Public Shareholding norm

October 2012
Foreign parent sells 9% via OFS at Rs 80/share
To a few FIIs
Foreign parent stake down to 81%

April 2013
Foreign parent decides to delist Indian company
To acquire all 19% public shareholding
Via voluntary delisting offer at Rs 130/share

June, 2013
SEBI interim order imposes sanctions
On companies with less than 25% public shareholding
Bars promoters & directors from buying/selling company shares
Interim order applies to Fresenius Kabi

To talk about this very interesting case and one that has become rather controversial, I have with me corporate lawyer Vyapak Desai and SES Founder JN Gupta.

Doshi: Is there anything in the or anywhere in Securities and Exchange Board of India (SEBI) regulations that prohibits a company from changing its mind?

Desai: We need to break this question into two. One is whether the order will come in the way for doing a delisting and two, whether SEBI can impose any restriction for delisting. Now if you see the order it says you cannot buy or sell or the promoters cannot buy or sell the securities except for the purpose of complying with the Minimum Public Shareholding (MPS) norms.

Now at the end of the day what is the objective? Either you comply with MPS or you delist. So, so long as the company has an intention to one way or the other comply with the listing agreement, which requires you to either comply with MPS or you don’t get listed on the stock exchange- I don’t see why Securities Appellate Tribunal (SAT) should not allow the company to buy or sell shares or the promoters to buy or sell shares, so long as they are doing it only for the purpose or the limited purpose of complying with the listing agreement. Now whether they have changed their mind or whether offer for sale (OFS) was done for malicious or extraneous reasons, the remedy lies somewhere else and not restricting a company to do what a corporate law or SEBI regulations would allow that company to do so long they are following the delisting regulations.

Doshi: Do you agree with that because your report at SES has raised the question that was the OFS done not to meet the public shareholding guidelines, but instead to facilitate the delisting?

SES Report
Company may be deemed to have been ineligible for OFS route if it had no intention of increasing public holding to minimum 25%
Was OFS planned to help the proposed delisting offer?

Gupta: Again, the question and the answer will be in different parts. The first, I agree with him that the compliance with the listing agreement will be either by reducing the promoter’s shareholding or going for delisting, but then when you go for delisting you don’t have to go for the delisting through the other thing; you have to go through the delisting rules.
Doshi: So, they are doing that?

Gupta: That is what I am saying. So you are doing this. Now there is something known as public information and I have given an information to the public, somewhere in October or somewhere in May 2012, that I am planning to go for the MPS complying with the minimum public shareholders (interrupted…)

Doshi: I changed my mind, I did that OFS, but thereafter there were six months and I changed my mind in those six months.

Gupta: I entirely agree, the right is there with every individual to change the mind, but when you change the mind you have also to take into account the step that you have already taken for that and you have to retrace that step.

Doshi: You are saying or raising the issue that did Fresenius Kabi play some sort of regulatory arbitrage?

Desai: The OFS was not allowed subject to the condition that you will not do delisting. Delisting regulation says that under what circumstances you cannot do delisting.

Gupta: I am not at all questioning the delisting, I am questioning the OFS. You could have gone through the route of OFS only if you were either in the top 100 company marketcap-wise or you were doing it for MPS. Since you have gone on the OFS route for MPS and you later said that it is not for MPS, then you have to retrace your step back to the original position. So, the law very clearly provides (interrupted…).

Doshi: Why should you? You did the OFS and thereafter in the six months after the OFS you could have done a second OFS to go from 81 to 75, but instead you realised because of certain events that you wanted to delist the company and you choose to proceed on delisting?

SES Report
OFS has made delisting easier
Pre OFS company to reach 95% promoter holding
Post OFS company to reach 90.5% promoter holding 
(needs less retail participation in de-listing)

SES Report
Promoter shareholding: 90%
Minimum acceptance for de-listing: 5%
Need: 2% Institutional shareholding + 3% retail

Post OFS
Promoter shareholding: 81%
Minimum acceptance for de-listing: 9.5%
Need: 9% Institutional shareholding + 0.5% retail

Gupta: I totally agree, and then you have to look into what have been the consequences of OFS. By doing OFS the company has made its life easier for doing delisting for the simple reason, earlier they were to acquire a shareholding which would have gone up to 95 percent for delisting, now they have to go 90.5 percent. This benefit that it has got or this easiness or whatever you can name it has come to them by going via the OFS on a premise that you are going to (interrupted…).

Doshi: The question that the SES report raises is as simple as this. Did they do the OFS so that they could have a more successful or an easier path to a successful delisting because through the OFS they have now allotted shares to some three or four foreign financial institutions or foreign institutional investors (FIIs). So, when it comes to the delisting they only have to be able to meet the ability to purchase. So, the role of those FIIs becomes very important in the delisting here?

Desai: Two points here. One, making delisting easier, is that a restriction for going for delisting.

Gupta: No, not at all.

Desai: If you have done something, which you were not supposed to do, the remedy lies as to whether that step (interrupted…).

Doshi: So, you are saying it is okay, we have not established that the company did the OFS to facilitate the delisting and it would be unfair to say that…(interrupted…)

Gupta: It will never be established.

Doshi: No because the company, I am told by sources close to the company because they are not talking since the matter is sub judice, that the reason they are going to use in SAT to explain why they changed their mind was a Food and Drug Administration (FDA) inspection of one of their plants in India, which caused a production shut down and thereafter the management changed its mind saying it is best in this business if we kept this company private, hence let us decide to delist. Does it matters how valid or (interrupted…)

February 2013
US FDA inspection at company’s API plant in West Bengal
Made observations relating to GMP non-conformities
Company implementing remedial measures
Has voluntarily put production on hold

Gupta: No regulator or no court can question what is in your mind. It is a circumstance and remedy lies in restoring the original position. I am not saying because if SEBI was to do or SAT was to do, you cannot play that no this was not the intention because it becomes subjective and no law can be subjective. Here the only question is that okay you want to go for delisting, you would have to acquire total 95 percent shareholding including your promoter shareholding, go ahead with 95 percent, we have no problem and that is what is a fair solution because you had given this information to the market all the time that you are going to reduce it to 75 percent.

Suddenly it has become, no you are not going to become 75 percent then the question is that I really cannot doubt whether the intention was bad or right, I will never question. What I am saying is that the result of which that it has made life little easier and why other investor should suffer at the cost of somebody’s life become easier.

Doshi: But we won’t know till the company does not go through the delisting process and till we are not able to see the data of who tendered their shares and till we are not able to establish that the only reason that this delisting was successful is because of that FII participation, the same FIIs who purchased in the OFS, we won’t know whether the OFS is connected to the delisting and even then I am not sure anybody can strike it down?

Gupta: But if suppose if those FIIs do not participate then delisting will never happen.

Doshi: If the delisting is allowed to go through and the FIIs play a crucial role in making the delisting a success, is there anything in the law, which says that, no SEBI would have to strike down the delisting or intervene in some fashion?

Gupta: The remedy lies very simply that no law can be visualize all possible situations, but here very simple thing is that you have availed a window that is of OFS for an objective, when that objective is no longer there you got to restore to the original position. Now you cannot restore to the original position because you cannot buyback from those people and then what will be the rate. So, the law should say that what is the best possible solution, which puts you into the nearest position of original position and that would be that when you say that okay you go ahead with the delisting, but you buy as many shares as you would have earlier without OFS and that is 95 percent.

Desai: Okay, let us take that forward. If that is what SEBI tells the company to do and company fails in achieving it, what is the situation? Company is not able to meet MPS and the company is not able to delist.

Gupta: No, I don’t agree.

Doshi: Suppose they fail in the delisting after your formula then they have to go all the way back down to 75 percent?

Gupta: Let them go for second OFS of six percent.

Doshi: Despite everything that Mr. Gupta says if SAT says you used the OFS, you had a genuine intention at that point to go down to 75 percent. Thereafter, there were events that made you change your mind. You have changed your mind. You are now following the delisting process as laid down in the regulations. So, there is no reason for any one of us to intervene. Would that be a good situation or position in law?

Desai: So far as delisting is concerned I don’t think SEBI would be entitled to intervene in this situation. (interrupted…).
Doshi: So then where does the remedy lie?

Desai: If OFS was done by making wrong disclosures or if there was an insider trading at that point in time because somebody knew (interrupted…).

Doshi: But none of that is here.

Desai: So then there is no question of any non-compliance. Either there was a bad intention of doing OFS or there was no (interrupted…).

Doshi: But how do you establish bad intention when you have a change in mind?

Desai: So then why should somebody be penalized for something which is so obvious?

Gupta: No, we are penalizing or we are not saying penalize. We are saying restore the original position; that is all.

Doshi: We fundamentally disagree on this discussion.

Gupta: I would say one thing that even if those FIIs tender this in the listing then you cannot say anything is wrong with FII because they are earning 90 percent return. (interrupted…).

Doshi: Yes, of course why not?

Desai: If the company has made its life easier for delisting by doing an OFS and if SEBI has to make that difficult by making it 90 percent or 95 percent what objective we are going to achieve so far as the minimum or the small shareholders are concerned. Are we doing any good for the minority shareholders by doing this?

Gupta: Here is a very different thing because the delisting route or the delisting process is such that it is basically on demand and supply. Now demand and supply by economics determine the fair price. Now what is happening if by some method you have ensured that the supply is available to you at the price that you want then the people who are not willing to supply will be forced to supply that.

Doshi: SES report raises this one clause in the delisting regulations that refers to a use of a device or fraud to assist you in delisting and I suppose the second question then is that does the use of an OFS amounts to some sort of deception that could (interrupted…).

SES Report
Regulation 4 (5) of Delisting Regulations
(5) No promoter or other person shall
(a) employ any device, scheme or artifice to defraud any shareholder or other person; or
(b) engage in any transaction or practice that operates as a fraud or deceit upon any shareholder or other person; or
(c) engage in any act or practice that is fraudulent, deceptive or manipulative
in connection with any delisting sought or permitted or exit opportunity given or other acquisition of shares made under these regulations.

Gupta: If it can be established by any investigation or whatever method which will be almost impossible to establish, but it can be established that right from day one everybody was hand in glove, then that para will apply.

Desai: I don’t think that is an impossibility. If the point is that they knew and they sold it to FIIs for this purpose and FIIs knew that they are going to go for delisting, it is a clear case where you can investigate. So long as circumstantial evidence or the evidence is sufficient enough to say that they have done this with an ill motive, the remedy would lie whether it was an insider trading, the remedy would lie whether it is a manipulative trade practice, the remedy would lie whether that OFS was right or wrong, whether it satisfies the criteria of saying you cannot do delisting (interrupted…).

Doshi: But he is not saying don’t do delisting. He is saying go back to the pre OFS position and then do the delisting?

Gupta: I am saying go back to it because that remedy is punitive, I don’t want punitive. I am saying that go back to the status quo which was there in October 2012 and do the delisting. I have no issue, investors are happy.


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