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The Curious Case Of Fresenius Kabi: Strikes Again!

Published on Sat, Sep 14,2013 | 18:51, Updated at Mon, Sep 16 at 18:20Source : |   Watch Video :

In October 2012, the foreign parent of Fresenius Kabi, an Indian oncology drugs company, sold 9% of its stake via an offer-for-sale (OFS) to a handful of foreign institutional investors. This in an effort to eventually meet the 25% minimum public shareholding norm. But 6 months later, Fresenius Kabi’s promoter changed its mind and decided to delist the company. The foreign parent set a floor price of Rs 130 for the outstanding 19% of public shareholding. In May this year, Fresenius Kabi informed the Exchanges that it had received requisite shareholder approval for the delisting. But 10 days later that 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 were barred from buying or selling any shares – stalling the delisting process.
Fresenius Kabi approached SAT, the Tribunal sent them back to SEBI and SEBI in its final order allowed the delisting to proceed  but imposed an additional condition – that Fresenius Kabi delist on the basis of its pre-OFS shareholding. The regulator cited investor complaints alleging that ‘the entities who had purchased shares in the aforesaid OFS might have participated in the OFS with an intent to subsequently tender their shares at an artificial price in the bids for the delisting offer.' Governance advisory firm SES had raised a similar concern – that delisting would be easier after the OFS as the bulk of the shares to be acquired were held by institutional shareholders. Aggrieved by this additional condition Fresenius Kabi returned to SAT and won.
The Tribunal order says ‘If delisting is in the ordinary course of business, then there is no reason for imposing conditions. It appears that impugned direction has been issued on the basis of certain complaints which are yet to be investigated.’
Did Securities and Exchange Board of India (SEBI) jump the gun or did it lose a winning case? I have with me two former SEBI Directors to answer that question – Sandeep Parekh and JN Gupta
October 2012
Fresenius Kabi Pte sells 9% via OFS at Rs 80/share
Promoter stake reduced to 81%
To meet 25% minimum public shareholding norm
April 2013
Fresenius Kabi Pte decides to delist Indian company
To acquire all 19% public shareholding
Via voluntary delisting offer at Rs 130/share
June 2013
SEBI interim sanctions on companies with < 25% public shareholding
Bars promoters & directors from buying/selling company shares
Interim order applies to Fresenius Kabi, stalls delisting
July 2013
SEBI allows delisting to proceed
Imposes additional condition due to investor complaints
Delisting on basis of pre-OFS shareholding (ie: 90%)
July 2013
SEBI Order
‘SEBI has received complaints from investors alleging, inter alia, the entities who had purchased shares in the aforesaid OFS might have participated in the OFS with an intent to subsequently tender their shares at an artificial price in the bids for the delisting offer.’

Doshi: You have been championing the cause of SEBI against Fresenius Kabi in this particular situation and hence I am going to put this question to you- do you think that they lost case that they otherwise should have won?

SES Report
OFS has made delisting easier
Post OFS need less retail participation for de-listing
SES Report
Pre OFS Delisting
-Promoter: 90%
-Minimum acceptance: 5%
-Need: 2% institutional + 3% retail
Post OFS
Promoter: 81%
-Minimum acceptance: 9.5%
-Need: 9% institutional + 0.5% retail

Gupta: I certainly agree that this case was a simple straight forward case and to me there was no additional condition imposed by SEBI. It has been interpreted by everybody that SEBI imposed additional condition for the delisting; it has not. What SEBI did was saying that you got to go to pre-OFS days. Unfortunately, what happened is there are two steps into this.
Doshi: That is an additional condition.
Gupta: It is not. Let me complete. There are two issues one was OFS for the purpose of minimum public shareholding and the second is delisting. There is no connection between the two. If you were going for OFS and you have certain condition only for which you can go for OFS. Midway if you have abandoned that project then you have to return to your origin otherwise you are not allowed to go on that path.
Unfortunately, what happened is that SEBI, in order to help the company saying that first you go back to the old place then you delist, they said combine the two. If SEBI would have passed an order saying that you have two choices, one is that you are not entitled to go for OFS for any other purpose and you have abandoned the project midway, you go back to the original position and do delisting from there or you have an option that from the intermediate position, go for delisting but consider the equity position of pre-OFS.
If that clarity was there in the SEBI order, the choice was given to the company.
Doshi: You are implying that their basis was strong for the case but their argument was weak. SEBI based their argument- based on what SAT said- on some investor complaints which SEBI itself has not investigated saying that because of these investor complaints we have asked you to delist on the basis of a pre-OFS and they never did use this logic as you made out.

September 2013
SAT Oder
‘If delisting is in the ordinary course of business, then there is no reason for imposing conditions. It appears that impugned direction has been issued on the basis of certain complaints which are yet to be investigated.’
September 2013
SAT Order
‘...since delisting of shares under Delisting Regulations have been sought for valid and genuine reasons, in our opinion, SEBI while permitting delisting was not justified in directing that the promoters’ shareholding prior to OFS, that is shareholding at 90% instead of 81%, should be taken into consideration for the purpose of delisting...’

Gupta: I would say that there are two issues. One was that they had in their order written about they went for OFS for MPS- SEBI had written and secondly, they had cited the investor complaint. Unfortunately, that does not distinguish that what for they are going to pass the order.
Doshi: Do you think that this is strong grounds but poor argument and hence SEBI lost the case or do you think that the grounds did not exist at all which should be a position contrary to what Mr Gupta has said?
Parekh: I would of course respectfully disagree with his views because I think that you have reached 81 percent and you need to cross 91-whatever percent which delisting regulation prescribes. These regulations are tabled in Parliament; these regulations have the force of law even the entire SEBI Board sitting together cannot overrule this. I do not see how an officer of SEBI can…(Interrupted by Anchor)
Doshi: So you are saying an additional condition is not laid down in the regulations, it is extrajurisdictional so to say and SEBI could not have imposed that.
Parekh: Absolutely.
Doshi: Let me say that suppose it was not done the way SEBI has done it but as Mr Gupta suggested that SEBI would point out to Fresenius Kabi that you used the OFS because you said your intent was to meet 25 percent. Half way through somewhere you decided to change your mind and delist, okay, fine, no problem. Please go back to your pre-OFS position, which is reverse the OFS or since reversing an OFS is a painful logistical thing to do, assume that you are delisting on the basis of your pre-OFS equity situation. Would you think that argument is fair given that the OFS is an instrument for a specific purpose and they were not going to meet that purpose after a point?
Parekh: I don’t know where this position is coming from because no law says that if you reach OFS half way, you have to reverse the position. You were actually asking somebody to break the law; then you are saying that you should do away from the law instead. Somebody has gone half way upto what the requirement is and then after that at some point you say that no because of the changed circumstances, I do not want to delist and the law entitles you to delist at that point of time and at that point of time, you say, no-no, you have to first reverse.. (Interrupted by Anchor)
Doshi: It is a fair point. As per the law, they needed to meet the 25 percent, they said that is our intent, we are reducing the promoter stake, they go from 90 to 81, they said we will do one more OFS, but there were events and there were events that took place, there was an foreign direct investment (FDI) investigation, it was a negative event, the parent company decided let us take this Indian company private?

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
SES Report
OFS route available only to
Top 100 companies by market capitalization
Companies required to increase Minimum Public Shareholding and comply with SCRR & Listing Agreement
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: Whose fault was this?
Doshi: That is not the point. Business people are allowed to change their minds, they change their mind and they said okay, we are going to delist because we don’t want to stay public anymore.
Gupta: I am not at all saying that you cannot take business decisions, you can take all your business decisions but within the framework of law.
Doshi: You have to respond to the point that imposing an extra condition doesn’t fit the delisting regulations and SEBI went beyond its reach.
Gupta: I am not at all saying it is an additional condition, it is a fiction. It is not a condition because I am saying you went on a path where you were allowed to go only for a certain condition and reason; you did not meet that condition, you come back on that point.
Doshi: I thought the weakest point in SEBI’s case here- though they do have grounds to suspect whether the OFS was used for warehousing reasons or not- but they haven’t established it, they have alluded to four-five complaints by investors but they haven’t investigated and that is what SAT has brought up as well.
Parekh: If it is a device, if it is a process which was devious which was sort to obfuscate and cheat the regulator and the investors, they could have taken the stand, a very strong stand after investigation and giving them a hearing that this is the allegation against you. We believe prima facie that this is the evidence, which can be substantial- what is your response and based on their response, they could definitely have taken the stand which they have taken saying that this OFS route which you have taken itself was full of manipulation.
Gupta: My concern is not their manipulation. I am saying very simply…(Interrupted by Anchor)
Doshi: You used OFS for a purpose, that purpose no longer exists so please go back to the position. Since you had both disagree, how do you think SEBI will fair in the Supreme Court with this Fresenius Kabi decision?
Gupta: I would say this very simply that the SEBI can pass a very simple order based on the circular on OFS that you under this circular have gone for OFS, you had all the time in the world to complete the OFS, you did not do it.
Doshi: You think it is a winning case.
Gupta: And they should pass the order right now that please reverse OFS, buy it back.
Doshi: How do they reverse OFS? You are saying ask them to reverse an OFS?
Gupta: That is their problem. They can reverse it.
Doshi: Take back the shares and give back the money.
Gupta: Yes otherwise agree to this condition.
Parekh: You are asking somebody to become less complaint with the law, is that your purpose? Reverse the OFS since your promoter shareholding goes up.
Doshi: Choose to delist from there then.


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