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The Curious Case Of Essar Oil!

Published on Fri, Dec 11,2015 | 23:31, Updated at Mon, Dec 14 at 22:48Source : CNBC-TV18 |   Watch Video :

The Ruia family have run into rough weather as they attempt to take their group company Essar Oil private. Changing regulations, a half–cooked stake sale and unprecedented price protection for minority shareholders – Aayush Ailawadi gets you the details!

The story dates back to June 20, 2014 when Essar Oil received a proposal from its promoters to voluntarily delist from the exchanges. The company obtained shareholder approval through a special resolution by postal ballot on August 6, 2014. The company also received in-principle approval from NSE in August 2014 but SEBI raised objections and the process stalled. By the time SEBI approved the de-listing in July 2015, the delisting regulations had changed! And so, even though Essar Oil’s de-listing process began when the 2009 regulations were in force, SEBI ordered Essar’s promoters to comply with the 2015 regulations!

Umakanth Varottil
Professor, National University of Singapore
Securities Law Expert

“Since this case began when the board and the shareholders approved the delisting under the previous regulations before the amendments, technically there is a case to be made out that the old regulations should apply but having said that, in the Essar Oil case, the question became somewhat moot. Because the company itself accepted the fact that they were willing to be bound by the new regulations. So, to that extent this question is less relevant but it’s my belief that there is an argument to be made that it’s the old regulations that should apply.”

That’s especially because the delay was prompted by SEBI. In its order SEBI says it received shareholder complaints in August 2014 – one alleging the company was concealing public information and another suggesting that some public shareholders were acting in concert with Essar’s promoters to facilitate the delisting. The order cites these as reasons for stalling the delisting approvals but is silent on why it took SEBI 1 year to investigate and grant approval.

Sanjay Asher
Partner, Crawford Bayley & Co

“On 14th of august, 2014 you said no to the stock exchange please don’t proceed. Now, you wait for such a long period of time, nearly 8 months and then say yes, you can proceed? What were the changed circumstances that you allowed the company to proceed? There is nothing in the order as to the changed circumstances except a whisper that the 2 letters by shareholders do not have any meat in it and they are of no consequences. But, one doesn’t know as to why SEBI said no and then why it stated yes?”

Essar Oil’s promoters have not disputed SEBI’s application of the new regulations on their case. Not yet atleast. That means they now have to comply with a new acceptance threshold, a new final offer price determination process and a change in formula for determining the floor price.

Earlier, the floor price was to determined as the highest of –
- The average of the weekly high and low of the closing prices during the past 26 weeks or
-Average of the weekly high and low of the closing prices during the past 2 weeks
But, under the 2015 regulations -the floor price is the volume-weighted average price in the 52 weeks preceding the delisting public announcement;

Sanjay Asher
Partner, Crawford Bayley & Co

“It’s a complete change! So, SEBI has said in its order, please go ahead with its new floor price without checking as to whether the old floor price was beneficial to the minority shareholder or the new price is beneficial. If you are giving the benefit that in 12 months time in case the promoter sell the shareholding to a foreign shareholder in which event the differential price has to be paid, then why not give the benefit to the investor if the floor price which is more beneficial whether under the old regulations or new regulations should be applied. It should have been, that whichever is the higher of the two, under old regulations or new regulations ought to have applied.”

That really is at the heart of this story – minority protection! Apart from insisting that the new regulations apply, SEBI has also ordered a new twist in the de-listing tale. While awaiting SEBI approval for de-listing, in about July this year, Essar Oil informed the stock exchanges that Russian oil major Rosneft was looking to buy a 49% stake from the promoters. The deal was in-the-works, even as the de-listing was pending. When that news broke, minority shareholders approached SEBI and the regulator gave them un-precedented price protection.

In its order on November 6th 2015, SEBI directed Essar Oil and its promoters to match the delisting price with that being paid by Rosneft for a 49% stake in the company. SEBI said that if the deal with Rosneft concludes after the delisting and if the price offered by Rosneft is higher than the de-listing price achieved via reverse book building, then the promoters of Essar will be required to pay the differential price to the shareholders within two months.

Umakanth Varottil
Professor, National University of Singapore
Securities Law Expert

“The positive aspect of this order is that SEBI has in a sense accepted the fact that certain other information such as the deal with Russian investors ought to be taken into account while determining the share price. So, even though the regulations only provide for reverse book building, SEBI has superimposed this requirement that the price should be at least equal to what is being offered to the Essar promoters by the Russian investors. To that extent, the order actually goes beyond what the regulations themselves actually require so in that sense I feel it is a positive aspect. But, it’s a different matter that this was not really contested by the promoters and they seem to accept the fact that this extra pricing will be paid, but otherwise that is something that benefits the minority shareholders.”

But the Rosneft deal, if it happens, will quite likely change the fortunes of Essar Oil. Since, such a material event took place after shareholders had approved the de-listing but before the delisting concluded, shouldn’t shareholder approval be sought again?

Sanjay Asher
Partner, Crawford Bayley & Co

“After a rejection, the entire process ought to have started all over again… because under a changed scenario, at the very threshold after having negated the proposal, the shareholders could have thought differently and could have voted against, in which case the entire delisting process would not have started at all, because the shareholders would also start thinking that- look, we have granted approval for the promoter to go ahead with delisting process but the regulator is saying- please don’t go ahead in which event the investor has to think- did i exercise my vote in a proper manner? Did I have adequate information that I said yes?”

Umakanth Varottil
Professor, National University of Singapore
Securities Law Expert

“The issue would be if all these end up being material information, then there may be a case to be made out that a whole process needs to be followed all over again in terms of getting approval of the shareholders. But, having said that, I am not concerned about these aspects because there are also other mechanisms which are in place. So, the shareholders are not out of the loop completely because they still have the option of determining the reverse book building price and under the new regulations, that at least 25% of shareholders will have to accept the offer. Some of these mechanisms and protections for the shareholder still continue to operate even though it may not be the case that they might go back and get the approval of the shareholders all over again!”

SEBI’s order suggests that Essar’s promoters proposed a time limit – that is if the Rosneft deal were to happen within one year of the de-listing, then the minority shareholders would be compensated. But, in the interest of minority shareholders, SEBI decided to keep the price protection open-ended. So even if the Rosneft deal were to happen, say 3 or 5 years after the de-listing, the minority could stand to gain. Both the price protection and that it’s open-ended set an interesting precedent.

Sanjay Asher
Partner, Crawford Bayley & Co

“Each time somebody will have to write to SEBI to say that in the event there is a deal which happens in the next 12, 6 or 24 months, the individual investor should benefit. If the deal price is more than the delisting price in the next 12 or 24 months then the promoter of the company whose shares are sought to be delisted should pay the differential. it is not that it is already an enactment, or that it is already embodied in the delisting regulations, so in which event, yes it has a persuasive value but somebody will have to appeal to SEBI, to say that look that please pass an order to the effect that in the event in the next 12 or 24 months, if the promoter sells the share of the company to somebody else at a price which is higher than the delisting price, then please pay to the shareholders the differential between the two. So it is not that it becomes a precedent, or a law, there will have to be an order because it is not embodied in the regulations! And now what will be the mechanism by which SEBI will impose such a condition on every entity which gets delisted! Unless the delisting regulations are amended you can’t have that!

Umakanth Varottil
Professor, National University of Singapore
Securities Law Expert

“The optimistic point is that the SEBI order considers extraneous circumstances such as the fact that the deal with the Russian investor was going to be entered into. So to that extent the precedential value of this order would be that these types of factors could be considered by SEBI at the time of the fixing the price. To that extent, it’s a positive order. Again, I would not be too optimistic about this because if somebody was to challenge this position, it may be argued that this is beyond the scope of the regulations which is premised on the reverse book building process. So, I think the downside of this could be that unless the regulations themselves are to be changed, this position may not be ultimately sustainable. So, the positive is that SEBI has gone ahead beyond the regulations, but the negative is that it’s probably still subject to question on that particular ground although in this case, that may not be an issue as the parties have accepted such an order.”

Essar’s promoters currently hold 71.46% of the company’s shares and need more than 18.5% for the delisting to succeed. This week, they announced a floor price of nearly 146 rupees, which is 40% lower than Friday’s closing price. It will be interesting to see how Essar’s public shareholders respond to the delisting offer, given the price protection they’ve been afforded. But, it will be even more interesting to see the future impact of this order. Will other shareholders also demand such price protection?

In Mumbai, Aayush Ailawadi

 
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