Religare-Burman saga brings forth a key inconsistency in Sebi and RBI rules for takeovers

Sebi takeover code places obligation on the acquirer to declare open offer.

The ongoing acquisition dispute between non-banking financial services company(NBFC) Religare Enterprises and the Burman group has brought forth an apparent conflict in the takeover rules issued by Indian market regulator and central bank, say legal experts. The seeming inconsistency in the rules could potentially impact any hostile takeover of listed NBFCs.

Under the Securities and Exchange Board of India’s(Sebi’s) takeover code, the acquirer is obliged to announce an open offer once the 25% shareholding threshold is breached. However, under the Reserve Bank of India(RBI) norms for acquisition of NBFCs, the target company is obliged to make an application with RBI seeking its nod for change in control.

In the Religare case, the Burman Group, through four group entities, breached the 25% shareholding mark in Religare Enterprises in September 2023 and announced an open offer for acquiring up to 26% more in the company. However, the board of Religare was non-cooperative with the Burman Group and declined to apply to RBI for approval, according to the Sebi order dated June 19. The Religare board took a view that the acquirers do not fulfill the requirement of ‘fit and proper’ as required under the RBI rules and hence the application was not made.

“This is a unique predicament since it is indeed true that prima facie there exists a conflict between the current regulations of SEBI and RBI,” said Suhana Islam Murshedd, partner, Aquilaw. “This conflict stems from the SEBI’s takeover code which mandates the acquirer in an open offer process to pursue all applicable statutory approvals in order to complete the open offer. However, the relevant RBI directions put the obligation on the target company to submit an application in its letterhead to RBI for obtaining RBI’s prior approval”

In a strong worded order last week, Sebi ordered the board of Religare to make the requisite RBI application on or before July 12. Technically, permissions from other regulators such as RBI doesn’t fall under its purview.  However, in the current case Sebi had to intervene since the dispute was having a broader impact on the minority investors, said experts.

“It is highly recommended that RBI either provides a clear option for the acquirer to voluntarily make an application for its approval and also stipulate specific timelines for application and approval process” said Soumitra Banerjee, partner, Juris Arena. “This could avoid potential delays in completion of acquisition, and prolonged disputes which could in turn affect the public shareholders of the target company. “

Legal experts say Sebi and RBI regulations approach the situations from different point of view which is the reason for the inconsistencies. Sebi rules are framed around rights of investors and since acquirers themselves are shareholders, they have the rights to announce an open offer. However, RBI rules approach the situation from a sectoral regulator point of view and the intention of the regulation is to ensure all NBFCs undergoing acquisition need prior RBI approval.

“Given that the target company is required to make an application to the RBI in the case of a change of control / shareholding, despite potential conflict of interest between the acquirer and the management of the target company, the management should defer to the RBI to assess the ‘fit and proper’ criteria, and not take such matters in its own hands.” said Yash Kumar, founder, Spark Legal.

“Until a change in regulations, it would be advisable for existing stakeholders who are against the takeover to separately represent to the RBI with their concerns and objections to the acquirers not being ‘fit and proper’. "

In its 12-page order, Sebi opined that the absence of any explicit provision under RBI rules for acquirers to make applications doesn’t mean the target companies have discretionary power in the matter. It went on to say, “If a contrary interpretation is adopted, no takeover would ever be possible in such cases, particularly, where the existing management is apparently hostile to  the  acquirer”.

However, Religare defended its position by arguing the RBI approvals were out of jurisdiction of Sebi. While Sebi itself agreed in the order that such approvals from RBI were beyond its ambit, it emphasised on the importance of shareholder rights.

“SEBI has rightly intervened, directing the company to file the application. The right of shareholders to exercise their prerogatives should not be held hostage by the existing management of the target company. The power to determine the suitability of the acquirer resides with the regulators, not the company,” said Sindhuja Kashyap, partner, King Stubb & Kasiva, Advocates and Attorneys.