Fresenius Kabi - Decoded!

Fresenius Kabi Oncology Limited (“Appellant Company”) in the present case, is a public limited company, incorporated under the Companies Act, 1956. It is engaged in the business of research, development, production and distribution of formulations used in oncology. Its shares are listed on both the Bombay Stock Exchange Limited (“BSE”) and the National Stock Exchange of India Limited (“NSE”).

Fresenius Kabi (Singapore) Pte. Ltd. (“FKSL”) is the Appellant’s promoter company.

The Public shareholding of the Appellant Company stood at 10% (the promoter shareholding was thus 90%) as opposed to the required 25% as prescribed by the amended Rule 19A of the Securities Contracts (Regulation) Rules, 1957 (“SCRR”).

Rule 19A of the SCRR which was amended in June 2010 provides that the minimum public shareholding within 3 years of a company being listed on the stock exchange should be 25%. To be in compliance with the MPS norms, the Listing Agreement was amended by a circular in December 2010 and further in February 2012 and it provided that the minimum shareholding can be achieved through two methods, (a) Institutional Placement Programme (b) Offer For Sale (“OFS”).

The Appellant thus decided to launch the OFS in 2 tranches of 7.5% each. On October 12, 2012 when the OFS was issued, it was issued with an option to sell an extra 1.5% of the Appellant’s shares if the OFS was received well in the capital market.

As it turned out, the Appellant ended up divesting its shareholding by 9% and consequently, FKSL’s shareholding in the Appellant was reduced to 81% from the previous 90%.

Unfortunately, in January 2013, a Food and Drug Administration (body in the US) inspection which took place in at the Appellant’s Kalyani Plant, found discrepancies in the documentation of the Appellant Company. Following this, the Appellant immediately stopped the functioning of the Kalyani plant. The plant has been inoperative since February, 2013. Also, relevant disclosures were made to the BSE and the NSE as required by the Listing Agreement.

Following this development, the Appellant Company’s Board of Directors decided to undertake voluntary delisting and in April this year proposed to launch a delisting offer to its public shareholders in order to acquire the entire public shareholding of the Appellant i.e. 19% of the Appelant’s capital (since post the OFS it stood at 81%).

By way of postal ballot voting, notices were sent and a successful resolution was passed by way of two-thirds majority as required by Regulation 8(1)(b) of the Securities And Exchange Board Of India (Delisting Of Equity Shares) Regulations, 2009 (“Delisting Regulations”). The result of the ballot was duly reported and communicated to the two stock exchanges.

By a SEBI order (“Said Order”) dated June 4, 2013, more than 100 companies had been asked to submit their replies as regard compliance with the mandatory requirement of 25 percent public shareholding pursuant to Rule 19A of SCRR which was brought into force with effect from 4th June, 2010. Fresenius Kabi’s name was on that list. Pursuant to that, FKSL and the Appellant were prohibited from accessing the securities market in any way whatsoever except in order to comply with the mandatory minimum public shareholding requirement.

The Appellant Company filed an appeal and vide an order dated June 24, the Tribunal considered the fact that the Appellant Company had voluntarily decided to delist its stocks and had progressed a lot in the direction as required by law. The Tribunal observed that the Appellant Company stood on a different footing as compared to the other 99 companies out of the 100 named in the Said Order.  The Tribunal also directed the Appellant to make necessary representations before the Respondent (SEBI) and decide the matter in the next four weeks.

Following the several representations made by the Appellant, an Impugned Order was passed by the Respondent which stated that in order to comply with the delisting offer proposed by the Appellant, the pre-OFS shareholding (90% instead of 81%) of the Appellant Company should be considered in order to comply with Regulation 17 of the Delisting Regulations.

The question which arose in the present appeal against the Impugned Order was that whether it is lawful for the Respondent to amend the Delisting Regulations. The Appellant Company contended that the powers of the Respondent arise from the SEBI Act and it is therefore unlawful on the Respondent’s behalf to prescribe a higher threshold. The Appellants also contended that though the Respondents have the power to take measures under the SEBI Act and the SCRA, it can only do so after undertaking an enquiry in the matter. However, in the present case, no such investigation had taken place.

Let’s take a look at what the law actually says with respect to the Delisting Requirements. Regulation 17(b) of the Delisting Regulations states that in order for a successful delisting to take place, the post offer shareholding of the promoter group, should be the total of the pre-offer shareholding and 50% of the offer size.

Applying this equation in the present scenario, we see that this would be 81%(which is the shareholding of the promoter group currently) plus 50% of 19 (which is the offer size) equating that to 9.5% taking it to a total of 90.5% which the Appellant Company would have to achieve in order to delist successfully.

However, what the Respondent ordered was a requirement of a much higher threshold of 95%. This is because the Respondent suggested that the pre offer shareholding of FKSL should be the shareholding before the OFS took place and not post. This would mean that instead of 81%, 90% should be calculated plus 50% of 10 taking it to a total of 95% required for FKSL to delist successfully.

The present appeal revolves exactly on this issue and discusses whether the Respondent has the power to impose the condition on FKSL of taking its shareholding up to 95% in keeping with Regulation 17 of the Delisting Regulation, even though the Appellant was in a genuine predicament.

The Respondent on the other hand contended that it received complaints accusing the Appellant of perhaps having acted in concert with investors purchasing shares amounting to 9% of the Appellants shareholding in response to the OFS. It contended that these investors might have bought the shares concerned with the aim of selling them off at artificial prices when the Appellant makes its delisting offer, to assist the Appellant in successfully completing its delisting offer.

The Respondent submitted that since the company had failed to comply with the minimum public shareholding requirement, it should be forced to offer such compliance, in the absence of any other penalty being levied on it.

The Respondent relied on several judgments to state that it is the duty of the SEBI to protect the investor’s interests and it has wide powers with respect to such a duty.

While deciding the dispute between the Appellant and SEBI, the Tribunal observed that wide powers granted to a public authority cannot be construed as allowing it to amend the law on a case to case basis. The law must operate uniformly to maintain its sanctity. It also pointed out that delisting of a listed company is the company’s prerogative, and as long as the process of delisting is carried out within the four corners of law, no authority can interfere with the same without a solid foundation.

It was stated by the Tribunal that in the facts of the present case, instead of fulfilling minimum public shareholding requirement under SCRR, since delisting of shares under Delisting Regulations had been sought for valid and genuine reasons 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.

The Tribunal also stated that the Respondent is, however, at liberty to investigate the complaints made by investors against the Appellant and take necessary action as per law. SAT's verdict thus provided Fresenius the much needed relief as it will now have to purchase 9.5% stake, instead of 14%, in its delisting offer.

Post this, SEBI went ahead and appealed to the apex court contending the irregularity committed by the Appellant Company. However, by an order dated February 02, 2014, the Supreme Court dismissed the appeal but stated that the question of law is left open to be decided in an appropriate case.

In my opinion, SEBI being the primary securities regulator, always has the best interest of the investors in mind. SEBI therefore needs to conduct thorough investigations and then appeal if anything out of the ordinary does appear. Delisting is an option a company can take as and when they need to as long as they keep their investors interest in mind and no irregularity is committed per se. In this case, a genuine predicament caught the company and they decided to delist, taking the lawful route. Therefore, as long as the investors have been given a rightful manner of exiting, there isn’t much SEBI can do about it.