SAT has recently decided    here      on the issue   on whether  , when and at what price would an open offer have to be made when   Share Warrants   are exercised.   I   am highlighting here just some interesting facts and decisions, simplifying them a little, to emphasize some interesting issues.

The   Promoter   of the target company,   Genesis International Corporation Limited  ,   was   issued   3530000   Share Warrants   therein at an   Exercise Price     of Rs. 19 per share in   early   2007. The   Promoter   exercised   Share Warrants   in 2008 whereby his holding increased from 50.48% to 60.48%. He made a   public announcement     for open offer but there were disputes with   SEC   regarding pricing.   The   Promoter   submitted that   the   offer price   should   be Rs. 19 being the   Exercise Price   and also for this purpose calculating the price with reference of the date of allotment   of   Share Warrants  .   SEC   argued that the reference date sho  uld the date of allotment of the equity shares on exercise of the Share Warrants or the date of the public announcement for the open offer   (it   actually   held to be the latter though the difference was of a few days only)  .   

The difference between the open offer consideration as per these two prices, as per the Promoter, was Rs. 24 crores,   apparently apart from interest that may arise.   (the price   determined by   SEC     is not known but   I   did some back of the envelop  e     reverse   calculations and this price appears  , assuming   I   am right,   to be about Rs. 102 as compared to Rs. 19  ).   

  It appears that there was no dispute on whether     an   open offer arises   in such facts or not (  although   this issue otherwise also appears to be well accepted, this decision is a good reference of record of this point)  .   

  The issue rather was whether the open offer arises when the   Share Warrants   were allotted or when   the   shares were allotted on their exercise.   SAT held that it is when the shares, which carry the voting rights, are allotted that the open offer gets triggered. SAT observed,   “We agree with the learned senior couDSEl for respondent no.1 that it is the acquisition of voting rights that triggers the provisions regarding public announcements and public offers contained in the Regulations. Acquisition of securities without voting rights, including convertible warrants as in the present appeal, will not, by itself, necessitate any public announcement or public offer.  ”     

  SAT further referred to various provisions and concluded   –     “Therefore, in the present case, the requirement of public announcement arises only with the allotment of shares and not with the allotment of warrants  ”  .   

  The answer to the issue of pricing then would logically follow and SAT held accordingly that   “Therefore, the reference date for computing the offer price should be 28.6.2008, the date of the BoD meeting when the shares were allotted and not 16.12.2006, as the appellant has taken nor 21.6.2008, the date of the public announcement, as decided by respondent no.1  ”   

  Note the fine distinction  ,   though of few days  ,   drawn by SAT. It held that it is   the date of the   Board Meeting where the shares were allotted that would be the reference point and not   the date of the   public announcement   for the open offer.   With   due   respect,   I am not sure how right this view is   but see the decision where SAT has given detailed reasoning   in paragraph 7 for   this view.   

SAT finally held that   SEC   should issue a fresh   communication within 2 weeks and allow a reasonable time for opening the offer and thereafter only provide for interest. With   due respect, I submit as follows. The decision   of SAT   is dated 15  ^th     October   2008. Let us say that the offer starts   on 1  ^st     January   2009. If one compares with the date held by SAT   of June 2008, then shareholders would receive   almost Rs. 30 crores (again as per rough back of the envelope calculations) after six months   –   because the acquirer chose to litigate the issue and which was decided against him. Even at the 10% interest rate   decided   by   SEC   (w  hich the Hon  ’  ble SAT does not appear to have changed), the interest comes to Rs. 1.50 crores  . With due respect, I submit that such interest, which is not   “  costs  ”   that are awarded or not awarded   as per facts  , should have been required to be paid in the circumstances.   I am not saying at all that the appellant was wrong in pursuing the matter in appeal   –     I   am asking why should the shareholders suffer on this account?   Also, surely, the   appellant   had full use of the money and, perhaps, as a cautious person, put it in interest bearing fixed deposit.   

Having said the above, it is possible that, in this particular case, though   exact facts are not available, the shareholders may not have really suffered. This is because, as per statement of the appellant recorded in the decision, the higher price was on account of substantial increase in the price   recently.   H  owever,   open offer pricing usually applies the average price of an earlier period and therefore, possibly, the recent price could have been much more than the higher open offer price held by SAT   (yes,   I   admit my laziness in not looking up the price tables of this period –   J  )  .   In that case, they had opportunity to exit at such higher market price and so in reality may not have   reason to argue that they have suffered a lot,   I   respectfully submit again that the issue of interest remains   a matter of concern.   

All in all,   I     think   the decision settles for   the   record some issues that are regularly faced   by   listed compan  ies and   Promoters  .

  ©     Jayant Thakur  , CA