Circumventing the Takeover Code

Kudos to the CNBC reporter, Sajeet Manghat, who has correctly analysed the scheme adopted by RIL to effectively circumvent the SEBI Takeover Code. The transcript, from the CNBC website, is as under:

“Delivery-based selling in RIL has gone up to 57.4% from 22.3% on Wednesday and there is also an increase in delivery volumes. The main reason why the stock is under pressure is because RIL has reclassified promoter shareholding ahead of warrant conversion. RIL has nearly 14% of its equity under treasury stock and classified under promoter and PAC. The treasury stock is held under petroleum trust and eight corporate bodies. RIL has converted eight corporate bodies into its subsidiaries. Subsidiaries lose promoter status and voting rights under regulations. RIL promoters converts warrants at Rs 1402 per share and infuses Rs 15141 crore. Promoter stake has fallen to 44.8% from over 51%. Post warrant conversion, RIL promoter stake has gone up to 49%. RIL promoter voting right also goes up to 52%. Warrant conversion has infused over Rs 15,100 crore into RIL funds”.

As per Section 42 of the Companies Act a subsidiary cannot hold shares in a holding company, however, a company which is not a subsidiary at the time it purchases the shares of the holding company and becomes a subsidiary later, due to the acquisition of its shares by the holding company, is exempt form the provisions of Section 42 (sub section 3). However, such a subsidiary then looses its voting rights (which in any case is irrelevant for a promoter who is already holding a high stake). Further, the subsidiary also looses its promoter tag under the Takeover Code and thus creates space for the promoter to acquire additional shares.

Would definitely like to someday connect with Sajeet and get more of these inside stories!