Understanding the Relation between ‘buy-back’ and ‘open offer’ through the case study of Ajanta Pharma Ltd and Gabs Investment Pvt Ltd.
Introduction
The Indian market has been able to adapt to the world economy through globalisation, liberalisation and privatisation. While the goal of each Company in the end is to maximise its profits and be successful in its field, that may not be possible due to all the different market forces present. In order to safeguard its interest, corporate restructuring is prevalent. Corporate restructuring is a stellar way to overcome hurdles that a company might be facing. It accelerated the Company’s growth by added investments and resources, tax benefits and possibly new management which may help the company to overcome the competition it may be facing. While the Indian stock market are backward compared to other countries, it is catching up. Due to the volatile nature of shares, many people are hesitant entering the stock market.[1][2]Corporate restructuring is done through share purchases. This is done by an agreement between two parties where in a Company transferee its shares to a transferee who may be a person or another Company. Two different methods of corporate restructuring for the purpose of this research paper is open offer and a buy-back offer.
Open Offer
In India, the takeover code is activated in the event that an acquirer has acquired 25% of the shares of the Company. After this a mandatory open offer is triggered which enables the acquirer to consolidate power and take over additional 26% of the Company. This will also put the acquirer (or the investor) in substantial control of the Company rather than having a mere de facto control.[3] The Takeover Code can also be triggered without reaching the quantitative figure of 25%, if SEBI believes that the acquirer is in a position of managerial control and power, an open offer can be invoked. There is a public announcement that is made before the open offer bid to intimate the shareholders giving them to opportunity to do their due diligence before selling their shares to the acquirer. While there is a floor price decided for the shares, there is no upper limit to price the shares in question which may allow the shareholders to earn more profit while parting with their shares.[4]
Another way of an open offer is a voluntary open offer where in if an acquirer holds more than 25% but has not crossed the maximum non -public shareholding limit in a company is allowed to make a public announcement about an open offer. This will allow the acquirer to access at least 10% more shares, however it would not be permissible to cross the maximum shareholding threshold.[5]
Buy Back
Buy back is a strategy for corporate restructuring through which a Company attempts to buy its shares back from its shareholders, it is also known as share repurchase. This is less hassle-free process that also allows the promoter to consolidate their power in the Company and allow them to re-invest the profits that they would earn from their own securities[6]. One of the main reasons for a buy back is that the Company may believe that its share prices are undervalued, hence, the Company may offer a premium (a higher price than the market value) as an incentive to buy back the shares. This also benefits the seller (especially retail investors) as they would be earning more money through a buy back than trading in the ordinary course. Buy backs are also an approach that defends companies against hostile takeovers. By increasing the proportion of shareholding, it may be difficult for a rank outsider to takeover a Company. A takeover also proves to be an expensive process for an acquirer, buying the shares at a later stage from the Company at an even higher share value may demotivate outsiders to raid a company of its shares.[7]
Gabs Investment Pvt. Ltd. v. Ajanta Pharma Ltd.
An interesting case study of Ajanta Pharma Ltd. may provide better understanding of the relation between an open offer and a buy back. In the case of Gabs Investment Pvt. Ltd. v. Ajanta Pharma Ltd. in 2018, Gabs Investment is a private investment company while Ajanta Pharma is a pharmaceutical company which is publicly listed. The shareholding of Gabs investment is wholly owned by the Agrawal family who also own 9.54% of the shares of Ajanta Pharma. Gabs is an investment holding company of the promoter of Ajanta Pharma. There was a scheme of amalgamation between the two companies which was presented in front of NCLT where in a transfer of 9.54% of the shares held by Gabs would go to the promoters. As a result, Ajanta would provide Gabs with the suitable number of shares. The rationale that was given for this amalgamation was so that the promoter group of Gabs Investment (Agrawal Family) could simplify the simplify the holding structure of the company along with the reduction of shareholding tiers. It would also demonstrate the dedication of the promoter group towards Ajanta Pharma. This structure was approved by the shareholders with a majority. There were many objections raised as it seemed to be a clear step towards tax evasion. The NCLT also observed that the scheme could only be applicable if it served a ‘public interest’. There were clear hesitancies from the NCLT’s side as the scheme was going to benefit the promoter group more than the shareholders and hence, did not bless the scheme. The NCLT rejected the amalgamation scheme also because the transfer of shares from Gabs Investment to the Promoters would trigger the mandatory open offer under the SEBI Takeover Regulations as the promoter group would collectively end up owning more than 25% of the shares in Ajanta Pharma, along with that, they would also be liable for an open offer through the route of creeping acquisitions as the threshold of no more than 5% per annum would also be exceeded. The scheme did not convey any intent to hold a open offer to the shareholders of Ajanta Pharma, the scheme was in non- compliance with the SEBI Takeover Regulations.[8]
According to Regulation 3 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011(SAST Reg.)[9] the acquirer will not be allowed to acquire shares or voting rights if they are entitled to 25% or more of the shares and voting rights unless they do not make a public announcement regarding an open offer for acquiring the shares of the target Company. Under Regulation 3(2) of the Takeover Code[10], if the acquirer holds more than 5% and less than the maximum permissible non-public shareholding, then the acquirer would not be entitled to the voting rights and the shareholding unless a public announcement of an open offer is made. As per Regulation 7 of the SAST Reg.[11], the open offer which is made under regulation 3 and 4 should be at least 26% of the total shares of the target Company. Moreover, shares which come under Regulation 3,4,5 or 6[12] cannot be bought at a price lower than the determined price.
Buy Back Offer of Ajanta Pharma Ltd.
After the scheme was not blessed by the NCLT, in an attempt to improve their shareholding valuation and the return on their equity, Ajanta Pharma Ltd. issued a buy back of their equity shares. This was done through the tendering process, that is a process of when the Company offers a particular number of shares, the prices of which have been predetermined, from its existing shareholders and are accepted in a proportionate manner. The tender price is generally higher than the market price till the time the buyback offer is not closed[13]. Ajanta Pharma bought back 7,69,230 fully paid up shares with the face value of ₹ 2 per share, These shares are 0.87% of the total equity shares of the Company from the existing equity shareholders and beneficiaries of the Company at a price of ₹ 1,300 for each equity share which resulted in the aggregate amount of ₹ 100 crore only. The paid up share capital after the buy back has reduced from 8,80,23,000 to 8,72,53,770.[14]
Ajanta Pharma also issued an Employee Stock Option Plan (ESOP) as a way of corporate restructuring in which 8,500 shares were offered along with 7,00 new options were granted to the employees.[15]
Conclusion
In a way, the open offer and buy back feel like a full circle, where in the target company has to part with its shares and lose their stake, however, in a buy back, in order to regain the power in the Company, the shares have to be bought back. Both of these strategies are advantageous to the minority shareholders who are given the choice to leave at the time of a potential change in control of management of the Company they have invested in. The share prices of a Company after an open offer and a buy back offer are quite volatile and might be exciting for traders to make some short-term gains. That being said, it is important that the buyers don’t not believe hearsay and make trades based on their emotion, rather read the offer document carefully and make an informed purchase.
In the case of Ajanta Pharma, it is visible that the Agrawal family was trying to consolidate its power in Ajanta Pharma, first by way of an amalgamation (which should have been an open offer in fact) and then a buy back of shares after the scheme failed. This is a defence used against takeovers. On 10th May 2022, Ajanta Pharma Ltd. issued a bonus equity shares with the ratio of 1:2. The shares of the Company closed 4% lower. Lastly, it is also interesting to note that while the Company’s revenue from operation is 15% higher than the last quarter the net profit has decreased by ₹ 8 crore from the last financial year.[16]
[1] Hiral Vyas,Patel R.K. , A Study of Buyback of Shares as a Restructuring Tool: Reference to the Indian Companies Act, Volume 6, SSRN, (2008), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3171649
[2] B K R Naik, Organisational Flexibility and Competitiveness, 247-256 (2014)
[3] Priyanka Devgan, Cracking the New Takeover Code, SSRN, (2013), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2224144
[4] Ramkrishna Kashelkar, How should investors take the right call on open offers and buybacks, The Economic Times (May 18- My 19, 2022), https://economictimes.indiatimes.com/how-should-investors-take-the-right-call-on-open-offers-and-buybacks/articleshow/7692271.cms
[5] Priyanka Devgan, Cracking the New Takeover Code, SSRN, (2013), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2224144
[6] Hiral Vyas, Dr. R. K. Patel, A STUDY OF BUYBACK OF SHARES AS A RESTRUCTURING TOOL: REFERENCE TO THE INDIAN COMPANIES ACT, volume 6 International Journal of Research in Management & Social Science, 81- 86 (2018)
[7] Hiral Vyas, Dr. R. K. Patel, A STUDY OF BUYBACK OF SHARES AS A RESTRUCTURING TOOL: REFERENCE TO THE INDIAN COMPANIES ACT, volume 6 International Journal of Research in Management & Social Science, 81- 86 (2018)
[8] CSP No. 995 of 2017
[9] SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, Regulation 3
[10] SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, regulation 3(2)
[11] SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, regulation 7
[12] SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, regulation 3, 4,5,6
[13] Hiral Vyas, Patel R.K., A Study of Buyback of Shares as a Restructuring Tool: Reference to the Indian Companies Act, Volume 6, SSRN, (2008), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3171649
[14] Ajanta Pharma Limited, Letter of Offer, https://www.sebi.gov.in/sebi_data/commondocs/jan 2022/Ajanta%20Pharma%20Limited_LOF_p.pdf (May 18- May 19, 2022)
[15] Ajanta Pharma Lt Director Report, https://economictimes.indiatimes.com/ajanta-pharma-ltd/directorsreport/companyid-3723.cms (May 18- May 19, 2022)
[16] Ajanta Pharma to issue bonus shares in the ratio of 1:2, mint, (May 18- May 19, 2022), https://www.livemint.com/market/stock-market-news/ajanta-pharma-to-issue-bonus-shares-in-the-ratio-of-12-11652174765901.html
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