The National Housing Bank (NHB) came out with a notification on 19th July, 2018, amending the Housing Finance Companies (National Housing Bank) Directions, 2010 with respect to change in control of housing finance companies.
The original provisions, introduced a short while ago, are influenced from the RBI regulations for non-banking financial companies. As per the original directions, any HFC undergoing any of the following would need prior approval of the NHB:
a. Change in control or management of the Company;
b. Change in shareholding of the Company, including progressive changes over time, resulting in change in 26% shareholding of the Company;
c. Change in management resulting in change in 30% of the composition of the Board of Directors of the company.
The latest notification has substituted the second criteria with the following clause:
(b) any change in the shareholding of an HFC accepting/holding public deposits, including progressive increases over time, which would result in acquisition / transfer of shareholding of 10 percent or more of the paid up equity capital of the HFC by/to a foreign investor
or
any change in the shareholding of an HFC, including progressive increases over time, which would result in acquisition / transfer of shareholding of 26 per cent or more of the paid up equity capital of the HFC.
Provided that, prior approval would not be required in case of any shareholding going beyond 10% or 26%, as applicable, due to buyback of shares/reduction in capital where it has approval of a competent Court. However, the same is to be reported to the National Housing Bank not later than one month from the date of its occurrence;
The text of the condition remains, barring the portion highlighted above, which happens to be a new insertion.
As its suggests, if a foreign investor having a shareholding of 10% of total paid up capital or more in HFCs intends to transfer the stake or if a foreign investor intends to acquire shareholding of 10% of paid up capital, the HFCs will to get an approval from NHB before accepting such change.
The phrase “a foreign investor” could be interpreted as a single foreign investor. However, the term “foreign investor” still holds ambiguity due to absence of any definition. Further, since, the intention behind these provisions seems to regulate change in control over HFCs, one can argue that considering only individual shareholding must not be appropriate and one should also consider the holdings of others persons who are acting in concert with the shareholder.
Further, here the term “progressive increase” would imply that while looking at the quantum of shareholding, we can consider a single instance of change. If there are multiple instances of change within a span of time, all of them must consolidated to see whether the threshold is breached or not.
The same can be explained by way of an example, say, a foreign investor acquires 5% of paid up equity capital of a HFC at the first instance and acquires 5% of the paid up equity capital at the next instance. In the first instance the person is acquiring only 5% of the paid up equity capital, hence the same is not crossing the threshold. However, in the second instance, even though the shareholder is acquiring only 5%, but in aggregate its shareholding is reaching the threshold; hence, a prior approval of the NHB would be required for the acquisition of 5% of paid up equity capital.
Further, though the provisions require us to consolidate progressive changes over time, however, the same is silent on the time duration, which should be considered. In this regard, we can draw parallels from the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, which talks about creeping acquisitions. The concept of creeping acquisition is also similar to these provisions, where the acquisitions over a period of time are considered to see if various thresholds under the Regulations are being breached or not. The time limit that has been set for this purpose under the Regulations is 1 year, it is safe to borrow the same for the purpose of these Directions as well.
(Author is associated with Vinod Kothari & Company)
What would be the scenario in a situation, for example- If ABC ltd is a shareholder holding 22% of the paid up equity capital of an HFC, XYZ ltd. Now suppose XYZ Ltd is going for rights issue and ABC ltd acquires 5% more and the total shareholding of ABC ltd becomes 27%. So would prior approval from NHB would be required in this case? Please suggest.