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Order in the matter of buy back of securities in Coal India Limited

SEBI

Feb 20, 2019

Judgment

CaseIQ

Smart Summary (Beta)

Factual and Procedural Background

Coal India Limited, a public limited company incorporated under the Companies Act, 1956 and listed on BSE and NSE, proposed a buyback of 4,46,80,850 equity shares in February 2019. This buyback was approved by the Board of Directors on February 4, 2019, and publicly announced on February 6, 2019. The buyback was to be conducted under the Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018 (“Buyback Regulations 2018”).

Coal India filed an application dated February 12, 2019, seeking exemption or relaxation from the strict enforcement of Regulation 24(i)(e) of the Buyback Regulations 2018. This regulation prohibits promoters from dealing in company shares during the period from board resolution approval till closure of the buyback offer.

The application arose in the context of a proposed transfer of promoter-held shares (held by the Government of India) to the Bharat 22 Exchange Traded Fund Scheme (“Bharat 22 ETF Scheme”) as part of the Government’s ongoing disinvestment program. The Government intended to transfer shares during the buyback period, which conflicted with Regulation 24(i)(e).

SEBI received supporting correspondence from the Ministry of Finance and the Government of India confirming the timing and nature of the proposed share transfer pursuant to the Bharat 22 ETF Scheme’s further fund offer (FFO 2).

Legal Issues Presented

Whether exemption or relaxation can be granted from the strict enforcement of Regulation 24(i)(e) of the Buyback Regulations 2018, which prohibits the promoter or associates from dealing in shares during the buyback period, in the context of the proposed transfer of promoter shares to Bharat 22 ETF Scheme as part of the Government’s disinvestment program.
Whether such relaxation is in the interest of investors and the securities market under Regulation 28 of the Buyback Regulations 2018.

Arguments of the Parties

Coal India Limited's Arguments

The proposed transfer of promoter shares to the Bharat 22 ETF Scheme is part of the Government of India’s disinvestment program and is outside the typical promoter dealing contemplated by Regulation 24(i)(e).
The buyback offer includes reservation for small shareholders, aims to improve return on equity, and offers shareholders flexibility to participate or not, thereby benefiting public shareholders.
Strict enforcement of Regulation 24(i)(e) would cause undue hardship and impede the disinvestment process, which is in the public interest.
The buyback is otherwise compliant with the Companies Act, 2013 and the Buyback Regulations 2018.

Government of India / Ministry of Finance's Position

Confirmed that the disinvestment through the Bharat 22 ETF Scheme, including the transfer of shares during the buyback period, was scheduled as part of the Government’s disinvestment strategy.
Clarified the timing of the Additional Offering Period and subsequent transfer of funds and shares to the Asset Management Company for allotment to investors.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court analyzed the application in the context of Regulation 24(i)(e) of the Buyback Regulations 2018, which prohibits promoter dealing in shares during the buyback period to prevent unfair advantage or market manipulation. However, the court recognized that the proposed promoter share transfer was mandated by the Government’s disinvestment program and was not a typical voluntary dealing by the promoter.

Under Regulation 28 of the Buyback Regulations 2018, the Board has discretion to relax procedural requirements if strict enforcement causes undue hardship or is procedural in nature. Although Regulation 24(i)(e) is substantive, the court found that the disinvestment-related transfer justified relaxation since the buyback was otherwise in the interest of investors and the securities market.

The court noted the benefits of the buyback to small shareholders and overall shareholder value, and concluded that prohibiting the transfer would not serve investor interests. Therefore, the condition in Regulation 24(i)(e) was relaxed subject to conditions ensuring compliance with other relevant provisions and the accuracy of the application’s facts.

Holding and Implications

Holding: The court granted exemption/relaxation to Coal India Limited from strict compliance with Regulation 24(i)(e) of the Buyback Regulations 2018, allowing the promoter (Government of India) to transfer shares to the Bharat 22 ETF Scheme during the buyback period.

Implications: This decision permits the continuation of the Government’s disinvestment program without hindrance from the buyback regulation’s restrictions on promoter dealings. The exemption is limited to this specific case and does not set a precedent for future cases. The buyback must comply with all other applicable laws and regulations, and the facts stated in the application must remain true and correct. The decision directly affects the parties involved by enabling the buyback and disinvestment to proceed concurrently without conflict under Regulation 24(i)(e).

Show all summary ...

UNDER SECTION 11(1) OF THE SEBI ACT READ WITH REGULATION 28 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (BUYBACK OF SECURITIES) REGULATIONS, 2018. IN THE MATTER OF BUY BACK OF SECURITIES IN COMPANY COAL INDIA LIMITED BACKGROUND

1. Coal India Limited (Coal India/Company) is a company incorporated under the provisions of the Companies Act, 1956 in the year 1973 and was inter alia subsequently converted into a public limited company on February 24, 2010. The registered office of Coal India is at Premises no. 4 MAR, Plot no. AFIII, Action Area1A, Newtown, Rajarhat, Kolkata700156. The shares of Coal India are listed on the BSE Limited (BSE) and the National Stock Exchange of India Limited (NSE).

2. Coal India had filed an Application dated February 12, 2019 (Application) seeking exemption/relaxation from the strict enforcement of the requirement contained under Regulation 24(i)(e) of the Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018 (Buyback Regulations 2018). The aforesaid Application has been necessitated on account of a proposed transfer of equity shares of the Company (which are held by the Promoter i.e. the Government of India) in February 2019, in relation to the Bharat 22 Exchange Traded Fund Scheme (Bharat 22 ETF Scheme), which is brought out in the subsequent paragraphs of this Order.

3. From the Application and the draft Letter of Offer (filed with SEBI on February 7, 2019) and other correspondences received by SEBI from Coal India, the following is noted A. Pursuant to Article 23 of the Articles of Association of the Company; Sections 68, 69, 70 of the Companies Act, 2013; the provisions of Companies (Share Capital and Debentures) Rule, 2014 to the extent applicable and in compliance with the Buyback Regulations 2018, the Board of Directors of Coal India in a meeting held on February 4, 2019, had approved the buyback of 4,46,80,850 equity shares [representing 9.86% (on a standalone basis)/6.46% (on __________________________________________________________________________________________ Order in the matter of Coal India Limited Page 2 of 5 a consolidated basis) of the aggregate of fully paidup equity capital and free reserves as on 31.03.2018 and 0.72% of its total paidup equity capital] of the Company @ 235 per share for an aggregate consideration not exceeding 1050 Crores. The proposed buyback shall be from the existing shareholders including the Promoter through the tender offer route under the Buyback Regulations 2018. B. Thereafter, the Company made a public announcement of the above mentioned proposed buyback on February 6, 2019, in accordance with Regulation 7(i) read with Schedule II of the Buyback Regulations 2018. C. The shareholding pattern in Coal India as on (i) February 15, 2019 (record date) i.e. prior to the proposed buyback and (ii) post the proposed buyback, is provided as under TABLE I SHAREHOLDING IN THE TARGET COMPANY (SOURCE: APPLICATION) CATEGORY PRIOR TO PROPOSED BUY BACK AS ON 15.02.2019 #POST PROPOSED BUYBACK NO. OF SHARES AND % NO. OF SHARES AND % A. PROMOTER AND PROMOTER GROUP 4,52,56,82,514 [72.91%] 4,49,75,92,682 [72.98%] B. PUBLIC SHAREHOLDING 1,68,17,26,663 [27.09%] 1,66,51,35,645 [27.02%] C. GRAND TOTAL (A + B) 6,20,74,09,177 [100%] 6,16,27,28,327 [100%] #Assuming full acceptance of equity shares in the buyback offer as per the Entitlement Ratio. D. As part of its disinvestment programme, the Government of India had in 2017 approved the setting up of Bharat 22 ETF Scheme comprising of equity shares of Central Public Sector Enterprises (CPSEs). Accordingly, the Scheme was launched by way of a new fund offer (NFO) and the units of the Scheme were listed on the stock exchanges in the form of an exchange traded fund tracking the S&P BSE Bharat 22 Index. A further fund offer was launched in 2018 (FFO 1). In accordance with an email dated February 12, 2019, from the Government of India, it is understood that the Government intends to transfer further CPSE shares to the Scheme for which a further fund offer (FFO 2) is expected to be announced which will result in the President of India (acting through different departments and ministries) selling shares of the constituent companies of the S&P BSE Bharat 22 Index. __________________________________________________________________________________________ Order in the matter of Coal India Limited Page 3 of 5

4. In addition to the Application, SEBI had also received a letter dated February 4, 2019, from the Ministry of Finance, Government of India inter alia stating that the abovementioned disinvestment may take place inter alia during the intervening period between the Board Resolution of the Company authorizing the buyback and the closure of such buyback as specified in Regulation 24(i)(e) of the Buyback Regulations 2018. Further, vide an email dated February 18, 2019, the Government of India informed SEBI that the Additional Offering Period of Bharat 22 ETF was opened and closed on February 14, 2019. Coal India is part of the basket of Bharat 22 ETF and as per SEBI guidelines, units are required to be allotted to the investors within 5 working days from the closure of offer. AMC has proposed to transfer the funds to Government of Indias account on February 21, 2019, immediately after which, shares of the underlying companies have to be transferred to AMC for further allotment to investors.

5. I have considered the Application made by Coal India along with all the material available on record. For the purpose of considering the instant Application, Regulation 24(i)(e) of the Buyback Regulations 2018 is reproduced as under

24. Obligations of the company for all buy-back procedure:

(i) The company shall ensure that

e) the promoter(s) or his/their associates shall not deal in the shares or other specified securities of the company in the stock exchange or off-market, including interse transfer of shares among the promoters during the period from the date of passing the resolution of the board of directors or the special resolution, as the case may be, till the closing of the offer.

6. In its Application, Coal India had informed SEBI that it proposes to transfer equity shares of the Company (which are held by the Promoter i.e. the Government of India) pursuant to FFO 2 of Bharat 22 ETF Scheme. Upon a consideration of the aforementioned in light of Regulation 24(i)(e) of the Buyback Regulations 2018, it is noted that the proposed transfer of the aforesaid equity shares by the Promoters will occur during the period between the date of passing the Resolution of the Board of Directors approving the offer of buyback of securities of the Company (i.e. February 4, 2019) and the closure of such offer.

7. As per Regulation 28 of the Buyback Regulations 2018, the Board may, in the interest of investors and the securities market, relax the strict enforcement of any requirement of the aforesaid Regulations except the provisions incorporated from the Companies Act, if the Board is satisfied that the requirement is procedural in nature or the requirement may cause undue hardship to investors. I note that the requirement contained in Regulation 24(i)(e) of the Buyback Regulations __________________________________________________________________________________________ Order in the matter of Coal India Limited Page 4 of 5 2018 is substantive in nature and imposes an obligation on the Company to ensure that its Promoter(s) do not deal in the shares of the company in the stock exchange or off-market including interse transfer of shares among themselves during the period from the date of passing the resolution of the Board of Directors till closing of the buyback Offer. At the same time, I note that the proposed transfer of equity shares of Coal India by its Promoter in relation to the Bharat 22 ETF Scheme is necessitated as part of the ongoing disinvestment programme formulated by the Government of India.

8. In addition, in its draft Letter of Offer, Coal India has stated that the proposed buyback will inter alia result in the following a. In the proposed buyback, 15% (fifteen percent) of the number of equity shares which the Company proposes to buyback or the number of equity shares entitled as per the shareholders holding, whichever is higher, shall be reserved for the small shareholders. The Company believes that this reservation for small shareholders will benefit a large number of public shareholders who would get classified as small shareholders; b. The buyback may help in improving the return on equity by reduction in the equity base and other financial ratios thereby leading to long term increase in shareholders value, and c. The buyback gives an option to the eligible shareholders to either participate in the buyback and receive cash in lieu of equity shares accepted under the buyback or not participate in the buyback and enjoy a resultant increase in their percentage shareholding in the Company post the buyback without any additional investment.

9. Accordingly, I find that the proposed buyback in the instant case is in the interest of investors and the securities market. As stated earlier, the prohibition under Regulation 24(i)(e) of the Buyback Regulations 2018 is intended to disallow dealing in securities by the Promoters (or their associates) of the Company proposing to make a buyback offer during the interregnum period between the date of passing the resolution of the Board of Directors till the closure of the buyback Offer. In this case, the transfer of securities from the Promoters to Bharat 22 ETF Scheme being part of an ongoing disinvestment programme, I do not find it appropriate to stop the proposed buyback if it is otherwise for the benefit of the shareholders of Coal India. Hence, in my view, the condition in Regulation 24(i)(e) of the Buyback Regulations 2018 can stand relaxed.

10. I am therefore, of the considered view that exemption/relaxation as sought for in the instant Application be granted to Coal India. However, such exemption/relaxation shall be subject to certain conditions stated herein. The exemption/relaxation has been granted as per the facts __________________________________________________________________________________________ Order in the matter of Coal India Limited Page 5 of 5 contained in the Application and subsequent correspondences received by SEBI from Coal India and shall not operate as a precedent. Order

11. I, in exercise of the powers conferred upon me under Section 11(1) of the Securities and Exchange Board of India Act, 1992 (SEBI Act) and Regulation 28 of the Buyback Regulations 2018, hereby grant exemption/relaxation to the Company, viz. Coal India from ensuring compliance with the requirement of Regulation 24(i)(e) of the Buyback Regulations 2018 in relation to the proposed buyback of 4,46,80,850 equity shares of the Company as mentioned in the Application.

12. The exemption so granted is subject to the following conditions:

i. The proposed buyback shall be in accordance with the relevant provisions of the Companies Act, 2013, the Buyback Regulations 2018 and any other applicable law.

ii. The statements/ averments made or facts and figures mentioned in the Application are true and correct.

13. The exemption granted above is limited to a relaxation from the strict enforcement of Regulation 24(i)(e) of the Buyback Regulations 2018 and shall not be construed as a relaxation from any other requirement under the Buyback Regulations 2108 or the provisions incorporated therein from the Companies Act, 2013.

14. The Application dated February 12, 2019, filed by Coal India is accordingly disposed of. Place: Mumbai G. MAHALINGAM Date: February 20, 2019 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA