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November 5, 2013

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SEBI (Delisting of Equity Shares) Regulations, 2009 – Regulation

Listed company – promoter diluted 9% of its shareholding by way of approved Offer for Sale “OFS” scheme - later company opted for delisting which was approved by majority of shareholders - Board insisted that the company’s eligibility for delisting should be linked to its promoter’s pre - OFS shareholding – whether tenable – Held,No.

The public shareholding in the Appellant stood at 10% as opposed to the mandatory requirement of 25% which has been prescribed by the amended Securities Contracts (Regulation) Rules, 1957 (“SCRR”). In order to achieve this minimum public shareholding, the appellant after seeking and receiving the required approvals from the Foreign Investment Promotion Board (“FIPB”) decided to issue and launch OFS in 2 tranches of 7.5% each. When the OFS was issued, it was issued with an option to sell an extra 1.5% of the Appellant’s shares if the OFS was received well in the capital market. As it turned out, the Appellant ended up divesting its shareholding by 9% and consequently, FKSL’s shareholding in the Appellant was reduced to 81%.

Meanwhile, appellant’s Kalyani plant was closed as the Food and Drugs Administration (“FDA”) of US, while conducting a routine inspection found certain discrepancies in adherence to norms with respect to manufacturing, documentation practices and product testing. Next, the Appellant decided to undertake voluntary delisting, which was successfully completed as per the norms laid down in the delisting regulations. The Respondent passed an order directing that the pre-OFS shareholding of FKSL shall be applicable for the purposes of regulation 17 of Delisting Regulations. This is challenged in the present appeal before the Tribunal.

It is clear from the facts on record that the OFS was made for valid reasons, to seek delisting of shares under Delisting Regulations, whether, SEBI while permitting delisting, is justified in directing that for purpose of delisting shares held by promoters, should be considered at 90% instead of 81%. Admittedly, necessary decision for delisting has been taken after following due process of law. SEBI does not dispute genuineness of the reasons on the basis of which delisting is sought. If delisting is in the ordinary course of business, then there is no reason for imposing conditions. It appears that impugned direction has been issued on the basis of certain complaints which are yet to be investigated. Therefore, in the facts of the present case, instead of fulfilling minimum public shareholding requirement under SCRR, since delisting of shares under Delisting Regulations have been sought for valid and genuine reasons, in our opinion, SEBI while permitting delisting was not justified in directing that the promoters’ shareholding prior to OFS, that is shareholding at 90% instead of 81%, should be taken into consideration for the purpose of delisting.

In the light of the aforesaid discussion, present appeal was allowed to the extent that the Appellants may go ahead with their delisting offer without the condition imposed by the Respondent regarding compliance with Regulation 17(b).

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