ABG Shipyard and Bharati Shipyard are involved in a bid to acquire M/s Great Offshore Limited. Certain developments have raised many such questions about what is happening in the deal. We are trying to look at the same from an investor(minority) or shareholders’s perspective.

Questions Arising

• Bid by ABG emerges only because he acquired 2.12 % shares of the company. When the shares under question are no longer held by him why it does not amount to non-compliance of the same and amount to cancellation or withdrawal of bid and mis statement as per letter of offer.
• In competitive bidding the law may be silent on profit making but the intention cannot be to allow a counter bidder to profit at the cost of minority shareholders.
• This would lead to a case where a cartel would bid, make an open offer and by bid, counter bid, counter counter bid, move the price and then exit leaving investors stuck. I believe though this may not be the intention, this is happening. ABG makes money and to safeguard his escrow account is keeping the bid ‘technically’ open.
• The amount of profit and the property in question should be frozen until a decision is taken.
• The open offer is allowed to be made only by Category I merchant banker and an escrow account is mandatory to impart credibility to the person making the offer. Here ABG has sold and mis represented and violated the trust that is to be demonstrated by an acquirer.

SEBI must act on this issue before it becomes a rampant way of cheating innocent shareholders.

Facts of the issue and case are given below in full detail.

The SEBI (Acquisition of Shares & Takeovers) regulations, 1997 is aimed at enabling minority shareholders participate in “price discovery” mechanism. The Regulations thus aims at not only protecting the interest of minority share holders but also their betterment.

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 have clearly stated the procedure of how an open offer should be conducted and laid down the manner and methodology by which any bidder has to proceed ahead with the prospective bid.

Similar to the case of an Initial Public Offering (IPO), SEBI has laid down stipulation to reflect commitment by the prospective bidder to provide comfort to the prospective tenderers. SEBI has vide Regulation 28 of SEBI (SAST) 1997 provided for opening of an escrow account which needs to be maintained by a merchant banker to the extent of limits stipulated under the regulation.

The rights, responsibilities and duties in case of an open offer of a merchant banker (in case of Target Company) stand at par when compared to that of an IPO. Notably only Category 1 merchant bankers are eligible to advise and be appointed as Managers to the offer. Any misstatement in the offer document by the prospective bidder could be disastrous and negatively impact the merchant banker’s credibility and hence future existence.

As per Regulation 21, the prospective acquirer is obliged to give a public announcement (PA) of minimum 20 % of the voting capital of the Company. As per Regulation 25 – Competitive Bid, any person other than the acquirer who has made the public announcement and who is desirous of making any offer, shall within 21 days of the public announcement of the first offer, make a PA for such number of shares which when taken together with shares held by him along with persons acting in concert (PAC) shall be atleast equal to the holding of the first bidder and for which the present offer by the first bidder has been made.

Facts of the case During December 2008, post invocation of pledge part of personal shareholding (14.89%) of Mr. Vijay K Sheath changed hands in favour of Bharati Shipyard Limited (BSL Group) at an estimated price of Rs.315/ share. On June 3, 2009 SBI Capital Markets Ltd. (Manager to the Offer) on behalf of BSL Group, made an Open Offer under REGULATION 10 through a public announcement (PA) for acquisition up to 78,26,788 equity shares representing 20% of the share capital of Great Offshore Limited (GOFF) at a price of Rs. 344 per share.

Subsequently on June 23, 2009 , under Regulation 25 of SASTR, Kotak Mahindra Capital Ltd. (Manager to the Offer) on behalf of ABG Group, made a counter offer under REGULATION 10 & 12 through a PA for acquisition of 1,25,71,072 equity shares forming 32.12% of the diluted equity share capital of GOFF at a price of Rs. 375 per share. (improved the BSL Groups offer by 9%). As on June 23, 2009, ABG Group together with PACs held 7,89,502 (2.12% of the share capital of the Company)

Increasing shareholding by both the prospective contenders resulting in “price discovery”

On June 23, 2009, BSL group acquired additional 4.58% equity stake at a price of Rs.405. As per regulation 26 of SASTR the revised price stood at Rs. 405 per share. (A rise by 17.7 %)

On July 29, 2009, ABG Group acquired additional 5.19% stake at a price of Rs.450 per share thereby increasing their aggregate holding to 7.21%. Revised price of the offer stood at Rs.450 per share (a rise by 20%). During the week ABG Group acquired additional 0.66% at Rs.520 per share increasing their aggregate holding to7.87%. Revised price of the offer stood at Rs.520 per share (a rise by 15.5 %).

On September 16, 2009, BSL group acquired additional 3.01% equity stake at a price of Rs.560 per share increasing their aggregate holding to 22.48%. Revised price stood at Rs. 560 per share (a rise by 38 %)

On 18th November 2009, SEBI accorded permission to both the contenders – Natural Power Ventures Pvt. Ltd. (the Acquirer) along with Bharati Shipyard Ltd. and Dhanshree Properties Pvt. Ltd. [together referred to as the Persons Acting in Concert (PAC) with the Acquirer], for convenience referred to as BSL Group and to Eleventh Land Developers Pvt. Ltd. (Acquirer) along with ABG Shipyard Ltd, referred to as the PAC with the Acquirer, for convenience referred to as ABG Group for making respective open offers to the shareholders of Great Offshore Limited within the SEBI (SAST) Regulations 1997.

Accordingly, ABG Group on 27th November 2009, made an Open Offer for acquiring 1,25,71,072 equity shares representing 32.12% of the fully-diluted capital of the company under Regulation 10 and 12 of the SEBI (SAST) Regulations 1997.

Similarly, BSL Group made an PA on 30th November 2009 for making an Open Offer for acquiring 78,26,788 equity shares representing 20% of the emerging voting capital of the company under Regulation 10 of the SEBI (SAST) Regulations 1997.

The detailed programme of the open offers as per PAs is as below:

In a significant development, On December 1, 200, BSL Group revised the Offer Price to Rs. 590 / share (earlier Rs.560/ share) making it applicable on the entire offer to acquire 20% of the emerging voting capital of the company.

On December 2, 2009 ABG Group sold 30,78,000 shares through stock market sales depleting its holding to 571 shares. A corresponding stock exchange filing was made on the same date. On December 9, 2009, ABG Group vide a PA declared the above sale of virtually its entire holding of around 8% as declared in the Letter of Offer and PA communicated to all shareholders.

Commitment

A per Regulation 28 of SEBI (SAST) 1997, as commitment BSL has deposited Rs.58.85 crores in an escrow account with Punjab National Bank while ABG Group has made available Rs.81.50 crores by way of escrow arrangement with Kotak Mahindra Bank Limited in favour of the respective Managers to the offer.

The respective offers are underway and post completion of the entire process the successful bidder would emerge.

However the common shareholder is at grave loss financially and against the spirit of SEBI. In a scenario which should have been the normal scenario BSL group would be holding 23% and ABG group would be holding 8%. Hence market float would be 69%. This would be eligible to chase aggregate offer of 53%. Hence probability theory mentions that every holding would have a 0.76 chance to get bought under any of the bidders. Hence academically if the entire float applies the 53% will change ownership. Hence, of this 20% would get Rs.590/ share while 33% would get Rs.520/ share.

Academically if an investor has 690 shares then he would be bought over to the extent of 525 shares i.e. he will get on 198 shares Rs.590/ share and on balance 327 shares he would get Rs.520/ share. Hence his total sale consideration is Rs.2,86,860 for 525 shares i.e. Rs.546 per share subject to tax and loss of mar to market on residual 165 shares @ Rs.519/ shares.

This scenario is different toady as the earlier float has increased on ABG selling its entire stake of 8% making the float of 77% eligible to change hands i.e. 53%. Hence market float of 77% would be eligible to chase aggregate offer of 53%. Hence probability theory mentions that every holding would have a 0.68 chance to get bought under any of the bidders. Hence academically if the entire float applies the 45% will change ownership, (presuming that 8% is bought over by one of the bidders).

Hence, if academically an investor has 690 shares then he would be bought over to the extent of only 450 shares i.e. if BSL has bought 8% then 120 shares will be sold @ Rs.590/ share and 330 shares would be sold @ Rs. 520/ share . Thus a total consideration of Rs. 2,42,400 i.e. Rs.538 per share subject to tax and loss of mar to market on residual 240 shares @Rs.519/ share. However if ABG has bought 8% then 200 shares will be sold @ Rs.590/ share and 250 shares would be sold @ Rs. 520/ share . Thus a total consideration of Rs. 2,48,000 i.e. Rs.551 per share subject to tax and loss of mar to market on residual 240 shares @Rs.519/ share.

First time in corporate history of take over’s, wherein SEBI has been put to test of not being able to handle the intricacies of the regulation under the takeover code.