Exemption order under regulation 11(5) of SEBI (SAST) Regulations, 2011 in the matter of Indo Asia Finance Limited

WTM/GM/CFD/ DCR1/29/2020–21 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER UNDER SECTION 11(1) AND SECTION 11(2)(h) OF THE SEBI ACT READ WITH REGULATION 11(5) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011.

IN THE MATTER OF PROPOSED ACQUISITION OF SHARES AND VOTING RIGHTS IN – TARGET COMPANY INDO ASIA FINANCE LIMITED

ACQUIRER SARAVANA GLOBAL HOLDINGS LIMITED

BACKGROUND – 1. An Application dated February 17, 2018 read with emails/letters dated March 14, 2018, April 18, 2018, March 08, 2019, September 26, 2019 and August 12, 2020 (“Application”) seeking exemption from the applicability of Regulations 3 and 4 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) in the matter of proposed acquisition of shares and voting rights in Indo Asia Finance Limited (“Target Company / TC / the company”) has been received by SEBI from Saravana Global Holdings Limited (“Proposed Acquirer”).

2. The Target Company, viz. Indo Asia Finance Limited, was incorporated on April 17, 1990. Its IPO took place on July 11, 1995 and it is listed at the Bombay Stock Exchange. The Target Company was registered with the RBI as an NBFC with registered certificate

Order in the matter of Indo Asia Finance Limited no. 07-00308 dated June 09, 2011, which has been cancelled vide RBI Order dated June 25, 2020.

3. Regulations 3 and 4 of the Takeover Regulations state – “Substantial acquisition of shares or voting rights.

3. (1) No acquirer shall acquire shares or voting rights in a target company which taken together with shares or voting rights, if any, held by him and by persons acting in concert with him in such target company, entitle them to exercise twenty-five per cent or more of the voting rights in such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations.

(2) No acquirer, who together with persons acting in concert with him, has acquired and holds in accordance with these regulations shares or voting rights in a target company entitling them to exercise twenty-five per cent or more of the voting rights in the target company but less than the maximum permissible non-public shareholding, shall acquire within any financial year additional shares or voting rights in such target company entitling them to exercise more than five per cent of the voting rights, unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations:

… … …

Acquisition of control. 4. Irrespective of acquisition or holding of shares or voting rights in a target company, no acquirer shall acquire, directly or indirectly, control over such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations.”

4. As per the Application, the Proposed Acquirer is part of the promoter group of the Target Company. The promoter group of the Target Company currently holds 51.67% of the total equity shares of the Target Company, out of which the Proposed Acquirer individually holds 0.01% equity shares in the Target Company. The shareholding pattern of the Proposed Acquirer (as disclosed in its letter dated September 26, 2019) is as under:

Shareholding pattern of the Proposed Acquirer Name of shareholder No. of shares Shareholding (%) Promoters’ holding Mr. Padam J Challani 2,51,000 2.49 Mrs. P Shobha 79,42,500 78.68 Jawarilal Padam Chand 8,98,200 8.90 HUF Mrs. J P Swapna 1,000 0.01 Ajit P Challani HUF 1,000 0.01 Total of Promoter Group 90,93,700 90.09 Non-promoters holding Narayanaswamy 10,00,000 9.91 Ramchandran Total 1,00,93,700 100.00

5. The shareholding of the promoter group of the Target Company is as follows:

Ms. P Sobha 45,54,154 (50.62%) Sarvana Global Holdings Limited (Proposed Acquirer) 1,300 (0.01%) Others 94,645 (1.04%) Sub-total 46,50,099 (51.67%)

Details of proposed acquisition:

6. The Proposed Acquirer proposes to acquire 60,00,000 equity shares, at a price of Rs.10 each (for a total price of Rs. 6 Crore) of the Target Company through preferential allotment. The equity shares have a face value of Rs. 10 each. The pre and post shareholding patterns of the promoter and promoter group in the Target Company pursuant to the proposed transaction as on September 09, 2019 are as under:

Name of shareholder Pre-transaction holding Post-transaction holding A. A. Promoter’s shareholding in the Target Company Ms. P Sobha 45,54,154 (50.62%) 45,54,154 (30.37%) Sarvana Global Holdings 1,300 (0.01%) 60,01,300 (40.00%) Limited (Proposed Acquirer) Others 94,645 (1.04%) 94,645 (0.63%) Sub-total (A) 46,50,099 (51.67%) 1,06,50,099 (71.00%) B. B. Public shareholding 43,49,901 (48.33%) 43,49,901 (29.00%) Total (A+B) 90,00,000 (100%) 1,50,00,000 (100%)

7. Since the aforementioned transactions (i.e. acquisition of shares by the Proposed Acquirer, which is part of the promoter group of the Target Company) would result in breach of threshold limits prescribed under Regulations 3 and 4 of the Takeover Regulations 2011, triggering open offer obligations thereunder, the Proposed Acquirer has sought exemption from the said open offer obligations.

8. The Proposed Acquirer was granted an opportunity of personal hearing on August 05, 2020 which was attended by Shri N. Srikanth (Director and CFO, Saravana Global Holdings Ltd.) through audio-visual means. Subsequently, the Proposed Acquirer has made further written submissions vide letter dated August 12, 2020.

GROUND FOR SEEKING EXEMPTIONS –

9. The Proposed Acquirer has cited inter alia the following grounds while seeking exemption:

(a) Indo Asia Finance Ltd, the Target Company, was incorporated in the year 1990 and was listed in 1995. It presently has around 1500 public shareholders. It is one of the pioneering Non-Banking Finance Companies (NBFCs) in Tamil Nadu, registered as an ‘Asset Finance Company’, instrumental for commercial vehicle financing particularly in the rural areas which did not have access to the regular banking at that point of time. It has carved a niche for itself over the last 30 years, amongst scores of commercial vehicle owners in Tamil Nadu.

(b) As per section 45-IA of the RBI Act, 1934, the Target Company had to maintain a minimum of Rs.2 Crore ‘Net Owned Funds’ (“NOF”). However, due to the effect of economic slowdown in the year 2008 and poor recoveries, the Target Company had to make substantial provisions in the years between 2010-2014, which severely depleted its NOF and it needed urgent infusion of equity capital.

To bridge the consequent resource gap and shortfall in NOF, the promoters of the Target Company proposed to make a fund infusion of Rs. 6 crores through the Proposed Acquirer, viz. Saravana Global Holdings Ltd. (which is part of the promoter group of the Target Company), subject to SEBI’s and other Statutory approvals. For this purpose, the shareholders of the Target Company approved a Preferential Allotment of 60 lakh shares at Rs. 10/- each, aggregating to Rs. 6 crores, to the Proposed Acquirer, by passing Special Resolution in the AGM held on 31.12.2014. The Special Resolution was passed unanimously by 100% of shareholders of the Target Company present and voted.

(c) Subsequent to the AGM, the Target Company was advised that the proposed Preferential Allotment would attract the provisions of SEBI Takeover Code and that the Proposed Acquirer would have to buy additional 26% from the public through open offer. At that point of time, the shares of the Target Company were traded at less than Rs. 5 per share (recent quotation is Rs. 3.80 per share) and the Target Company was advised that the Preferential Allotment has to be made at not less than Rs. 10 face value (since the Companies Act, 2013 does not provide for issue of shares at discount in such cases) and the acquisition from the public shareholders at the same time has to be at the same issue price of Rs. 10/- per share. Since this would have involved an outgo of about Rs 3 crores, the promoters of Proposed Acquirer were not in a position to do so. Having regard to that, since the Promoters’ infusion of Rs. 6 Crores through the Proposed Acquirer was the very lifeline for the Target Company and which had material bearing in meeting the NOF requirements of RBI, failing which the certificate of registration (COR) would have been cancelled, the Proposed Acquirer chose to file the instant Application dated February 17, 2018 with SEBI seeking exemption as per Regulation 11 (1) of Takeover Regulations.

(d) While the Application was still pending, the RBI issued a letter dated May 20, 2019 to the Target Company asking to show cause as to why the Certificate of Registration of the Target Company should not be cancelled due to inter alia non-compliance with the NOF criteria. In the said letter, the RBI had calculated the Target Company’s NOF by inter alia excluding the amount of Rs. 6 crores of impending Preferential Allotment to the Proposed Acquirer, which was reflected as “Share Application Money” in the Balance Sheet of the Target Company awaiting abovementioned exemption from SEBI.

(e) Subsequently, the RBI vide an order dated June 25, 2020, cancelled the certificate of registration of the Target Company, in terms of sub-section (6) of Section 45- IA of the RBI Act, 1934, citing non-compliance with the provisions regarding maintenance of minimum regulatory NOF by the Target Company as one of the grounds. The RBI had also referred inter alia to the Target Company’s failure to allot shares against ‘share application money’ of Rs.6 Crore and had rejected the Target Company’s plea to treat the said amount as part of capital for calculation of NOF.

(f) However, the Target Company is sanguine about restoration of its NBFC license once the exemption sought for in respect of the Preferential Allotment is received from SEBI. Firstly, in order to defend and protect its interests, the Target Company has taken necessary steps to prefer an appeal against the impugned order of cancellation of RBI before the Union Government of India. Further, in its oral interactions with the RBI, the Target Company has been given to understand that at least, if the allotment of shares of Rs.6 Crore to the Proposed Acquirer, which would automatically increase the capital base of the Target Company, which is one of the two major issues pointed out by RBI, had happened, the present cancellation of COR would not have occurred. Further, if the Target Company is able to favorably conclude the same, further time would be granted and the certificate of registration would be restored.

(g) Unless the Target Company increases its NOF and complies with the criteria stipulated by the RBI, its Certificate of Registration is not likely to be revived, leading to stoppage of business and irreversible damages to the Target Company. It is for this reason that the Proposed Acquirer is making the capital infusion of Rs.6 Crore in the Target Company. If the preferential allotment for Rs. 6 Crore to the Proposed Acquirer is not completed, it would have adverse implications for the company’s business existence. The proposed preferential allotment to the Proposed Acquirer will support the Target Company to continue to be compliant with RBI’s capital adequacy norms. The proposed capital infusion of Rs.6 Crores is the single main solution for the Target Company to comply with the NOF Requirements stipulated by the RBI.

(h) The Proposed Acquirer does not have the wherewithal to acquire additional 26% of the equity shares from other shareholders of the Target Company under open offer which would be required to be given under the provisions of Takeover Regulations due to the proposed acquisition. The price of the scrip of the Target Company is about Rs. 3.80 which is less than 50% of the par value of Rs. 10. Since the proposed preferential allotment is to be done at a price of Rs. 10 per share which his 2.5 times higher than the current market price, any additional acquisition of shares under open offer would have to be done at the same price, resulting in huge financial burden for the Proposed Acquirer, for which it does have adequate resources.

(i) The Proposed Acquirer with great difficulty has arranged funds of Rs.6 Crore towards capital infusion in the Target Company by way of Preferential

Allotment, in order to improve its business viability and sustainability. Since the assets of the Proposed Acquirer are not in liquid form, it will not be possible under the current circumstances for the Proposed Acquirer to mobilize additional funds to carry out the open offer.

(j) The promoter & promoter group already holds 51.67% of the Target Company which will increase to 71% on account of the preferential allotment. Hence, there will be no change in control. Further, considering that the approval for Preferential Allotment to the Proposed Acquirer was passed by Special Resolution of the Target Company in December 2014, if the Proposed Acquirer had exercised its right as Promoter to acquire 5% every year under the Takeover Regulations without triggering the Take-over code, it would have resulted only at the same level of holding. It is also pertinent to mention that SEBI has recently in June 2020, allowed promoters to increase their stake by 10% through preferential allotment without triggering the Takeover Code for the current financial year, due to Covid 19.

(k) The interest of the public shareholders will not be prejudicially affected by the grant of exemption to the proposed acquisition for the reasons that (i) the money is being brought into the company directly by the Promoters as direct investment to meet the RBI requirements to retain the COR and preserve and protect the on-going business of the Company and not as purchase of secondary market shares or secondary investment, (ii) the Preferential allotment to the Proposed Acquirer is proposed to be made at a price of Rs. 10 per share which is at nearly 3 times the market price and hence will certainly safeguard the interest of public shareholders, and (iii) the Preferential allotment to the Proposed Acquirer is proposed to be made at over two times the book value post preferential allotment of Rs. 4.80 per share.

10. The Application was referred to Takeover Panel which in its meeting held on February 25, 2020 recommended to reject the Application on the ground that RBI has not prescribed any specific mode to meet NOF requirement and exempting the proposed transaction would lead to setting undesirable precedents and will deprive public shareholders from opportunity to exit the company.

CONSIDERATION –

11. I have considered the Application submitted by the Proposed Acquirer and other material available on record. After examining the facts and circumstances of the case, I note the following:

(a) The Target Company held a certificate of registration as an NBFC, as on date of Application, which has since been cancelled by the RBI inter alia due to non-compliance with the NOF requirements stipulated by it. The Target Company is in urgent need of capital infusion to meet the NOF requirements stipulated by the RBI and the proposed Preferential Allotment to the Proposed Acquirer is vital for the said purpose, since the Target Company intends to make an attempt to revive the company’s certificate of registration with RBI as an NBFC. In the absence of funds proposed to be infused through the Preferential Allotment, which are aimed at meeting the statutory obligations pertaining to NOF for attempting to revive its certificate of registration with RBI, the company’s very existence as an NBFC appears to be at stake.

(b) The current market price of the shares of the Target Company is Rs.3.45 per share (closing price on BSE as on September 11, 2020) whereas the Preferential Allotment is proposed to be made at Rs.10 each (which is almost thrice the current market price of the scrip). Thus, the grant of exemption to the Proposed Acquirer appears to be in the larger interest of the Target Company and its shareholders, mainly the public shareholders.

(c) The promoter group of the Target Company, which includes the Proposed Acquirer, already holds 51.67% equity shares of the Target Company, which would increase to 71%. Further, Mrs. P. Sobha, who is one of the promoter of the Proposed Acquirer (viz. Saravana Global Holdings Ltd.) and individually holds 78.86% shares therein, is also a promoter of the Target Company and individually holds 50.62 % shares therein, prior to the proposed acquisition. Further, Mrs. P. Sobha’ husband Shri Padam J Challani also holds 2.49% shares directly and 8.90% shares through his HUF in the Proposed Acquirer company. Thus, there is no change in control in the Target Company.

12. Considering the aforementioned factors in totality, I am of the view that exemption as sought for in the Application (read with further submissions) may be granted to the Proposed Acquirer, solely from the perspective of fulfilling the regulatory capital requirements without, at the same time, jeopardizing the interests of the public shareholders.

ORDER –

13. I, in exercise of the powers conferred upon me under Section 19 read with Section 11(1) and Section 11(2)(h) of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) and Regulation 11(5) of the Takeover Regulations, hereby grant exemption to the Proposed Acquirer, viz. Saravana Global Holdings Limited, from complying with the requirements of Regulations 3 and 4 of the Takeover Regulations with respect to the proposed acquisition in the Target Company (viz. Indo Asia

Finance Limited), by way of the proposed transaction as mentioned in the Application.

14. The exemption granted above is limited to the requirements of making open offer under the Takeover Regulations and shall not be construed as exemption from the disclosure requirements under Chapter V of the aforesaid Regulations; compliance with the SEBI (Prohibition of Insider Trading) Regulations, 2015; Listing Agreement/SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 or any other applicable Acts, Rules and Regulations.

15. The Application dated February 17, 2018 read with e–mails/letters dated March 14, 2018, April 18, 2018, March 08, 2019, September 26, 2019 and August 12, 2020 submitted by Saravana Global Holdings Limited, is accordingly disposed of.

PLACE: MUMBAI G. MAHALINGAM DATE: SEPTEMBER 14, 2020 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA