Order in the matter of proposed acquisition of shares and voting rights in Indian Overseas Bank

SEBI/WTM/SR/CFD–DCR/50/09/2016 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: S. RAMAN, WHOLE TIME MEMBER ORDER UNDER 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 INDIAN OVERSEAS BANK.

Background –

1.1 Indian Overseas Bank (“Target Company”) is a Public Sector Bank having its Registered Office at Central Office, 763, Anna Salai, Chennai–600002. The shares of the Target Company are listed on BSE and the National Stock Exchange of India Limited (“NSE”).

1.2 The Target Company filed an application dated August 18, 2016 (“Application”), on behalf of its Promoter i.e. the Government of India (“Proposed Acquirer”) seeking exemption from the applicability of Regulation 3(2) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”).

1.3 Regulation 3(2) of the Takeover Regulations, states – “3. Substantial acquisition of shares or voting rights. (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: Provided that such acquirer shall not be entitled to acquire or enter into any agreement to acquire shares or voting rights exceeding such number of shares as would take the aggregate shareholding pursuant to the acquisition above the maximum permissible non-public shareholding.”

1.4 From the aforesaid Application, the following is noted –

A. Vide a letter dated July 19, 2016, the Government of India proposed an infusion of capital in the Target Company, amounting to ₹3101 Crores.

B. 50% or ₹1551 Crores of the aforesaid amount of ₹3101 Crores will be infused immediately through a proposed preferential allotment of 55,57,14,797 equity shares in favour of the Proposed Acquirer/Promoter i.e. the Government of India (“Proposed Acquisition”).

C. At the Board Meeting of the Target Company held on August 16, 2016, the Board of Directors approved raising of additional equity capital to the extent of ₹1551 Crores by way of issue of equity shares on a preferential basis to the Proposed Acquirer/Promoter.

D. An Extra–Ordinary General Meeting (“EGM”) of shareholders in the Target Company was held on September 15, 2016, wherein necessary special resolution for issue and allotment of shares to the Proposed Acquirer/Promoter on preferential basis. The issue price per equity share has been arrived at ₹27.91, in accordance with Regulation 76(1) of (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”). Based on the issue size of ₹1551 Crores and issue price of ₹27.91, the total number of equity shares to be allotted to the Proposed Acquirer/Promoter is 55,57,14,797 of face value ₹10 each.

E. The shareholding pattern in the Target Company (i) prior to the proposed acquisition and (ii) subsequent to the proposed acquisition, is provided as under –

TABLE I – SHAREHOLDING IN THE TARGET COMPANY (SOURCE: APPLICATION) CATEGORY PRIOR TO PROPOSED ALLOTMENT SUBSEQUENT TO PROPOSED (AS ON 26.08.2016) ALLOTMENT NO. OF SHARES NO. OF SHARES AND % AND % A. PROMOTER AND PROMOTER GROUP 139,73,28,445 195,30,43,242 [73.58%] [79.56%] B. FINANCIAL INSTITUTIONS/BANKS/ FOREIGN 50,16,85,686 50,16,85,686 PORTFOLIO INVESTORS/ [26.42%] [20.44%] NON RESIDENT INDIANS/OVERSEAS CORPORATE BODIES/ OTHER PUBLIC SHAREHOLDERS C. GRAND TOTAL (A + B) 189,90,14,131 245,47,28,928 [100%] [100%]

i. From Table I, it is observed that as on August 18, 2016, the Proposed Acquirer/Promoter i.e. the Government of India, held 139,73,28,445 equity shares (73.58%) in the Target Company.

ii. Subsequent to the proposed acquisition i.e. preferential allotment of 55,57,14,797 equity shares, the Proposed Acquirer/Promoter will hold 195,30,43,242 equity shares (79.56%) in the Target Company.

F. The resultant change in shareholding on account of the allotment indicated at paragraph E(ii) above, is likely to increase the concentration of the Proposed Acquirer/Promoter/Government shareholding in the Target Company by 5.98% during the Financial Year 2016–17 i.e. more than 5%, thereby attracting the provisions of Regulation 3(2) of the Takeover Regulations.

G. The details pertaining to the Board of Directors of the Target Company as on the date of the Application, is provided as under –

TABLE II – BOARD OF DIRECTORS OF THE TARGET COMPANY (SOURCE: APPLICATION) SR. NAME STATUS NO. 1. MR. ATUL AGARWAL EXECUTIVE DIRECTOR 2. SMT ANNIE GEORGE MATHEW GOVERNMENT NOMINEE DIRECTOR 3. MR. NIRMAL CHAND RESERVE BANK OF INDIA NOMINEE DIRECTOR 4. MR. R. SAMPATH KUMAR WORKMEN EMPLOYEE DIRECTOR 5. MR. CHINNAIAH PART TIME NON–OFFICIAL DIRECTOR 6. MR. SUJATHA PART TIME NON–OFFICIAL DIRECTOR 7. MR. A. B. D. BADUSHAS PART TIME NON–OFFICIAL DIRECTOR 8. MR. K. RAGHU PART TIME NON–OFFICIAL DIRECTOR 9. MR. NIRANJAN KUMAR AGARWAL SHAREHOLDER DIRECTOR 10. MR. SANJAY RUNGTA SHAREHOLDER DIRECTOR

H. Submissions made by the Target Company on behalf of the Proposed Acquirer/Promoter for exemption from the provisions of Regulation 3(2) of the Takeover Regulations.

In its Application on behalf of the Proposed Acquirer/Promoter, the Target Company submitted as under – a. “Our Bank raises capital from time to time in order to achieve the desired level of CRAR. As on March 31, 2016, Bank’s Tier I CRAR under BASEL III was 7.10% and total CRAR was 9.66%. In order to achieve the desired Tier I of 8.25% and in view of the probable increase in risk weighted assets as on March 31, 2107, bank requires capital infusion. b. Ministry of Finance, Government of India vide letter dated July 19, 2016, has conveyed that the Government has decided to allocate funds to the tune of ₹3101 crore in the bank by way of preferential allotment of equity shares to Government of India.

c. Further, ₹1551 Crore is marked for infusion immediately. Remaining 50% will be infused by the Government of India based on the performance of the Bank on various benchmark activities as envisaged by the Government of India, by the end of December 2016 or earlier. d. The entire process of raising capital by way of preferential allotment must be completed at the earliest in order to improve CRAR as on March 31, 2017, factoring the effect of proposed additional capital infusion by Government of India through the preferential issue in tranches. e. As the proposed infusion of funds by Government of India would increase their shareholding by more than 5% during the Financial Year 2016–17, exemption is sought from the applicability of Regulation 3(2) of the Takeover Regulations. f. Bank has sufficient head room for infusing equity shares and bank’s Board in its meeting held on May 27, 2016, has accorded its approval to the Bank to issue equity shares to a maximum extent of 78.82 crore equity shares (maximum) by way of FPO or QIP or shares to LIC of India any other Insurance Companies/Mutual Funds or shares to employees.”

1.5 Vide an e–mail dated September 28, 2016, SEBI sought clarification from the Target Company regarding compliance of Public Sector Banks with minimum public shareholding requirements in terms of Securities Contracts (Second Amendment) Rules, 2014.

1.6 In reply to the abovementioned e–mail, the Government of India, vide a letter dated September 30, 2016, informed as under:

“As per the request of SEBI, Department of Financial Services, Ministry of Finance, Govt. of India, being the promoter of the company declares that Indian Overseas Bank will comply with Minimum Public Shareholding (MPS) requirements in terms of Securities Contracts (Second Amendment) Rules, 2014.”

Findings –

2.1 I have considered the Application made by the Target Company on behalf of the Proposed Acquirer/Promoter alongwith other relevant material available on record. In this regard, I note – i. The shareholding of the Proposed Acquirer/Promoter in the Target Company as on August 18, 2016, was 73.58% (approximately 139,73,28,445 equity shares).

ii. The Target Company has taken into account the preferential allotment of 55,57,14,797 equity shares to the Proposed Acquirer/Promoter during the Financial Year 2016–17 (increasing Promoter’s holding from 73.58% to 79.56%) while calculating the quantum of proposed acquisition in the instant matter.

iii. The change in shareholding on account of the aforementioned allotment of equity shares by way of the proposed preferential allotment, will result in an increase in the Proposed Acquirer/Promoter’s shareholding in the Target Company by 5.98% during the Financial Year 2016–17 i.e. more than 5%, thereby attracting the provisions of Regulation 3(2) of the Takeover Regulations.

iv. The proposed acquisition is necessitated on account of the Government of India’s objective that all Public Sector Banks are adequately capitalized for ensuring compliance with BASEL III norms.

v. There will be no change in control of the Target Company pursuant to the proposed acquisition as the change will only be in the manner of holding the shares by the Proposed Acquirer/Promoter. Further, there will be no change in the number of equity shares held in the Target Company, by the public shareholders, pursuant to the proposed transactions.

2.2 The infusion of additional capital by the Proposed Acquirer/Promoter will enable the Target Company to maintain a capital over and above the minimum requirement mandated under BASEL III norms and will also provide the Target Company with additional leverage for raising further equity capital at a later date, as and when the need arises. Accordingly, I am of the considered view that exemption as sought for in the Application made by the Target Company, be granted to the Proposed Acquirer/Promoter, subject to certain conditions as ordered herein below.

Order –

3.1 I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) read with Regulation 11(5) of the Takeover Regulations, hereby grant exemption to the Proposed Acquirer, viz. the Government of India, from complying with the requirements of Regulation 3(2) of the Takeover Regulations with respect to the proposed acquisition of 5.98% equity shares during the Financial Year 2016–17, in the Target Company viz. Indian Overseas Bank, by way of the proposed preferential allotment as mentioned in the Application.

3.2 The exemption so granted is subject to the following conditions:

i. The proposed acquisition shall be in accordance with the relevant provisions of the Companies Act, 2013 and any other applicable law. ii. The Government of India/Target Company shall ensure compliance with the statements and disclosures made in the Application. iii. The statements/averments made or facts and figures mentioned in the Application by the Proposed Acquirer/Promoter are true and correct. iv. The public shareholding in the Bank shall be increased to 25% within a maximum period of 12 months from the date of the proposed preferential allotment, in the manner specified by SEBI.

3.3 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 Takeover 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.

3.4 The Application dated August 18, 2016, filed by Target Company on behalf of the Proposed Acquirer/Promoter, is accordingly disposed of.

Place: Mumbai S. RAMAN Date: September 30, 2016 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA