Background and Proposed Transaction
CHL Limited[1] is a listed company on BSE Ltd. with a promoter and promoter group holding around 72.84% and public holding around 27.16%. The promoters include individuals and entities such as Malbros Investment Inc. and members of the Malhotra family.
The company proposed to raise funds by issuing compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCDs) to investors categorized into:
- Promoter and Promoter Group members (including Foreign Investor Entity 1, an entity incorporated in British Virgin Islands wholly owned by promoter member Mr. Lokesh Malhotra).
- Public investors including Domestic Investor Entity (Indian resident) and Foreign Investor Entity 2 (incorporated in Malta).
The issue aims to allot CCPS/CCDs in FY 2024-25, converting into equity shares in FY 2026-27, changing shareholding patterns but without increasing the promoter group’s overall voting percentage beyond thresholds.
Structure of Transaction
- The CCPS and CCDs will be issued on the same date and meeting.
- Post-conversion, promoters’ overall shareholding is expected to slightly reduce by about 0.96%.
- Foreign Investor Entity 1 will receive rights to appoint 3 non-executive nominee directors and 1 non-voting observer on the Board.
- Foreign Investor Entity 2 will have rights to appoint 1 non-executive nominee director and 1 non-voting observer.
- Due to these appointments, 4 additional independent directors will be appointed to comply with SEBI Listing Obligations and Disclosure Requirements Regulations, 2015.
- Board strength will increase from 6 to 14 directors, comprising 2 executive, 7 independent, and 5 non-executive non-independent directors including nominee directors.
SEBI’s Interpretative Guidance and Conclusion
- Since the preferential allotment and subsequent conversion of CCDs and CCPS lead to no increase in promoter group’s aggregate shareholding beyond the 5% threshold but a marginal reduction (approx. 0.96%), no open offer is triggered for promoters or Foreign Investor Entity 1 under Regulation 32.
- Foreign Investor Entity 1’s individual shareholding post-issue does not exceed 25%, so no obligation for open offer arises under Regulation 33.
- Domestic Investor Entity and Foreign Investor Entity 2 holding stakes below thresholds, so they are not required to make public open offers.
- Appointment of nominee directors by Foreign Investor Entity 1 and 2 does not amount to acquisition of control since they do not hold majority on the Board, and promoter group continues to control management.
- Increasing board size and appointing independent directors further dilutes control by new investors, supporting that change in control or majority directorship is not occurring.
- The guidance clarifies that open offer obligations do not get triggered solely by these nominee appointments or increase in voting rights within the prescribed limits.
- The SEBI’s view is based on facts represented and may differ if underlying conditions change.
- SEBI’s informal guidance relies on interpretations of Takeover Code provisions consistent with previous clarifications emphasizing control linked to majority directorship or substantive management rights.
- The ruling aligns with the principle that mere minority nominee directorship rights without majority or management control don’t trigger takeover obligations.
- It reiterates how shareholding thresholds and control definitions interplay in triggering open offer requirements.
For detailed discussion, please feel free to contact devadhaantu@devadhaantu.in
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[1] SEBI Informal Guidance on by way of an Interpretive Letter in relation to SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) in the matter of CHL Ltd. dated January 22, 2025