The Securities and Exchange Board of India (SEBI) in an informal guidance letter to Xchanging Solutions Limited recently made public, has given a view that contractual mergers effected in foreign jurisdictions which per se do not follow a merger approval process similar to India (ie with blessings of a  court / tribunal), despite regulatory oversight (and including shareholders' approval), would not be exempted from open offer obligations under the Securities and Exchange Board of India (Substantial Acquisitions of Shares and Takeovers) Regulations 2011 (Takeover Code). For context, the relevant merger exemption under the Takeover Code states that any substantial acquisition pursuant to a scheme of arrangement or reconstruction plan (including amalgamations / mergers / demergers) directly or indirectly involving an Indian listed company must be pursuant to an order of a court / tribunal / competent authority, in India or overseas.

According to the application seeking the informal guidance, the overseas contractual merger (triggering mandatory open offer obligations in respect of Xchanging Solutions Limited, an Indian listed company) was to be effected in accordance with "Chapter 92A of the Nevada Revised Statutes" which unlike the Indian scenario (ie of obtaining an approval of a court / tribunal), requires inter alia a satisfactory review of the shareholders proxy disclosure statement, a registration statement being declared effective by the Securities and Exchange Commission (ie the securities market regulator in the United States of America), a vote in favour by the shareholders of the overseas listed company on the contract envisaging the merger, and finally, filing a merger certificate with the Secretary of State of the State of Nevada. Therefore, Chapter 92A of the Nevada Revised Statutes did not envisage obtaining any "order" of a court / tribunal / competent authority. Strangely, SEBI's informal guidance letter does not provide any rationale for its view, leading one to deduce that SEBI may have applied principles of strict interpretation while arriving at its conclusion. The SEBI (Informal Guidance) Scheme 2003 does not explicitly mandate SEBI to provide a rationale for its view; however historically SEBI has generally provided reasons (albeit succinct) in its informal guidance letters.

The timing of the informal guidance letter may have also jolted SEBI to adopt a strict view instead of a liberal and purposive interpretation of the merger exemption: it was after the 2017 order of the Securities Appellate Tribunal (SAT) in Arbutus Consultancy LLP v SEBI (Arbutus). In Arbutus, the appellants relied inter alia on a past informal guidance where SEBI had diluted (wrongly) a certain explicit 3-year condition for availing an inter-se promoter transfer exemption under the Takeover Code. In turn, the SAT observed that "... an interpretation provided under the Scheme by an official of department of SEBI cannot be used against the correct interpretation of law (in the instant matter SAST/Takeover Regulations, 2011)". The SAT further appeared to accept arguments put forth by the respondent, SEBI to state that:

"When a straight forward reading of the Regulation/law is available that is the only way it should be read. In the instant matter no other interpretation is actually possible... When the statute is clear, informal guidance should not be relied on. Informal guidance scheme cannot be used to reduce the importance of the statute itself."

Be that as it may, in Xchanging, considering that the spirit of the Takeover Regulations (founded on principles of fair treatment and regulatory oversight) seems to have remained intact, SEBI did have some leeway (unlike in Arbutus) to liberally and purposively interpret the exemption provision placing reliance on the SAT's order in Eaton Corporation v SEBI (2001), which coincidentally also involved an overseas contractual merger being effected in the United States of America (State of Ohio) and such merger being exempted  from open offer obligations under the 1997 takeover regulations. The view adopted by SEBI can potentially scuttle overseas contractual mergers as merger parties would not only be embroiled in a time consuming open offer process [in India] but also the restrictions and costs associated with it. After all, as the Ajay Singh acquisition of SpiceJet suggests, it is not uncommon for SEBI to be liberal when it comes to open offer exemptions.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com