Tribunal permits control through preference shares

A recent order by the Securities Appellate Tribunal (SAT) in the matter of Weizmann Fincorp, a listed company, is likely to open up a hitherto unexplored avenue for promoters to arrogate almost absolute control over a listed company, without delisting or making a mandatory open offer under the (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the takeover code).

Promoters of Weizmann enhanced their voting rights from 65.67% to 98.32% by virtue of preference shares they held. Preference shares, if unpaid for two years, acquire voting rights akin to those accompanying equity shares under the provisions of section 87(2)(b) of the Companies Act, 1956.

Preference shares were excluded from the purview of the takeover code in September 2002, on the ground that they do not carry voting rights. However, considering the spirit of the takeover code, which mandates an open offer to all shareholders upon the slightest increase in a shareholder’s voting rights beyond 55%, it was unclear if the voting rights attached to preference shares could be entirely excluded from the purview of the code. In its order, SAT has now clarified that the increase in voting rights attached to preference shares shall not be considered for the purposes of the takeover code.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.