Astrazeneca delisting: Test case for Sebi's rule on 10% cap for FIIs

Astrazeneca Pharma’s delisting could be delayed further with some aggrieved shareholders moving the Securities Appellate Tribunal claiming the process was rigged. The Bombay High Court has ruled that the Astrazeneca cannot proceed with the delisting unless SAT decides on the appeal.

The matter relates to Astrazeneca’s controversial offer-for-sale (OFS) to institutional investors in May 2013 to pare its stake to 75 percent from 90 percent to comply with Sebi rule on minimum 25 percent public shareholding.

A Sebi probe revealed in June this year that 6 FII sub-accounts-DB International Asia, Liverpool Limited Partnership, Suffolk (Mauritius), Morgan Stanley Asia (Singapore) PTE, BNP Paribas Arbitrage, Mansfield (Mauritius) and Merrill Lynch Capital Markets Espana S.A. SVB-bought 94 percent of the OFS.

Minority shareholders alleged that the company had planned the OFS in such a way that it would be able to meet the 90 percent threshold for delisting by buying back the 15 percent it had sold to the institutional investors. In the postal ballot held in June, 76 percent of the votes in favour of the delisting came from two enties, Mansfield and Suffolk.

Sebi’s probe of the end subscribers of these sub-accounts revealed a common name-Elliot group.

Sebi’s findings:

* Suffolk (Mauritius) Limited (SEBI registered sub-account) is indirectly wholly owned by Elliott International L.P.
* Mansfield (Mauritius) Limited (SEBI registered sub-account) is indirectly wholly owned by Elliott Advisors, L.P.
* The Liverpool Limited Partnership is wholly owned by Elliott Associates, L.P.
* Elliott Advisors (HK) Ltd. provides management service to Elliott International L.P and Elliott Associates L.P. through Elliott Management Corporation.

After the OFS, the Elliot Group bought some more shares from the open market and now owns 15.52 percent in AstraZeneca.

Sebi observed that “prima facie, the entities appeared to be related.” The regulator also raised a red flag that “Elliott group might be working in collaboration/concert with the promoters of Astrazeneca, to facilitate the delisting.”

In case the entities are related, as Sebi suspects, it is a clear violation of the FII rule that prohibits a single foreign portfolio investor or an investor group from owning more than 10 percent stake in a company.

The good part in the Astrazeneca case is that Sebi has been able to track down the end subscribers. But the challenge for the regulator will be to prove that the entities are related and have been acting in concert.

Else Sebi’s recently announced restrictions on offshore derivative instruments (commonly known as participatory notes or P-notes) will have little meaning.

The modified Sebi guidelines on issuance of participatory notes rule that where an FII has investments as registered foreign portfolio investor and also holds positions as a participatory note subscriber, the 10 percent limit would apply on the aggregate of FPI investments and P-note positions held in the company.

The Astrazeneca case could be a starting point for the regulator to show that it can enforce this rule.