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Tamilnad Mercantile Bank IPO: SAT Dismisses Challenge To Withdrawal Of OFS

The shareholders' objection was to TMB's decision to withdraw the offer for sale component from the IPO.

<div class="paragraphs"><p>Tamilnad Mercantile Bank corporate head office, Tuticorin, Tamil Nadu. (Source: Tamilnad Mercantile Bank)</p></div>
Tamilnad Mercantile Bank corporate head office, Tuticorin, Tamil Nadu. (Source: Tamilnad Mercantile Bank)

The Securities Appellate Tribunal dismissed the challenge to Tamilnad Mercantile Bank Ltd.'s initial public offer on Friday.

Six shareholders of the bank—Robert and Ardis James Co., East River Holdings, Swiss Re Investors (Mauritius), Kamehameha Mauritius, Cuna Group (Mauritius), and FI Investments—had approached the SAT with a plea to injunct the IPO.

Their objection was to TMB's decision to withdraw the offer for sale component from the IPO.

According to the draft red herring prospectus filed in September last year, the IPO was proposed to include fresh issue and the OFS. The red herring prospectus filed in August this year did away with the OFS.

When TMB's board took the decision to withdraw the OFS, the bank approached the Securities and Exchange Board of India in May this year. It sought an exemption from refiling the offer document reflecting the decision of withdrawal of the OFS. SEBI granted TMB an exemption from filing a fresh DRHP.

The six entities challenged this exemption by SEBI on grounds that the shareholder resolution only empowered the board to change the size of the OFS, and not withdraw it altogether.

The modification is illegal as no approval of shareholders was taken before making such a material change, Abhishek Manu Singhvi, counsel for Robert and Ardis James, said.

If there were impediments, the six shareholders should not have been invited to take part in the public issue in the first instance, he said.

The aggrieved shareholders have taken part in the resolution approving the public issue and have also shown willingness to take part in it. The aggrieved shareholders are being excluded based on mere speculative risk. TMB’s board has changed the substratum of the shareholder resolution. On the pretext of modification, you cannot change the intrinsic nature of the scheme.
Abhishek Manu Singhvi, Counsel for Robert and Ardis James

The bank has misused the power of modification under the shareholder resolution, Singhvi argued.

"Such a power was meant to make meagre procedural changes that does not affect the nature of the issue."

Adding to this, Janak Dwarkadas, counsel for East River Holdings, said that the six shareholders became aware of the bank's decision to withdraw the OFS only when an affidavit was filed by it before the Bombay High Court.

Dwarkadas informed the SAT on the dispute around the OFS issue:

  • October 2020: The company sought shareholders’ approval for an IPO and offer for sale.

  • September 2021: The DRHP is issued. "For the first time, we get to know our shares will not be included in the OFS due to FEMA proceedings."

  • November-December 2021: Shareholders made representations to SEBI.

  • January 2022: Three shareholders file a writ before the Bombay High Court. SEBI tells the high court that documents have been asked from the company. "Post that, there was radio silence from SEBI."

  • Aug. 5, 2022: For the first time, "we realised during high court proceedings that entities holding 12,000 shares have asked for an exemption from the OFS".

That's when we realised that SEBI has not only exempted those 12,000 shares, but it has exempted the entire OFS.
Janak Dwarakdas, Counsel for East River Holdings

Rebutting this argument, SEBI's counsel Pradeep Sancheti said the regulator has only exempted TMB from the requirement of filing a revised DRHP reflecting the decision of withdrawal of the OFS. This decision of withdrawal is not what SEBI has opined on, he said.

Additionally, the law firm for the six shareholders was informed of TMB's decision to withdraw the OFS in June 2022. The petitioners' lawyers responded saying that they are seeking relief from the high court to allow participation in the OFS, Sancheti said.

The writ petition is about OFS. I [SEBI] was told [by the high court] whatever information you get, pass on to them [shareholders]. We [SEBI] have done so, and told them OFS has been withdrawn.
Pradeep Sancheti, SEBI's Counsel

Picking up on the shareholders' raising the OFS issue before the Bombay High Court, TMB's counsel said they were engaging in forum shopping. "They approached the high court on the OFS issue. Now that the OFS is scrapped, their petition has become infructuous," TMB's counsel Somashekhar Sundaresan said.

Second, shares of the six shareholders cannot be part of the public issue due to ongoing legal proceedings by the Reserve Bank of India and the Enforcement Directorate, Sundaresan said.

Only eligible shares could be offered to the public as per the shareholder resolution. Eligible shares are those shares with a clear title of ownership. There are several ED proceedings pending against the appellants which makes them ineligible to be a part of the issue.
Somashekhar Sundaresan, TMB's Counsel

Third, there is no need to file a fresh draft prospectus since the disclosure on withdrawal of OFS has been made in the Red Herring Prospectus, Sundaresan said.

If I were to file a new DRHP, what will I do? I will remove the OFS component. That’s exactly what I’ve done in the RHP. I’ve withdrawn the OFS component. This is exactly what the revised DRHP would read. We urgently need to list. I can’t open new branches until I list.
Somasekhar Sundaresan, TMB's Counsel

Finally, pointing to the language of the resolution, Sundaresan said the shareholders themselves gave the bank's board the authority to modify the IPO and the OFS.

"How can they now say board does not have the authority? How are they feigning surprise? You empowered the board. My fresh issue is being held to ransom because of this OFS issue."

The SAT dismissed the arguments challenging the IPO. The appellate tribunal's detailed order is awaited.