AstraZeneca's 'game of delisting' and Elliott Group finally under SEBI lens!
Moneylife Digital Team 25 June 2014

The de-listing process of pharma major AstraZeneca and the role of Elliott group has come under market regulator SEBI’s lens for violation of its regulations on fraudulent and unfair trade practices

Market regulator Securities and Exchange Board of India (SEBI) has asked Bombay stock exchange (BSE) and National Stock Exchange (NSE) to keep an eye on the delisting process of AstraZeneca Pharma India Ltd (AZ India). However, the market regulator has still not acted upon several instances of insider trading relating to AZ India, as highlighted by Moneylife in March 2014.

In a late night order issued on Tuesday, SEBI asked BSE and the NSE to “closely monitor the entire delisting process of AstraZeneca Pharma and allow the final delisting of its shares only after satisfying themselves that the process has been fair and transparent.”

The market regulator has asked both the Exchanges to promptly report aberrations in the delisting process.

SEBI further directed that the promoters of AstraZeneca Pharma to purchase shares from public shareholders in the delisting offer only, after seeking approval of the BSE and the NSE.

The market regulator suspects Elliott Group (end subscribers or participatory note - PN holder and sub accounts) is working in collaboration or concert with the promoters of AstraZeneca Pharmaceuticals AB (AZP AB), to get the shares of AZ India delisted.

In its order, SEBI had given several reasons for its doubts on dealings of the Elliott group. It said, the seller broker (ICICI Securities) conducted more than 60 road shows prior to the offer for sale (OFS) of AZ India and the OFS floor price was at a significant discount to the prevailing market price and yet only Elliott Group was allocated 94.02% of shares offered through OFS.

SEBI said, “The floor price of AZ India was kept at Rs490 against the previous day's closing price of Rs805.30, which made the bids (2.84 times over subscription) in the OFS hover around this price only. This facilitated the Elliott Group to mop up almost all the shares (i.e. 94.02%) offered in the OFS at an average price of Rs625.35, which was lower than the previous day's closing price by Rs179.95.

The OFS bid prices of Elliott Group were significantly above the floor price and the then prevailing indicative price. Elliott Group had placed their bids in the OFS in a synchronised manner through six foreign institutional investors (FIIs) or sub-accounts and the final bid modifications were made a few seconds ahead of the market closing, SEBI said.

Earlier delisting offers of AZ India were unsuccessful or rejected as retail shareholders were either demanding a price of Rs3,000 per share or were not keen to delist the company.

SEBI said, the present delisting offer would not have gone through without favourable voting by Elliott Group. The Elliott Group and the participating FIIs, with their current  shareholding 15.52% of the equity share capital are in position to ensure that the delisting process goes through even if none of the retail investors offer their shares.

Delisting failed twice earlier

Earlier, AstraZeneca Pharma's parent AZP AB had made two unsuccessful attempts to delist the Indian company's shares. In 2004, the delisting could not be completed successfully as the delisting price (Rs3,000 per share) discovered through reverse book building process was not acceptable to AZP AB. Again in 2010, the delisting proposal of AZP AB was not approved by shareholders of AZ India.

In December 2001, the parent AZP AB held 56.51% shares in AZ India. Through two voluntary offers in 2002 and open market purchases, it increased its holding to 91.61% by March 2003.

Then in July 2004, AZP AB came out with a delisting offer at a floor price of Rs825. The exit price discovered was Rs3,000 (for paid up shares of Rs10 each then), which was rejected by the parent. Then to meet SEBI guidelines, it had to bring down the shareholding to 90% in March 2005.

Market regulator SEBI then came out with fresh guidelines making it mandatory for companies to have a minimum public shareholding of 25% by June 2013 or else they will have to delist. Keeping this in mind, AZ India again came out with a delisting proposal in July 2010 with a floor price of Rs576.10 and set a maximum acceptable price of Rs1,152 (paid up shares of Rs2 each now).

As per sec 8(1)(b) of SEBI’s delisting regulations, 2009, the company had to obtain prior approval of the shareholders by a special resolution through a postal ballot and that the results of the postal ballot would have to indicate that the votes cast by public shareholders in favour of the resolution amount to at least two times the number of votes cast against it. Astra lost the postal ballot and the delisting offer had to be dropped.

Moneylife earlier wrote about The deadly delisting itch of AstraZeneca Pharma India, explaining how AstraZeneca is on course to achieve its decade-long plan to delist its shares from the Indian bourses by hook or by crook.  

The 'game of delisting'

As on 31 March 2013, AZP AB held 89.99% stake in AZ India. In order to comply with minimum public shareholding norms AZP AB carried out OFS of 37.50 lakh shares or 14.99% stake in AZ India. BSE was the designated exchange for OFS and ICICI Securities was appointed as Seller Broker to this.

On 27 March 2013, the OFS floor price was fixed at Rs490 with a cut off price after book building was determined at Rs620 per share. However, SEBI observed, just before the price fixing, on two previous trading sessions, AZ India closed on NSE at Rs694.05 and Rs805.3 on 24th March 2013 and 27th March 2013 respectively.

The OFS was oversubscribed by 2.84 times. Out of the 37.50 lakh shares offered by AZP AB, over 94% were allotted to six FIIs or sub-accounts. These were DB International Asia Ltd (7.87 lakh shares at Rs628 per share), Suffolk (Mauritius) Ltd (7.13 lakh shares at Rs620), Morgan Stanley Asia (Singapore) PTE (7.12 lakh shares at Rs625), BNP Paribas Arbitrage (5.99 lakh shares at Rs625), Mansfield (Mauritius) Ltd (4.32 lakh shares at Rs630) and Merrill Lynch Capital Markets Espana SA SVB (2.8 lakh shares at Rs626 per share).

However, SEBI later found that the end subscribers for whom the shares were purchased through the OFS, were related with Elliott Group. SEBI registered FII, Elliott Advisors (HK) Ltd provided management service to two end subscribers, Elliott International LP and Elliott Associates LP through Elliott Management Corp.

"From the information provided by Elliott Advisors," SEBI said, "it observed relationships between the FIIs or sub-accounts. Suffolk (Mauritius) (SEBI registered sub-account) is indirectly wholly owned by Elliott International.  Mansfield (Mauritius) Ltd (SEBI registered sub-account) is indirectly wholly owned by Elliott Advisors. The Liverpool Ltd Partnership is wholly owned by Elliott Associates, and Elliott Advisors (HK) provides management service to Elliott International and Elliott Associates through Elliott Management Corp."

SEBI said, based on the facts, it was prima facie observed that all these end subscribers are related (to Elliott group). "On examination of bid placement patterns of the Elliott Group in the OFS book building, it was observed that all of the above mentioned FIIs or sub-accounts initially placed a minimal bid quantity of around 600-700 shares between 10:40am to 12:18pm. All the orders were placed around the floor price of Rs490. Further, all the FIIs modified the bid order in the last few minutes of market closing to a price much higher than the floor price and the indicative price prevalent at that point in time," SEBI said.

According to the market regulator, the bid orders were modified through all six FIIs or sub-accounts just before of the market closed. The Exchanges periodically disseminate the indicative price on their websites while the OFS book is getting built. The indicative price forms the basis for all market participants to modify their bids. SEBI said it was observed that the final bid price amendment by Elliott Group through all six FIIs or sub-accounts was significantly more than the indicative price. At 15:25:00, the indicative price was Rs545.43 and the Elliott group bids through all six FIIs or sub-accounts were already more than the same at that time.

"Still in the last 30 seconds before the market closing, the Elliott group increased the bid price significantly from the range of Rs570-585 to Rs620-630 in a synchronized manner. It is worth mentioning that though these revised bids were higher than the prevailing indicative price by Rs75 to Rs85, yet the same were substantially lower than the previous day's closing price, i.e. by Rs175 to Rs185. Apparently, the unusually low floor price of Rs490 per share as against the last closing price of Rs805.30 per share made the market bids, and consequently the indicative price, hover around the floor price i.e. much lower than the previous day's closing price, and facilitated the Elliott group to mop up almost all the shares at a price much lower than the last closing price," SEBI said.

Elliott group hand in glove with AZP AB?

According to the market regulator, the present delisting offer of  AZ India would not have gone through without favourable voting by Elliott group. SEBI said, prior to the date of OFS, none of the entities of Elliott group had comparable previous exposure in the scrip of AZ India nor did they hold any shares of the Indian company.

The Elliott group and the participating FIIs, with their current shareholding at 15.52% were in a position to ensure that the delisting process goes through even if none of retail investors offer their shares.

In the present delisting proposal, a special resolution was passed by shareholders of AZ India through postal ballot. There were 460 shareholders eligible for e-voting and held 15.05 lakh shares. Out of this, 130 shareholders holding 13.02 lakh shares voted in favour of the resolution, while 330 stakeholders with 2.02 lakh shares voted against.

However, SEBI found that out of the 130 stakeholders, who voted in favour of delisting, two entities of the Elliott group, Suffolk (Mauritius) and Mansfield (Mauritius) hold voting rights for 87.98% of total votes cast for the proposal. "Thus, the entire voting rights of Elliott group were exercised in  favour of delisting  proposal.  From  such  voting pattern it  may  be seen that  the present delisting would not have been through without favourable voting by Elliott group," the market regulator noted.

As per regulation 17 of the Delisting Regulations, for a delisting offer to be successful, the post offer shareholding of the promoter group should be higher of 90% of the total issued share capital excluding the shares which are held by a custodian and against which depository receipts have been issued overseas, or the total of the pre-offer promoter shareholding and 50% of the offer size.

In the case of AZ India, SEBI said, the promoters AZP AB would need to increase their stake to a minimum of 90% from current 75% through reverse book building process. However, since the Elliott Group holds 15.52% stake, it is in a position to ensure that the delisting process goes through even if none of the retail investors offer their shares.

In addition, SEBI noted that by virtue of their 15.52% stake as against the 8.89% shareholding of retail investors, had the potential to influence the delisting price in a manner that could be detrimental to the interest of retail shareholders.

SEBI is examining the matter further and if the suspected concerted or co-ordinated action of AstraZeneca and Elliott Group is found true, they would be held guilty of violating SEBI’s regulations on fraudulent and unfair trade practices.

AZ India closed 1.75% lower on Wednesday, at Rs1,132 on the BSE, while the 30-share Sensex ended the day marginally lower at 25,316.

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