Deal Talk

SEBI “Clears the Runway” For Spicejet: Promoters to Take Off Without Open Offer Turbulence

A. Introduction

• Takeover of public listed companies in India is governed under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘Takeover Code’). The Takeover Code provides for the following triggers for an open offer obligation on the acquirers and persons acting in concert with such acquirers (‘PAC’):

• Regulation 10 of the Takeover Code provides for general exemptions available to an acquirer and a PAC. While Regulation 10 provides specific types of events and / or acquisitions which will be exempt from the requirement of making an open offer, Regulation 11 also provides the Indian securities market regulator (i.e. the Securities and Exchange Board of India (‘SEBI’)), the power to exempt any transaction from an open offer obligation, if SEBI believes that such exemption is required in the interests of investors in securities and the securities market.

• An acquirer and a PAC can file an exemption with SEBI by providing their rationale for seeking such exemptions. Over the years, there have been a lot of precedents for deal-making through the grant of such exemptions. Recently, SEBI granted an exemption to the promoters of SpiceJet Limited (‘SpiceJet’) for conversion of their warrants into equity shares of SpiceJet.

• This exemption is unique given that the promoters of SpiceJet made a strong case to SEBI that the open offer obligation was onerous on the promoters and would be further detrimental to the financial position of SpiceJet. To prove their commitment to this position, the promoters also agreed to discharge certain additional obligations in case the exemption were to be granted.

• In this Deal Talk, we discuss this exemption from SEBI, and discuss how a voluntary attempt to comply with spirit of the law may be beneficial in structuring deals and assisting with a regulatory approval process (which, in this case, involved seeking an exemption from SEBI with respect to the mandatory open offer requirements under the Takeover Code).

B. Particulars of exemption sought by the promoters of SpiceJet

• Before we move to the exemption application that was made by SpiceJet, below is the existing structure of SpiceJet (as on March 31, 2024):

• In light of the 2019 Covid pandemic, the Indian government had announced an Emergency Credit Line Guarantee Scheme (‘ECLGS’) to provide financial support to Indian companies in different sectors, which also included aviation. Under the ECLGS, an airline was eligible for a loan of up to INR 1,500 crores per borrower (as part of which, up to INR 500 crores was allowed only if there was proportionate equity contribution by the promoters / owners of the Company).

• As part of the ECLGS, existing lenders of SpiceJet had previously sanctioned credit facilities worth INR 200 crores, and the promoters of SpiceJet were required to also infuse proportionate equity capital to avail disbursement of the credit facilities.

• In order to satisfy the aforementioned criteria and to help SpiceJet during its financial distress, SpiceJet Healthcare Private Limited (‘SHPL’) (a ‘promoter group entity’ as per applicable SEBI regulations) infused INR 200 crores in SpiceJet as part equity and part warrant transaction structured as below:

• As per the SEBI (Issue of Capital and Disclosure Requirements) Regulations, in case of issuance of warrants by a listed company, at least 25% of the consideration amount based on the exercise price shall be paid upfront and the remaining unpaid consideration shall be paid at the time of exercise of the warrants. Therefore, SHPL was statutorily obligated to pay INR 294.09 crores to SpiceJet at the time of exercise (which corresponds to balance 75% of the consideration amount for warrants).

• The other promoters of SpiceJet would be considered as ‘persons acting in concert’ with SHPL (as Mr. Ajay Singh holds 50% shares of SHPL), and the total shareholding of SHPL with its PAC would be more than 25%. Therefore, SHPL and the other promoters of SpiceJet could only acquire 5% additional shares of SpiceJet in any financial year to avoid triggering an open offer due to the occurrence of a creeping acquisition (i.e. an acquisition of up to 5% shareholding that is permissible for a person holding 25% shareholding of a public listed company, with any increases beyond this threshold being subject to a mandatory open offer under the Takeover Code). Given that the warrants upon exercise would entitle SHPL to 13.74%, the exercise of the warrants would trigger a creeping acquisition.

• SHPL requested SEBI for an exemption from the obligation to undertake an open offer. The grounds provided by SHPL for this exemption request were as follows: 

• In addition to these grounds, SHPL also offered to adhere to certain additional obligations in order to exhibit its commitment to the fact that the investment was not for increasing shareholding but for assisting SpiceJet financially. These obligations include:

C. SEBI’s position with respect to the exemption

• SEBI granted the exemption to SHPL while citing the following reasons and making SHPL subject to the following conditions:

  • The proposed direct acquisition of 13.74% by SHPL would not affect or prejudice the interests of public shareholders of SpiceJet in any manner and investment into SpiceJet was required to attain eligibility of ECLGS.

  • The acquisition of 13.74% by SHPL would not lead to any change in control of SpiceJet and the acquisition would not breach the requirement of ‘Minimum Public Shareholding’ under the Securities Contracts Regulation Rules, 1957 (N.B.: The ‘Minimum Public Shareholding’ requirement for a public listed company is 75%).

  • Given the current shareholding of SHPL along with its PACs, an open offer would become mandatory in case of any acquisitions crossing the creeping acquisition threshold (i.e. acquisition of 5% or more of voting rights in the listed company). SHPL undertook to only exercise 5% voting rights every financial year out of the total of 13.74%. Other than the 5% of the additional voting rights which will be exercised by SHPL every year, voting rights attached to the other shares out of the 13.74% shall stand frozen in that particular financial year.

  • SHPL shall adhere to 6 extra months of lock-in, which would mean a total lock-in of 24 months from the date of trading approval.

D. Does this mean that others can also claim a similar exemption from the open offer requirement under the Takeover Code?

• While previous exemptions granted by SEBI under the Takeover Code have precedential value, not all grounds raised by SHPL were something which provided comfort to SEBI. The open offer being a paper exercise due to no actual change in control or being an additional cost to the acquirer would, in all probabilities, not be considered as valid grounds for seeking an exemption from the open offer requirement.

• The factors that would have perhaps given most comfort to SEBI (which is also reflected in observations by SEBI) were: (a) the fact that SHPL had invested into SpiceJet to ensure eligibility under the ECLGS in order to assist the company during financial distress; (b) the self-imposition of an additional lock-in (over and above the period contemplated within the law); and (c) restriction of the exercise of voting rights to 5% in every financial year (in order to ensure compliance with applicable law). This helped SHPL convince SEBI that their intention was always to help SpiceJet, and therefore this exemption would be in the interests of investors in securities and the securities market.

• While it would be interesting to see if SEBI continues to provide similar exemptions based on self-imposition of restrictions, solely self-imposition would not ideally entitle an acquirer for an exemption. A key factor in this case was the financial distress being faced by SpiceJet. There have been multiple precedents of SEBI providing exemption from open offer to the investors in cases where the target company is going through financial distress and resolving the financial distress specifically required promoter fund infusion as per the ECLGS scheme. Neither of these reasons in silo would have helped the promoters of SpiceJet. For instance, in the exemption order for acquisition of Lyka Labs Limited (2016), the promoters claimed that the target company was in financial distress and their subscription to the warrants was for resolving the financial distress and therefore, they were seeking an exemption from open offer upon conversion of such warrants. One of the key reasons why SEBI denied the exemption was that while the company was in financial distress, the banks did not stipulate that promoter infusion was a condition precedent to the banks providing further funds. The banks in their letter had only communicated that the company is facing a liquidity crunch, and it was advisable that the company should infuse fresh capital or increase their net worth to improve their financial ratio. SEBI was of the view that this was in no nature a stipulation and therefore did not grant an exemption. So, the fact that as part of ECLGS, promoter infusion was a stipulation was also a key consideration for SEBI. Additionally, in the same order (and other precedents as well) SEBI has held that additional cost to the promoter or financial status of the promoter is not a reason for exemption from open offer.

Authors:

Anurag Shah, Parina Muchhala and Nishchal Joshipura

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