SEBI opens Pandora’s box with NDTV ruling
In a move that has created significant ambiguity, the Securities and Exchange Board of India (“SEBI”) has recently ruled in the matter concerning NDTV Limited (“NDTV”) that acquisition of warrants and call option rights is sufficient to trigger an open offer under certain circumstances.1 This decision comes as a major hindrance for structuring investments into listed companies, and also adversely impacts various promoter funding avenues.
NDTV is a company incorporated in New Delhi, with its securities listed on BSE and NSE. In 2008, RRPR Holding Private Limited (“RRPR”), Prannoy Roy and Radhika Roy (collectively, the “Promoters”) initiated an open offer for purchase of NDTV shares. In order to fund this open offer, RRPR (on behalf of the Promoters) availed a loan of Rs. 450 crore from Indiabulls Financial Services Ltd. To repay this, the Promoters availed a loan Rs. 375 crore from ICICI Bank.
Finally, the Promoters repaid the loan from ICICI Bank by taking a loan of Rs. 350 crore from Vishvapradhan Commercial Private Limited (“VCPL”), pursuant to loan agreement dated July 21, 2009 (“Loan Agreement”). Simultaneous with the Loan Agreement, two other affiliates of VCPL, being Subhgami Trading Private Limited and Shyam Equities Private Limited, entered into call option agreements with RRPR which gave them the right to purchase 14.99% and 11.01% equity shares of NDTV from RRPR respectively at a fixed price of Rs. 214.65 per share (“Call Option Agreements”).
SEBI, vide a show cause notice, alleged that the loan obtained by the Promoters from VCPL was not a normal investment transaction, and that VCPL’s primary purpose was to acquire control over NDTV (through RRPR). To this effect, SEBI postulated that pursuant to the Loan Agreement and Call Option Agreements, VCPL acquired control over NDTV (i.e. through RRPR).
Some of the key terms of the Loan Agreement considered by SEBI in this regard were as follows:
Some of the key terms of the Call Option Agreements considered by SEBI in this regard were as follows:
Issue for determination
Whether the mere execution of the Loan Agreement and Call Option Agreements resulted in VCPL acquiring ‘control’2 over NDTV as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (“Takeover Code 1997”)?
DEFENSE ARGUMENTS AND SEBI ORDER
While various legal concepts were examined by SEBI, the crux of the decision can be summarized in the following points:
1. Commercial terms of the loan. While the commercial terms of the loan were not ‘market-standard’ per se, VCPL provided the following justifications:
SEBI Analysis. While SEBI did not conclude that ‘control’ was acquired merely because of the non-market terms, SEBI placed significant emphasis on the following aspects in arriving at its decision:
2. Voting Rights. According to VCPL, the provision of the Loan Agreement which required the Promoters to exercise their voting rights in NDTV to give effect to the terms of the Loan Agreement is merely a cooperation/ assurance clause. This does not result in VCPL acquiring the voting rights of the NDTV shares held by RRPR in all respects.
SEBI Analysis. This clause has the effect of the Promoters ceding their voting rights in favor of VCPL, at least to the extent of 26% shares of NDTV held by RRPR and the 26% shares of NDTV covered under the Call Option Agreements.3 Hence, VCPL has acquired positive decision making rights over NDTV.
3. Exercise of warrants/ call option. It was argued by VCPL that despite the agreements permitting exercise of call options/ warrants at any point (even after repayment of loan), legally, this should not impact the analysis of whether ‘control’ has been acquired or not. This is because as per the Takeover Code 1997, ‘control’ is not acquired by subscribing to convertible instruments/ entering into optionality arrangements till such time the actual conversion right/ option is exercised.
SEBI Analysis. The right to exercise the warrants/ call option is so open-ended and uncircumscribed by any pre-requisite that it is as good as having control over the shares in one’s hands without any further act
4. Veto Rights. As per SEBI, the aspect of ‘veto rights’ amounting to ‘control’ was not relevant to be examined since ‘control’ was acquired purely by entering into the Loan Agreement and Call Option Agreements.
Based on the above, SEBI concluded that the Loan Agreement and Call Option Agreements resulted in VCPL acquiring ‘control’ over NDTV, and ordered VCPL to make an open offer as per Takeover Code 1997.
On a rather unfortunate note, this order by SEBI has disturbed a settled position of law without any cogent reason for the same. While we admit that the overall transaction between VCPL and RRPR is not standard in nature, it is well settled that in case of call option arrangements, ‘control’ is not acquired until the call option is actually exercised. In addition, SEBI’s analysis that mere execution of open ended call option agreements results in deemed exercise of the call option is devoid of any legal backing.
Further, SEBI seems to have alluded that certain standard practices followed by most lenders in the market can result in acquisition of control. For instance, it is standard for lenders to have certain protective rights against the borrower and its assets, and also standard to insist that borrowers vote their shares (in the underlying portfolio company) in a manner that does not prejudice the lender’s interests. SEBI however seems to suggest that such voting assurance clauses will automatically result in the borrower ceding all the voting rights associated with such shares in favor of the lender. This effectively alters the very perspective with which protective covenants are viewed in the context of lending transactions (both at the listed company level and the promoter level), and also dilutes certain key protections typically sought by lenders.
Net-net, this decision by SEBI seems to be a clear case of overreach. It will be interesting to see how SAT views this matter (if appealed) – and to what extent SEBI’s position will stand vindicated.
– Saumya Ramakrishnan, Shreyas Bhushan & Nishchal Joshipura
You can direct your queries or comments to the authors
1 In the matter of NDTV Ltd., in respect of Vishvapradhan Commercial Private Limited (WTM/ GM/ EFD/ 31/ 2018-19)
2 ‘Control’ includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
3 It is not entirely clear why SEBI considers RRPR to hold 52% equity shares in NDTV. This conclusion is not supported by the facts mentioned in the order.