 "SAT order on Network 18 clouds SEBI's brightline plan")
The timing of the order by Securities Appellate Tribunal (SAT) on the takeover of Network 18 by Reliance Industries (RIL) Group entities is interesting. A day before the order, former promoter of Network 18 group Raghav Bahl launched his new venture in business television at a glitzy press conference in Mumbai. The tribunal on Wednesday asked Sebi to re-investigate whether Independent Media Trust, related to Reliance Industries, acquired control over Network 18 from Raghav Bahl even before inking the share purchase pact in 2014.
But, what could be a more significant coincidence is that the order came a day before the window for public comments on a crucial discussion paper on 'control' closes.
On March 14, the Securities and Exchange Board of India (Sebi) had floated a Discussion Paper on “Brightline Tests for Acquisition of ‘Control’ under SEBI Takeover Regulations”. Today is the last date for public to send in comments.
In the discussion paper, Sebi had indicated that there would be more clarity on the subject of control if the acquisition of control through other means such as special rights, etc “would not” necessitate open offer under Takeover regulations.
It indicated that there would be lesser uncertainty if the definition of ‘control’ under the Takeover Regulations is amended as: “(a) the right or entitlement to exercise at least 25% of voting rights of a company irrespective of whether such holdings gives de facto control and/or (b) the right to appoint majority of the non-independent directors of a company.”
The discussion paper suggested the other option of going into the question of protective rights and other structures of acquirers and investors and trying to define if this amounts to control could lead to confusion.
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But, the Network 18 acquisition where multiple agreements between the promoter and the acquirer existed nearly two years before the actual takeover announcements were made in 2014 has complicated the decision.
SAT has held that the agreements fall within the existing meaning of control and the matter needs reinvestigation.
“In our opinion, divesting the control over the target company in the facts of present case, prima facie falls within the meaning of the word ‘control’ defined under regulation 2(1)(e) of the Takeover Regulations, 2011,” SAT said in an order on an appeal by minority shareholder Vivian Fernandes.
Fernandes' stand is clear evidence that not all minority shareholders, whose interest Sebi is responsible to protect, share the "bright line" view.
“In such a case, whether the obligation to make a public announcement of an open offer under the Takeover Regulations, 2011 has triggered or not is a question which needs consideration. Although SEBI claims to have considered that question in its communication dated 09.02.2015, there is nothing in the said communication to suggest that various clauses contained in the ZOCD agreement have been considered by SEBI,” the tribunal said.
SAT added that since SEBI has failed to give reasons as to why various clauses contained in the ZOCD (Zero coupon optionally convertible debentures) agreement do not amount to divesting control over the target company from the Bahl Group to the respondent no. 2, (Independent Media Trust). RIL was the sole beneficiary of Independent Media Trust.
The tribunal further added that , “ We in public interest direct SEBI to reinvestigate the question as to whether the respondent no. 2 in the guise of executing ZOCD agreement, indirectly acquired control over the target company without following the procedure prescribed under the Takeover Regulations, 2011 and if so, take appropriate action against the concerned person or persons for violating the provisions contained in the Takeover Regulations, 2011 so that such violations are not committed again.”
Therefore, it would be in public interest that Sebi takes a call on its proposed brightline plan only after it examines these clauses and arrives at a decision on whether control was acquired indirectly.