Open offer must for all future GDR/ADR issues with voting rights.
In a move that could have implications for the talks between Bharti and South Africa's MTN for a cash-and-share-swap deal, the Securities and Exchange Board of India (Sebi) today decided to amend the Takeover Code to mandate an open offer if American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) with voting rights cross the prescribed threshold.
Under the Takeover Code, a stake acquisition of more than 15 per cent triggers the open offer requirement. Depository receipts, however, were not considered part of this requirement until they were converted into Indian shares.
But with overseas investors increasingly seeking voting rights, the market regulator decided to amend the norms even as the Takeover Code drafted over a decade ago was being reviewed by an expert committee, Sebi Chairman C B Bhave told reporters at a press conference in Mumbai today. At present, the depository exercises voting rights on behalf of holders of ADRs and GDRs.
Today's decision by Sebi, taken at a board meeting in Mumbai, reversed an “informal guidance” in July that had exempted MTN from making an open offer to Bharti shareholders. At that time, Sebi had said an open offer would be triggered only once the GDRs issued to MTN and its shareholders by Bharti Airtel were converted into local shares with voting rights.
But Bhave today said any informal guidance from a department was always subject to review by the board.
In May, Bharti said it would acquire 49 per cent in MTN and, in turn, the South African company and its shareholders would acquire an approximate 36 per cent economic interest in Bharti, of which 25 per cent would be held by MTN with the remainder held directly by MTN shareholders. MTN's shareholding would be in the form of GDRs. This arrangement fell just short of outright merger that would have raised myriad complex regulatory hurdles in both countries.
With a holding of 25 per cent, MTN could have exercised voting rights even without converting the underlying shares into Indian securities. With the latest amendment, the South African firm would have to make an open offer.
In a media statement, a Bharti spokesperson said, "We can confirm that the structure, under discussion with MTN will be fully compliant with the laws in both countries. All relevant approvals, including exemption from open offer from Sebi (if required), would be sought at the appropriate time."
Earlier in the day, Mittal met Prime Minister Manmohan Singh and is understood to have discussed a few contentious issues like dual listing and exemption from open offer to be availed by MTN, according to a PTI report.
Legal experts said Sebi’s decision would have a major impact on the $23-billion deal and both companies would have to go back to the drawing board to change the details of the merger agreement, leading to further delays.
Talks on a deal, potentially the largest in the global telecom business, started in May this year and a second deadline is due to lapse on September 30.
“You can't be issuing GDRs without voting rights since the underlying nature of a GDR is that it gives the holder control over the equity of a company with voting rights. Sebi has done the right thing by removing the differentiation between GDRs that are converted into equity and GDRs with voting rights,” said one company law expert.
The company law expert, however, added that “it makes no sense for MTN to put in money in Bharti and have no voting rights. That is why they have to look for a different structure, which is dual listed companies, and that will take time.”
Dual listing allows for the two telecom companies to stay as separate entities but listed in each others' stock exchanges and run by a common board. This model is intended to address the sensitivities of the South African government which has reservations about one of its largest companies delisting from the Johannesburg stock exchange in the event of a merger.
A team from South Africa is currently holding talks with Indian authorities on this issue. Bhave said the company had not discussed the issue with Sebi. Sources said that the issue of dual-listed entities had to be first cleared by the Reserve Bank of India since it involved full capital account convertibility.
In separate decisions, the regulator also approved other amendments to the Takeover Code that mandated the disclosure of acquisition or sale of 2 per cent or more in a company. Under the new norms, shareholders with a 15 to 75 per cent stake in a company would be required to make the disclosure, against the earlier threshold of 15 to 55 per cent.
Also read: sept 21: Bharti-MTN deal ready to be signed
