Saibal C. Pal
‘Examination of Minority Shareholders’ interest in Cairn India Ltd deal keeping in mind future of the securities market
On 17th August, 2010, news on acquisition of the shareholding of Cairn Energy (CEL) in Carin India Limited (CIL) (BSE and NSE listed) by Vedanta Resources PLC (VEDANTA) at Rs. 405/-($8.66) per share became public. Closing price of each shares of CIL on the NSE on 14th August, 2010 was Rs.355/-. Vedanta will have to incur $ 9.6 billion (Rs 44,928 Crore) for acquiring CIL. Deal between the parties was concluded in London.
CIL the target company is engaged in oil exportation at three sites in Mangla, Bhagyam and Aishwariya in Rajasthan and one site in Sri Lanka. Price in a take over is determined as per the provisions of Regulation 20(4) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (`Take Over Code/ Code’). An additional amount of Rs.50/- has been added to the last quoted price of Rs.355/- per share as non-competition amount to be payable to the existing promoters. The non- competition amount of Rs. 50/- was calculated at 32 per cent of the average quoted price of CIL shares for the last ninety days in the bourse. Other shareholders will be offered a price of Rs. 355/- through the mandatory open offer as per Regulation 14(1) of the Code. The agreement includes a clause by which stake sale between CEL and Vedanta will be triggered over the next 3 years through reciprocal arrangements of put and call options in July, 2012 and July, 2013 respectively. The options clause gives Vedanta comfort level to obtain control of at least 51 per cent holding in CIL.
Regulation 20(8) of the Code allows addition of non-competition amount in the deal price upto 25 per cent of the settled price between the parties over the control of the target company. This is payable to existing promoters restraining them to compete in the area of operation of CIL with the acquirer for a limited period. Any amount agreed in excess of 25 per cent of the offer price by the acquirer to the seller will be added to the offer price to the other shareholders in the public offer. The public offer will be as per Regulation 12 of the Take over Code. CEL could have negotiated upto Rs. 85.75 per as non-competition amount (being 25 per cent of the offer price of of Rs.355/- quoted on 14th August, 2010).
Vedanta is set to make an open offer to the other shareholders through Sesa Goa Ltd., the Indian subsidiary, a person acting in concert, upto 20 per cent of the shares of CIL at a price of Rs 355/- per share. No non-compete amount is being offered to minority shareholders who constitute 2.5% of the total holding. Questions have arisen regarding the price differential in the deal. Manner of the deal gives impression that parties to the deal being foreign entities have preferred to be covered by UK laws on acquisition of the target company, CIL, incorporated and listed in India with BSE and NSE.
Offer price by Sesa Goa Ltd., in the ensuring open offer, will be as per Regulation 20(4) of the Code which states that for the purpose of sub-regulation (1) of Regulation 20 the offer price shall be highest of:
(a) the negotiated price under the agreement pursuant to Regulation 14(1) which states that the open offer shall have to be made within four working days of entering into the agreement for acquisition;
(b) highest price paid by the acquirer or person acting in concert with him for the acquisition;
(c) other parameters including return on networth, book value of the shares of the target company, earning per share, price earning multiple vis-à-vis industry average.
Regulation 2(1)(h) of the Code defines a promoter as one who either controls the company or one who is named in the offer document of the target company or is one as per any shareholding pattern filed with the Stock Exchanges as per Clause 35 of the Listing Agreement.
Deal finalized between CEL, the promoters of CIL and Vedanta the acquirer was concluded in London, and announced from there. Both CEL and Vedanta are incorporated in UK. The agreement on takeover, having been executed in London considered non competition amount in the price per share. However, the code is silent on the manner of computation of the non-competition amount and only fixes the percentage upto which the price can go. However, a draft policy on such payment is awaiting approval.
Minority shareholders would be deprived of the benefit of the non- competition amount included in the price fixed by CEL and Vedanta between them for the acquisition. Differential pricing for two sets of shareholders, promoters and minority, is bound to lead to debate and cause impact on the deal. Regulation 20 and the other relevant regulations of the Code have been drafted keeping in view the preamble of the SEBI Act, 1992 which reads as under:
‘an Act to provide for the establishment of a Board to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto.’
When the objective of the securities market laws are based on the above drop back of any regulation or action affecting minority interest needs examination. Listing agreement does not allow shares with differential price or voting rights. Clause 28A of the Listing Agreement needs consideration for the purpose:
‘the company agrees that it shall not issue shares in any manner which may confer on any person, superior rights as to voting or dividend vis-à-vis the rights on equity shares that are already listed.’
Price differential in the deal clearly hits Clause 28A of the Listing Agreement. The deal clearly brings out two classes of shareholders in CIL. Promoters controlling the company have engineered the deal to their advantage.
Art.14 of the Constitution of India states that the state shall not deny to any person equality before the law or equal protection of the laws within the territory of India. Further Art. 13 states that there can be no law inconsistent with or derogation of the fundamental rights and where laws are inconsistent with the provisions of this Part, shall, to the extent of such inconsistency be void. On the strength of the Articles included in the constitution minority shareholders are entitled to receive the offer price of Rs. 405/- against the announced price of Rs. 355/- meant for them and the deal finalized in London to enable CEL to receive a better price compared to the minority shareholders cannot be paid. CEL and Vedanta have taken advantage of their foreign domicile status to cause deprivation to the minority shareholders.
The clause that the stake sale will be triggered over the next 3 years as regards to put and call options in July, 2012 and 2013 respectively guarantees 51 per cent stake to Vedanta by CEL. Minority interest stands to be a deprived on this account. Minority has been treated subservient to CEL, the shareholders in control of CIL by Vedanta which will effect the open offer through Sesa Goa. A deal in London on a subject pertaining to India with Indians being a part of the deal cannot exonerate CEL and Vedanta in case of any discrimination. The apparent differentiation is likely to be stuck down.
As per the Code, non-compete amount is not added to the open offer price. Under India’s take-over norms, non-compete amount is not permitted to be paid to the offerees in the open offer unless the price exceeds 25 percent. Vedanta would save upto $ 9 with Sea Goa making the open offer which could pit Vedanta against the CIL’s minority shareholders.
Investor base in the country is between 2 to 3 crore. The figure is seen increasing at the hindu grow rate. Growth in number of investors is slow owing to the numerous laws in force. Citizens hardly have the means to access to them even in the cities, leave apart towns and rural areas. The securities market is mainly centered in Mumbai followed by other metropolitan cities. Laws are written in English. About 80-90% of the investors are not at all conversant with English language upto the level it is expected. There are few laws translated into the languages spoken in the country. Last but not the least there are few experts on the subject who are dedicated to guide persons in the language it is required most i.e. Hindi. Money is the key factor to investment but understanding the laws and the market conditions are equally important. Of the 110 crore population in the country it will not be surprising to find if less than 1 per cent of the people who are aware of the Vedanta deal with less than 0.01 per cent understanding the deal outcome.
Vedanta deal reminds one of the novel, `Animal Farm’ written by George Orwell and the popular line, `all animals are equal but some are more equal than the others.’ Incidentally Orwell was born in India but wrote the novel in England. In the deal CEL, has been treated preferentially compared to the minority within the parameters of the regulations. Vedanta will pay higher price of Rs 50/ – per share as the non-competition amount compared to minority shareholders of CIL in the ensuring open offer. The take-over code mentions of payment of non-competition amount but fails to show the manner of computation of the non- competition amount. Unfortunately, the Companies Act, 1956 does not provide for class suits. Had there been the provision of institution of such suits, the Vedanta and CEL deal over CIL would have faced stiff opposition from the minority shareholders.
If the differential prices of Rs. 405/- to CEL and Rs. 355/- to the minority shareholders are allowed to prevail, then the securities market is set to receive a severe blow. Investor confidence will be shaken and will lead to the end as shown in Napoleon’s Animal Farm where those in control manipulate advantages in their favour against the uprising of animals against exploitation. The deal only brings to the fore laws which run into pages in India and are mostly adaptations and they prove ineffective at the time of crisis. Laws are amended as smart deals go through without hindrance due to loopholes in the laws.
Price determined in the deal was based on the provisions of the take-over code and unwritten rules of the manner of computation of the non-competition amount. It requires a re-call that the SEBI Act was enacted to protect minority investors and not to fatten the purse of the people in control of the target company. Vedanta deal in its present form is a clear deprivation of the minority and law makers need to give a re-think on the Take-over code. The first factor that is to be ensured in all future deals for protection of minority interest in Indian listed companies is that all agreements should be entered in India so that Indian laws become applicable to the parties to the deal. Orderly growth of the securities market will depend on the equitable application of the laws and not in the manner in the deal discussed.
It will not be out of place to discuss the report to SEBI submitted by the Achuthan Committee headed by C.Achuthan, former presiding officer of SAT. The report states that either non-competition fee should be done away or beneficiaries of such payments should be asked to share them with the non-promoters or public shareholders. The suggestion is in the interest of retail and other public shareholders and respects the preamble of the SEBI Act.
Edited by: Neha Doshi & Priti Chowdhary
