Introduction

Adani Enterprises, along with its subsidiary AMG Media Networks Ltd., on August 24 launched a hostile takeover attempt of NDTV in an expansive bid to foray into the Media and Entertainment Industry. In a first, strategising on getting the 29.18% chunk which breaks up the position of a majority holding of promoters, Radhika Roy and Pranoy Roy (Roys’) for which under the ambit of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SAST Regulations”) triggering an open offer of 26% in a bid to complete its acquisition of the target company and indirectly NDTV.

This article analyses the history of hostile takeover attempt and the evolution of the process in light of SAST Regulations alongside examining the effect of the SEBI Order of 2017 prohibiting Roys from directly or indirectly trading in the securities market.

History Behind Present Conundrum

In 2009, NDTV allocated 29.5% of its equity to a promoter-owned entity, RRPR Pvt. Ltd., which further pledged these shares to Vishvapradhan Commercial Pvt. Ltd. (VCPL) with a restriction on the free transfer of share of the entity in order to take an unsecured loan of Rs. 403 Crores to repay its growing debt spiral from other lenders like ICICI Bank. Interestingly, VCPL got this money from Shinano Retail which owned a part of VCPL and itself a wholly-owned subsidiary of Reliance Ventures Ltd. During this process of attempting to manage its debt, the promoters tried to arrange funds from various sources, and while amidst an open offer, also allotted the shares privately to Goldman Sachs, which led to the promoters being barred from trading and dealing in securities market till November 26, 2022.

Adani Enterprises acquired VCPL and issued a notice of conversion of debt to equity of 99.5% of RRPR Pvt. Ltd. which came within its right conferred through the loan agreement clause, conversion of debt to equity with a two days’ notice period, thereby making VCPL and AMG Media Networks Ltd., Persons Acting in Concert (PAC) and attracting the relevant sections of SAST Regulations in light of takeover attempt exceeding 25% shareholding.

Analysing the Legal Framework of Adani’s Substantial Acquisition of Shares

Dynamics of a mandatory open offer as per SAST Regulations

As per Regulation 3 read with Regulation 4 of SAST Regulations, the acquirer is prohibited from the acquisition of shares of the target company directly or indirectly by itself or together with the person acting in concert (PACs) if such acquisition entitles them to exercise 25% or more of voting rights without making a public offer – where in a prior position the holding in the target company is less than 25% prior to the acquisition.

In consonance with Regulation 3 and 4, the offer shall be constructed within the framework as under Regulation 7, which provides for the minimum size of such public offer (to all shareholders of the company except the acquirer and the PAC) to be 26% of total shares of the target company at a price meets the parameters laid by Regulation 8.

With the takeover of VCPL, Adani got entitled to exercise the option of converting the unpaid debt of RRPR Pvt. Ltd. into 99.5%, which holds 29.18% of NDTV Ltd. At the same time, conversion of this equity remains in process, as status quo VCPL and AMG Media Networks Pvt. Ltd. do not hold the prescribed threshold as per Regulation 3 (1) and (2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, i.e., 25%. On successful completion of the conversion exercise, the PACs shall be indirect owners of 29.18% of NDTV Ltd.

Thus, the said transaction will result in an indirect acquisition of voting rights in excess of 25% of NDTV, triggering an open offer by VCPL under the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SAST Regulations”) for up to 16,762,530 fully paid-up equity shares, constituting 26% of the voting share capital of NDTV (“Open Offer”).

Effect of SEBI’s Order on Prohibiting Promoter’s Access to Securities Market

On November 27, 2020, SEBI passed an order restraining the Roys from directly or indirectly participating in Securities Market. As a time-buying exercise, the NDTV group has contested that this order hinders their ability to transfer shares. In contrast, Adani contests this order does not affect the RRPR as an entity. The question that arises is:

1. Whether the said exercise is the transfer of shares or conversion by RRPR?

2. Whether the exercise shall violate the order passed by SEBI – does off-market transaction?

3. Shall the order of SEBI override the pre-agreed contract?

I. Nature of the Conversion

RRPR has issued unsecured convertible debentures to VCPL with ambit of contractual obligation of conversion to equity shares in lieu of the Rs. 403 Crore debt raised by VCPL. The said exercise of conversion is that within the ambit of the company – RRPR Holdings and does not involve the interplay of SEBI order banning the promoters, the dilution mechanism leading to equity share conversion and/or direct transfer mechanism leads since it has no role of directors in any individual capacity and shall be part of exercise of company as an artificial entity, or even in the case of role of promoters, the fiduciary role of board can be played in order to honour the award that is prior to order itself. Also, the prima facie control of transferability has been a domain of first control by VCPL.

Therefore, the said exercise of contractual obligation involves the role of the company entity and ousts the role of Roy’s as individuals restrained from dealings in securities.

Does an off-market transaction come under the ambit of SEBI?

Section 11 (2) of the SEBI Act empowers SEBI prima facie to regulate securities and Capital market and to uphold the interest of investors of securities market but whether securities themselves are within the ambit of SEBI in light of transactions off-market and by the companies which are unlisted. In this context, the contractual agreement of RRPR Holdings Pvt Ltd and VCPL are off market transactions and RRPR itself is an unlisted-private company where jurisdiction prima facie lies within the ambit of the Companies Act, 2013. Could the order of SEBI restraining Roys potentially impact the workings of an unlisted company in the transaction of an off-market private deal?

In the above matters, the court in Sahara India Real Estate Corporation Ltd. & Ors. v. SEBI & Anr., along with Sahara Housing Investment Corporation Ltd. & Ors. v. SEBI & Anr., SAT held that in matter of Regulating Unlisted Company; “While interpreting the powers of SEBI under section 11, 11A and 11B of the SEBI Act, the wider scope must be given to take necessary steps to safeguard the interest of investors in securities. Therefore, SEBI can exercise power without distinction between listed and unlisted securities/ company. Especially, a case where a listed company (here NDTV) is affected by SEBI’s jurisdiction can be viewed with a wider scope.”

III. Does SEBI Order override Prior Agreement and Distinguishing Roy’s from RRPR

As per the SEBI order, Roys personally cannot in any manner deal in securities. The question that arises is whether the convertability of debt to equity would lead to the conversion of securities involving Roy’s holding in RRPR or the company shall as a corporate entity convert the debt to equity.

In case the securities of Roys personally are to be converted, then the SEBI order would be a hurdle in the deal, but the contention raised is that Roys personally are separate from the company, and its board and company shall convert the debt as a body corporate alongside honouring the agreement prior to order would be a fiduciary task of the board of directors and voluntarily upliftment of veil from the company would lead to taking benefit of one’s own wrong in a convenient manner.

Way Forward

On close examination of the shareholding pattern, the Adani group has broken the majority stake of Roys by gaining a 29.14% stake, and the contention of non-convertibility seems baseless, and even if it holds true, the order will lose its effectiveness by November 26 of this year, thereby making it only a time-buying exercise just like the non-consequential argument of Income Tax order on NDTV for non-transfer of shares whereby the order has no impact on RRPR. The other 9.75% is held by LTS Investment Fund Ltd., which has substantial influence in Adani group companies and can be presumed to incline in favour of Adani, totalling 38.89%, making them the single largest shareholders, especially at an advantageous position when Roys are explicitly restrained from any securities market activity.

Author: Vaibhav Gupta & Varun Matlani are 3rd year B.Com., LL.B. (Hons.) students at Gujarat National Law University, Gandhinagar

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