4-August-2022
The Securities Appellate Tribunal recently ruled against Securities and Exchange Board of India’s orders in the case of New Delhi Television promoters’ loan agreements with Vishvapradhan Commercial and resulting breach of the takeover regulation.
SEBI had earlier held that Vishvapradhan Commercial breached the takeover regulations by failing to make an open offer.
In another order SEBI held that NDTV’s promoters Prannoy Roy, Radhika Roy, and RRPR Holding violated the listing and anti-fraud regulations by not making disclosure on the loan agreements and their terms to the company or stock exchanges. Since it was material and price sensitive information, the investors and board of NDTV were deceived and the acts of the three promoters were, therefore, fraudulent, SEBI held in its order.
The SAT had combined the appeals against these two and other related orders of SEBI in the same matter.
Its ruling in the case deals a blow to SEBI’s efforts to get promoters of listed companies to be transparent and upfront about the fetters and covenants on their shares when they borrow money. SEBI must, therefore, appeal against the ruling.
The Tribunal’s interpretation went against SEBI as there were grey elements in the regulations whose interpretation could have gone either way.
At the core of the contentions was the meaning of control and acquisition of control under SEBI’s takeover regulation.
According to the regulation, “control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable…, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.”
The “in any other manner” provision in this definition applied to the NDTV promoter case. SEBI had rightly held that covenants or conditions in the loan agreement between Vishvapradhan Commercial and NDTV promoters gave the former indirect control over the company.
Further, the clause on the acquisition of control in the regulation specifies that “irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company.”
This would lead one to interpret that a control can be acquired irrespective of whether or not an actual acquisition of shares took place.
But these two clauses became the bone of contention in the case before SAT.
The Tribunal in its wisdom decided that the loan provisions did not result in acquisition of shares till such time that the NDTV promoters didn’t default on repayment of the loan.
It did not accept SEBI’s contention that through the debt covenants Vishvapradhan Commercial had acquired veto rights in 26% shareholding held by promoters and this resulted in the acquisition of control.
It said that so long as the loan remained unpaid by NDTV promoters, Vishvapradhan Commercial continued to have the warrant conversion option, the purchase option, and the call option, under the call option agreements.
“It is a settled position of law that when there are options with convertibility, unless such options are exercised, the obligation to make an open offer…is not triggered.”
SEBI must, however, not treat this interpretation as settled since the complexities in the shareholding structures of companies have gone up significantly and some of these are designed to side-step the regulations.
In fact SEBI must reconsider the proposals made in a consultation paper in May 2021 that called for replacing the promoter and promoter group concept with the concept of controlling shareholders and persons acting in concert.
SEBI has not accepted this and other proposals made in the consultation paper.
Investors and other securities market participants are intuitively aware that in an increasing number of cases the real controlling shareholders are not among those listed in the promoter category.
The NDTV promoter case setback must motivate SEBI to accept the path-breaking proposals made in that paper.
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