SEBI Watch: NDTV case vindicates SEBI's stand on indirect acquisition

29 August 2022

The Adani Group's ongoing attempt to acquire a controlling stake in New Delhi Television by converting debt into equity shines the spotlight on an order last month by Securities Appellate Tribunal on how these loans should be viewed.

SAT overturned a Securities and Exchange Board of India order holding that the 4-bln-rupee interest-free borrowing by NDTV promoters under onerous conditions from Vishvapradhan Commercial should be treated as equivalent to the acquisition of a stake by the latter.
 
In the original order of June 2018, SEBI had pointed out that Vishvapradhan Commercial's loan agreement with the NDTV promoter company, which held 26% stake at that time, was not a normal lending transaction and its primary purpose was to acquire the broadcaster's shares.

To prove its point, it pointed out that the loan agreement gave Vishvapradhan Commercial the right to convert its loan into shares aggregating to a 99.99% stake in the NDTV promoter company "at any time during the tenure of the Loan or thereafter without requiring any further act or deed on the part of the Lender."

The market regulator had, therefore, concluded that "the exercise of the right to convert warrants into shares of RRPR (promoter company) thereby indirectly acquiring 26% of NDTVs equity is not dependent on the repayment of the loan."

Based on this finding, it held that Vishvapradhan Commercial had breached the takeover code by not making an open offer for NDTV shares after signing the loan agreement.
 
But these contentions were subsequently thrown away by the Securities and Appellate Tribunal while hearing appeals by Vishvapradhan Commercial and NDTV promoters.
 
On its part, SAT said that from a reading of the loan agreement and the call option agreements it was clear that either the loan had to be repaid or the call, conversion or purchase options would get exercised. SAT said the wording of the agreement indicated that VCPL would be entitled to exercise the warrant conversion if the loan remains unpaid at the end of the tenure. “In our opinion, it does not mean that the warrant conversion option could be exercised even after the loan is extinguished," SAT had said.

Thus, it rejected SEBI’s contention the warrants could be exercised even during the tenure of the loan.

The events of the last few days have given us new material to evaluate whose position was closer to reality. The events show that SEBI had its finger on the pulse of the complex web of covenants in the legal agreements between the promoters of NDTV and the lender.
 
The question in the minds of every minority shareholder of a listed company today is: If a promoter uses its shares to borrow or carry out deals under such onerous clauses, can it continue to be considered the true owner of those shares? It also points to the need for promoters to disclose the terms under which they resort to raising funds against their shareholding.
 
Separately, another worrying aspect is that SAT seems to have overlooked the fact that when it issued its order last month, the 10-year tenure of the loan was already over, and Vishvapradhan Commercial could, at any moment, convert its loan into shares of the promoter company.

Even if one accepted SAT’s reading that default was a condition for the conversion of the debt into shares, SAT should have asked why no open offer was made immediately after July 2019 when the loan expired and presumably slipped into default.

SEBI has got every reason to tap itself on its shoulders given how the NDTV case has turned out. But it must introduce the controlling shareholder concept in our securities market as this column argued for recently (https://www.informistmedia.com/sebi-watch-ndtv-case-shows-need-to-relook-controlling-shrholder-norm/).