2018 (6) TMI 1837 - AT - SEBI

Violation of SAST Regulations - takeover exercise couched as a loan agreement - secured loan advanced by VCPL to RRPR - scope of conversion option and the purchase option (outlined in the loan agreement) and call option - No public announcement to acquire shares of the target company made - whether execution of the set of agreements (i.e the Loan Agreement between VCPL and RRPR along with the Call Option agreements through VCPL s affiliates binding the Promoters of NDTV) partakes of the structure of a loan transaction or an arrangement entered into by the parties to acquire control over NDTV under Regulation 12 read with regulation 14(3) of SEBI (SAST) Regulations, 1997? - HELD THAT - All the concerns attached to the manner in which the loan agreements and call option agreements were entered into and the subsequent conduct of the noticee do not substantiate its argument that the transaction was only in the nature of a loan. Instead, it appears that the loan agreement and call option agreements were used to shroud the true nature of the transaction which was acquisition of beneficial interest in NDTV Ltd. The elaborate mechanism adopted by the noticee and its associates appear to be solely to deflect attention from this acquisition and thus covetously overcome the obligations imposed by the Takeover Regulations. In effect, the transaction is not to secure the loan but to acquire control over all the affairs of the Target Company leaving only the right to control the editorial policies of NDTV to the Promoters and Borrowers, right from the day of execution of the loan agreement. Thus in our view, the takeover exercise has been conveniently couched as a loan agreement with the predominant intention of the Noticee being to acquire control over NDTV without contemplating any repayment of the loan, whatsoever, from the Promoters or Borrowers. The transaction documents admittedly confer Conversion Option, Purchase Option and the Call option, and if the voting rights is to give full effect to the Transaction Documents, it would straightaway mean that the 52% of the voting rights of NDTV have to be exercised by the Promoters as per the dictates of the Lender and the same may traverse the specified Veto rights under Schedule 3. What is certain is the idea of the Noticee to start exercising control through the Promoters by keeping a tight hold on 52% of the shares of NDTV, through the threefold 'Options' conveyed by the Promoters, by helping them to meet the loan repayment that was pending to ICICI Bank. The related issue as to whether veto rights confer any rights of control in favour of the noticee is not relevant for consideration in the instant case as the veto rights in Schedule 3 are eclipsed by the operative provision in Clause 20 of the Loan Agreement and are not significant enough for an independent consideration from the 'control' angle. A close look at the structure of the transaction revolving around the conversion option and the purchase option (outlined in the loan agreement) on the one hand and a call option on the other clearly reveals that the transaction structure is unusual and peculiar to say the least. The absence of an explicit clause in the Loan Agreement rendering the conversion option void on repayment of loan is strikingly abnormal and it clearly lays out an unfettered path for the noticee to stake its access to NDTV, albeit through the medium of RRPR. The call option construct is also strangely devoid of any time limitations and it endows the noticee (and its affiliates) the right to acquire 26% of NDTV shares from RRPR, at any time with no linkage to the loan. The strike price of the call option has been set so high (at a premium of 51% to the then average market price by noticee's own admission in its reply dated May 21, 2018) that it renders the whole exercise of collateralization of the loan a non-starter. Given the price history of NDTV shares, the argument of the noticee about the call option serving as a collateral seems very hollow. Thus the noticee i.e. VCPL did indirectly acquire control in NDTV Ltd., by entering into the Loan agreement and the Call Option agreements on 21st July, 2009, thereby obligating it to make a public announcement of an open offer under Regulation 12 read with regulation 14(3) of SEBI (SAST) Regulations, 1997, as alleged in the SCN. Order a) The noticee shall make a public announcement to acquire shares of the target company in accordance with the provisions of the SAST Regulations, 1997, within a period of 45 days from the date of this order; b) The noticee shall along with the offer price, pay interest at the rate of 10% per annum from the date when they incurred the liability to make the public announcement till the date of payment of consideration, to the share-holders who were holding shares in the target company on the date of violation and whose shares are accepted in the open offer, after adjustment of dividend paid, if any.

Summary

Issues Involved:
1. Nature of the Loan Agreement and Call Option Agreements.
2. Acquisition of Control over NDTV.
3. Procedural Issues Raised by the Noticee.
4. Miscellaneous Issues.

Detailed Analysis:

1. Nature of the Loan Agreement and Call Option Agreements:
The primary issue was whether the Loan Agreement between VCPL and RRPR, along with the Call Option Agreements, constituted a genuine loan transaction or an arrangement for acquiring control over NDTV. The agreements were scrutinized to determine their true nature.

Key Findings:
- The Loan Agreement was for Rs. 350 Cr. with a tenure of 10 years, without interest, and included convertible warrants for 99.99% of RRPR's equity.
- The Call Option Agreements allowed VCPL's affiliates to purchase up to 26% of NDTV's shares at a fixed price of Rs. 214.65 per share.
- The agreements included clauses that restricted the Promoters from selling or transferring their shares without VCPL's consent and mandated their voting rights to align with VCPL's interests.

Conclusion:
The agreements were found to be structured in a manner that disguised the acquisition of control over NDTV. The terms allowed VCPL to exercise significant control over RRPR and NDTV, indicating that the primary purpose was not merely a loan but to acquire beneficial interest in NDTV.

2. Acquisition of Control over NDTV:
The tribunal examined whether the execution of these agreements resulted in VCPL acquiring "control" over NDTV as per Regulation 12 of the SEBI (SAST) Regulations, 1997.

Key Findings:
- VCPL had rights to convert warrants into RRPR shares, thereby indirectly acquiring 26% of NDTV's shares.
- The Call Option Agreements provided VCPL's affiliates the right to purchase NDTV shares, further consolidating control.
- The agreements included veto rights and non-compete clauses, indicating control over significant decisions and operations of NDTV.

Conclusion:
The tribunal concluded that VCPL indirectly acquired control over NDTV through these agreements, triggering the obligation to make a public announcement of an open offer under the SEBI (SAST) Regulations, 1997.

3. Procedural Issues Raised by the Noticee:
VCPL raised several procedural objections, including the lack of a prior investigation, the absence of specific proposed actions in the SCN, and the delay in proceedings.

Key Findings:
- The tribunal noted that a formal investigation was not mandatory if the examination of agreements and submissions sufficed to draw conclusions.
- The SCN's primary objective was to ensure shareholders received an exit opportunity, which did not necessitate detailing specific actions.
- There was no statutory limitation period for initiating enforcement actions, and the delay did not prejudice the proceedings.

Conclusion:
The procedural objections raised by VCPL were dismissed as they did not hold merit in the context of ensuring justice and regulatory compliance.

4. Miscellaneous Issues:
The tribunal addressed additional issues, including the comparison with Zero Coupon Convertible Bonds (ZOCDs) and the structure of the transaction.

Key Findings:
- The tribunal found that the transaction's structure, including perpetual conversion options and open-ended call options, was unusual and indicated an intent to acquire control.
- The financial statements of VCPL and its affiliates did not support the claim of a genuine lending transaction, raising further suspicion.

Conclusion:
The tribunal concluded that the agreements were designed to acquire control over NDTV, and the comparison with ZOCDs was not applicable due to the unique transaction structure.

Final Judgment:
The tribunal directed VCPL to make a public announcement to acquire shares of NDTV within 45 days and to pay interest at 10% per annum from the date of the violation. This order aimed to ensure compliance with SEBI regulations and protect the rights of NDTV's shareholders.