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TMI Blog2018 (6) TMI 1837X X X X Extracts X X X X X X X X Extracts X X X X ..... olding Pvt. Ltd. ("RRPR"), Prannoy Roy and Radhika Roy (hereinafter referred to as "Promoters"). An open offer was made by the promoters of NDTV Ltd. in the year 2008. It was observed that a loan of Rs.540 Cr. was taken by the promoters from M/s. Indiabulls Financial Services Ltd. to fund the aforesaid open offer. To repay the aforesaid loan, another loan of Rs.375 Cr. was taken from ICICI Bank. The loan taken from ICICI Bank was repaid in the year 2009 by taking another loan of Rs.350 Cr. from Vishvapradhan Commercial Private Limited ("VCPL"/ "the noticee"), vide an agreement dated July 21, 2009 (hereinafter referred to as "the Loan Agreement"). 2. Significant aspects/clauses of the Loan Agreement are as follows: i. The term of the loan is 10 years i.e. upto July, 2019. ii. The loan is an unsecured loan and without any interest payment. iv. RRPR will issue a convertible warrant to VCPL, convertible into equity shares aggregating to 99.99% of the fully diluted equity share capital of RRPR at the time of conversion, convertible at any time during the tenure of the loan or thereafter. v. VCPL shall have the right to purchase from the promoters all the equity shares of RRPR a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other entity. (c) Cause NDTV to take any steps towards bankruptcy, insolvency or reorganization, arrangement, adjustment, winding up, liquidation etc. (d) Buyback of equity securities, reduction or alteration of share capital of NDTV. (e) Take any action to issue any equity securities or enter into any agreement as a result of which the promoters cease to be in sole control of NDTV. 3. Taking note, inter alia, of the above, a notice dated December 20, 2016 (hereinafter referred to as "the Show cause notice"/ "the SCN") was issued by SEBI to the Noticee alleging that the loan was not a normal investment transaction, that the primary purpose of the loan was to acquire the shares of NDTV Ltd. and that although VCPL had not acquired any shares of RRPR or NDTV directly, RRPR acquired shares from other promoters to increase its holding in NDTV to 26% as a precondition to the loan agreement. The SCN also stated that the loan has been granted by the Noticee for the considerations enlisted at (a) to (e) at para 8, which includes the right to purchase 99.99% shares of RRPR through convertible warrants along with right to purchase 26% shares of NDTV held with RRPR through call opt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7, the Hon'ble SAT directed that since the hearing is fixed on August 3, 2017, it would be open to the appellant (VCPL) to raise the plea of inspection of documents before the Whole Time Member("WTM") and if raised, the WTM of SEBI, after hearing the appellant would pass appropriate order thereon. However, while the hearing was scheduled for submissions on merits, the noticee chose to make submissions only on the issue of documents that in its opinion should have been made available to it in inspection. Pursuant to the same, vide letter dated October 03, 2017 issued with the confirmation and approval of the Whole Time Member, SEBI provided its comments on the documents sought after taking a decision with respect to the relevance of each of the documents sought. Upon receipt of the said letter, VCPL has sent another letter dated October 12, 2017 basically contending the following issues: i) That the direction of the Hon'ble SAT was to pass an appropriate order on the matter of inspection; ii) Seeking confirmation as to whether the contents of the letter dated October 3, 2017 is an order of WTM that was required to be passed in terms of the SAT Order dated 27th July, 2017 or whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and further result in delay and also clog the qausi-judicial and appellate fora with unwarranted litigations. Further, reasons earlier tendered for rejecting the request for additional documents were reiterated in the said order. Pursuant to hearing before the Hon'ble SAT dated January 04, 2018, additional documents were provided to the notice as directed in its order. 7. Subsequently, reply to the SCN was received vide letter dated February 20, 2018. During the personal hearing granted to the noticee on February 22, 2018, certain queries were raised with the noticee, to which it proposed to make a separate set of written submissions. Accordingly, reply dated March 09, 2018 was received from the noticee. In the said reply the noticee again sought an opportunity of a personal hearing which was granted on May 03, 2018. During the said hearing in response to the submissions made by the noticee, certain clarifications were sought to which the noticee chose to make written submissions dated May 21, 2018. Submissions during the opportunities of personal hearing were made by Advocate Somashekhar Sundaresan, who was accompanied by Advocates Dhaval Kotharai, Rahul Dutt and Manish Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to purchase from RRPR equity shares of NDTV, representing up to 11.01% of the equity share capital of NDTV, in each case at a fixed price of Rs.214.65 per share (collectively, "Call Option"). The call option agreements are enclosed as Annexure 3 and Annexure 4 respectively. As per Clause 7 of the Loan Agreement, any money paid to RRPR to purchase NDTV's shares from RRPR under the call option agreements is to be used by RRPR only for repayment of the loan to VCPL. It is a well-known legal position that unless and until either the Conversion Option or the Purchase Option or indeed the Call Option are exercised, there is no question of triggering an open offer under the Takeover Regulations, 1997 or the Takeover Regulations, 2011. (vii)No person connected with VCPL either directly or indirectly has been appointed as director of NDTV or RRPR at any time. (viii)Clause 6.1 read with Schedule 1 and Clause 6.2 of the Loan Agreement provides that as and when, if and when, the Conversion Option or the Purchase Option or the Call Option (which collectively are a part of the Collateral) gets exercised, at that point of time, the transfer of shares - whether of RRPR or of NDTV - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable information that Dr Prannoy Roy, Mrs Radhika Roy and their Affiliates, from the date of Loan Agreement till date (i) have owned and controlled 61.45% shareholding of NDTV and are the major share-holders of NDTV (ii) voted on 61.45% shareholding in NDTV in all meetings (iii) are promoters of NDTV (iv) have appointed the directors of RRPR and NDTV (v) appointed the chairman of RRPR and NDTV in all the meetings and (vi) have exercised control and taken all policy decisions and managed the affairs of RRPR and NDTV. (xii)It is evident from the conduct of VCPL, and of RRPR, Dr Prannoy Roy and Mrs Radhika Roy, that the intention of providing loan to RRPR was not to acquire "control" over RRPR or NDTV and the Loan Agreement is a normal lending transaction to enable RRPR repay its then existing debt. The following clearly establishes the same:- (a) VCPL has not exercised any of the rights provided under the Loan Agreement till date; (b) The day-to-day operations of RRPR and NDTV have always been under the control and management of Dr Prannoy Roy and Mrs Radhika Roy; (c) The directors and key managerial personnel of RRPR are appointed by Dr Prannoy Roy and Mrs Radhika Roy and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed up to a price so as to give a return on the investment. For VCPL to be incentivized to exercise it, the market value would have to be such as it would give a return. There was no specific trigger for their exercise, and nor was there any specific contingency; except that, as explained above call option would have been an effective mechanism if say NDTV share prices increased up to a price so as to give a return on the investment. Otherwise, if VCPL did decide to take over RRPR's shares in NDTV, a more effective mechanism would have been to exercise either the conversion option or the purchase option. The net result is that exercise of any of the options in full will mean VCPL would not exercise any other option, because VCPL would already have achieved 26% NDTV shares. The question to be framed is whether the "right to exercise an option" constitute "acquisition of shares"? This is because the law rightly recognises that it is when the holder of a convertible security, in fact, converts it, it is only then can it be said to be have acquired shares, and not before that. This position of law has been laid down in several cases. (xvi) The Loan Agreement clearly is a loan for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (xxii) The absence of an interim repayment schedule is purely a matter of contract and it is quite conventional to even see prohibition on prepayment in loan agreements. (xxiii) The Maturity Date falls 10 years from the disbursement. That is a long time. In that time, VCPL has options and if it does not exercise them then the loan becomes repayable. VCPL took a longterm view on the investment. (xxiv) Since VCPL has provided the loan to RRPR, and it holds the options to the shares, it is but natural for VCPL to expect that any buyer of RRPR should be acceptable to VCPL and must be a 'stable and reliable' buyer. 8. Issue for Determination The Noticee has raised several preliminary objections during the proceedings and the same will be taken up for consideration after the deliberation of the merits of the violations alleged in the SCN. However, the main issue for consideration in the matter is hereunder: Whether the 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another loan of Rs. 375 Cr. was taken from ICICI Bank. The loan taken from ICICI Bank was repaid in the year 2009 by taking another loan of Rs. 350 Cr from VCPL i.e. the Noticee, vide the Loan agreement executed on 21st July, 2009. 11. On 21st July, 2009, three simultaneous or co-existing agreements were executed by VCPL and its affiliates with RRPR as part of the financial transaction between VCPL and RRPR- (i) the Loan agreement between VCPL and RRPR; (ii) Call option agreement between VCPL and Shubhgami Trading Pvt Ltd (STPL) and; (iii) Call option agreement between VCPL and Shyam Equities Pvt. Ltd. (SEPL). I have perused the contents of each of these agreements and sought the comments of the Noticee regarding the same during the multiple opportunities of hearings that were granted. 12. I proceed to examine the relevant clauses of the Loan Agreement and the parallel Call Option Agreements to ascertain whether the same were in fact part of a lending transaction or not. Clause 2 of the Loan Agreement deals with the debt obligation which makes it clear that the Lender agrees to lend Rs.350 Cr. without any interest and that the same shall be repayable on the Maturity Date. The Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocuments of the loan Agreement means "(i) the Loan Agreement (ii) the Call Option agreements and (iii) all other documents and agreements relating to the above and or designated as such by the lender in relation to the Loan, as such documents may be amended or supplemented from time to time." 13. It is observed that the loan agreement was entered into between VCPL, the Noticee on one side and RRPR, Prannoy Roy and Radhika Roy, on the other side in the capacity of promoters of NDTV Ltd. The loan amounted to 350 crore rupees with a repayment period of ten years from the loan amount being drawn down. According to the Noticee, the loan had the following collateral, as stated in para 32 of its reply dated 20th February, 2018: (i) Conversion Option i.e., the convertible warrants aggregating to 99.99% of RRPR's equity capital which when converted translated into the 26% equity of NDTV, since RRPR held the said quantum of NDTVs shares; (ii) Purchase Option-i.e. the option to purchase all equity shares of RRPR from Dr. Roy and Radhika Roy at par; (iii) Call Option - i.e. a call option in favour of the Noticee's associates to purchase upto 26% (14.99% and 11.01% respectively through two ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seems very peculiar. The per share value of NDTV's shares quantified based on the loan agreement and call option agreements was Rs 214.65 (the number having been arrived at by dividing the number of shares in NDTV from the 'loan' amount advanced to RRPR). I note that at the time of the execution of the loan agreement, the market value of NDTV's shares was substantially lower than the value of the collateral of the loan agreement. On the 21st of July, 2009, market price touched a high of Rs 130 and closed at around Rs 127. Therefore the collateral was valued around Rs 84 more than its market value. Normally when loans are advanced on the back of security or collateral, the value of collateral undergoes a haircut to provide for exigencies. This unusual valuation reinforces the belief that the said convertible warrants could not be referred to as collateral. (vi) Clause 20 of the Loan Agreement dealing with the Promoters and Borrower's voting rights in NDTV unambiguously binds them to exercise the voting rights attached to the equity shares held by them in NDTV and NDTV Group to give full and complete effect to the provisions of the Transaction Documents including but not limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the agreement would be in force and effect until the date of the re-payment of the loan. So also, if the Call Option were exercised in full it would follow under clause 7 that the proceeds would be utilized to repay the full loan which would in turn lead to the agreement ceasing to have force and effect." Although the noticee has made the above assertion, a careful reading of the terms of the agreements reveals the contrary. Clause 8 of the loan agreement clearly alludes to the agreement being in full force till the repayment of the loan or exercise of call options in full, whichever is later, which means mere repayment of the loan is not a sufficient condition for termination of the agreements. The said Clause 8 reads as follows: "The Agreement shall become binding on the Parties on and from the date first above written. Notwithstanding anything contained in this Agreement, this Agreement shall be in full force and effect till the later of: (1) all the monies due and payable by the Borrower under the Transaction Documents are fully paid off to the satisfaction of the Lender and (2) the exercise of the call options in full under the call option agreements." 16. Added to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with "Right Of First Refusal" provides that "The Promoters and their Affiliates are not permitted to sell or transfer either directly or indirectly in any manner whatsoever their Equity Securities in NDTV to a third person prior to the expiry of five years from the date of this Agreement without the prior written consent of the Purchaser. The Purchaser and its Affiliates are not permitted to sell the Call shares prior to the expiry of five years from the date of this Agreement without the prior written consent of the Promoters." The Non Compete Clause in Clause 4 states "The Promoters together with their Affiliates shall not directly, indirectly or beneficially invest in or participate in or be financially engaged, concerned with or interested in any undertaking or in the management of any Person (including, but not limited to, any joint venture, partnership or other arrangement of whatsoever nature) engaged in the business of the NDTV group or the business of undertaking broadcasting of news and current affairs channels without the prior written consent of the Lender. Provided nothing herein shall apply to the holding of the Promoters in NDTV and NDTV Group. The Promoters shall ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Promoters of NDTV, unchanged. 19. It is not clear why the lender (VCPL) had to resort to execution of Call Option agreements in addition to the Loan Agreement if it was an outright lending transaction. The explanation offered by the noticee is that the call option agreements protected the lenders interest in acquiring NDTVs shares in case the price of NDTVs shares increased beyond the strike price. This infact reinforces the opposite argument i.e. the primary purpose of the Loan Agreement and related agreements was towards acquiring a stake or control in NDTV. The specific submissions of the Noticee with respect to Call Option agreements is extracted below as the same is relevant to decide the intent of VCPL: "Query: Is the call option over NDTVs shares in addition to the warrants issued through the loan agreement? Yes. The Call Option is an additional collateral- in addition to the Conversion Option and the Purchase Option. Of course, all these options complement each other such that the net result of all or any of them fully would lead to VCPL acquiring directly or indirectly 26% shares in NDTV. Query : What is the tenure of the call option agreements? In other words, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Call Option Agreement dealing with 'Right of First Refusal' binds both the borrower and the lender and restricts them from selling or transferring the equity securities in NDTV to a third person prior to the expiry of five years from the date of the Call Option Agreement. From the said clause 3(a) of the Agreement, it appears that VCPL through its affiliate has an ascertainable or enforceable right over the shares that prevents the borrower from selling the said 26% of NDTV shares without its permission. Such a non-disposal covenant or a ROFR contained in a Call Option Agreement to the extent of 26% of NDTV shares coupled with another 26% entitlement which is in lieu of repayment of loan, makes it evident that the loan agreement is to disguise the acquisition of control. The ROFR clause, in the first reading, appears to balance out the mutual interests of the parties. However the burden of ROFR on the Borrower or the Promoter is much more than on the Noticee as the Noticee did not have 26% of NDTV shares on the date of the agreement with it to be bound equally by the covenant. Thus, this strengthens the inference that the Lender was clamping its hold over the Borrower by not allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said agreements circumscribe the period within which call option may be exercised. When the loan agreement itself binds the borrowing transaction thereunder along with the transactions under the call option agreements, it strengthens the assumption that this is not a simple case of lending. Though questions regarding the call option agreements were specifically put to them, the Noticee has not contested this aspect in detail except to submit that the net effect of the three agreements was the 'lenders' right to acquire 26% of NDTV's voting capital. This submission is not one that I am able to accept on a thorough and conjoint reading of the loan agreement and call option agreements. The right to purchase shares under the call option agreements seems to be independent of the conversion of warrants into shares in terms of the Loan Agreement. The only caveat under the Loan Agreement is that money paid towards purchase of shares under the call option agreement must be used by RRPR to repay the loan . It may also be noted that VCPL appears to be the end beneficiary of the call option agreements as can be seen from the clauses of the loan agreement. 22. The nature and structure of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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. 24. 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 my 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 mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Agreement in the instant case would bear no resemblance to any other case involving ZOCDs as convertibles in the course of transactions. 27. 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 conversion option which entitles the Noticee to 99.99% of RRPR shares has a perpetual existence not circumscribed by the tenure of the loan. The Noticee has a right to exercise his conversion option even after the loan is settled. In essence, it means that the entitlement of the notices to 99.99% of RRPR shares is absolute, and not contingent upon any event or bounded by limitations of time. 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 affil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me runs contrary to the objective of ensuring justice; particularly so when the alleged violation contravenes the rights of the investors in a listed company. In the instant case, if the Noticee is held to have had acquired control, statutorily it was required to provide an exit opportunity. Not providing that opportunity would be a serious violation of the statutory rights of shareholders. The Noticee has addressed several other related issues individually and extensively by relying on various case law. However, I find those issues do not warrant any detailed consideration as most have become irrelevant in the light of the above examination and analysis. The instances of SAT and SEBI orders as well as SEBI's Informal Guidances quoted by the noticee in its submissions are all in relation to acquisition of shares and not in relation to acquisition of control. To conclude, I am of the view that a conjoint reading of the facts and circumstances involved in this case brings out its uniqueness and leads me to conclude that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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