The Hindu Business Line : Kingfisher acquisition of Deccan under lens

The Ministry for Corporate Affairs (MCA) has issued a show-cause notice to the acquirer (UB Group) for non-compliance with the provisions of the Companies Act.

A senior Corporate Affairs Ministry official told Business Line that notice has been issued seeking explanation as to why the provisions of the Act have not been complied with. The Act prescribes that if post-acquisition the market share of the two entities combined exceeds 25 per cent the corporate concerned needs prior approval of the Union Government,. The official said that the notice was issued by the southern region field office of the Ministry.

In May last year, the UB Group through Kingfisher Radio Ltd and UB Overseas Ltd had acquired stake in Deccan Aviation that ran the low-cost airline Air Deccan.

The UB Group had acquired 26 per cent stake in Deccan Aviation and subsequently acquired 20 per cent more. As on quarter ended March 2008 Kingfisher Radio Ltd held 42.57 per cent stake and UB Overseas held 7.19 per cent stake in Deccan Aviation.

The notice has been issued for violation of provisions of Section 108A of the Companies Act, the official said. Provisions of Section 108A is applicable in cases were the acquisition of shares leads to a dominant position in the market. According to estimates, Kingfisher Airlines and Air Deccan post-acquisition together have a market share of about 32 per cent, which made both of them among the top two airlines in the industry.

Any apparent violation of the provision of the Companies Act attracts severe penalties. Asked whether any violation, if found, would impact the stake purchase, official sources said, “Currently, it is a grey area. It is up to the Ministry to take a view.” According to Section 9 of the Companies Act any agreement in violation of the Act becomes void.

When contacted, Mr Vijay Mallya, Chairman of the UB Group, said, “The Regional Director had issued a notice to UB Holding Ltd (UBHL) asking for a confirmation that UBHL has sought prior approval of the Central Government before taking 26 per cent initial stake in Deccan.

“UBHL has contested this saying that Section 108A does not apply as such it is not required to seek the approval under the section. It is also clarified that this is the matter between UBHL and the Company Law Board and does not in any way affect the merger, which was approved by the Karnataka High Court.”