Abu Dhabi-based Etihad has agreed to settle for two directors on the board of Jet Airways, instead of the three it had sought earlier when it signed the deal to pick up a stake in India’s leading private sector airline.

This follows questions raised in various quarters on whether Etihad was asking for more powers than what its 24 per cent stake in Jet entitled it to. A clearance for the deal is still pending and both Jet and Etihad now hope that the re-worked agreement will ensure smooth passage. Officials from Etihad had also recently met the market regulator Securities and Exchange Board of India to address the latter’s concerns over control and substantive stake.

SEBI had given Jet and Etihad the option of amending the shareholder agreement and removing stringent clauses that were disproportionate to their voting rights. This meant that Etihad would have to forego the powers it sought for under the earlier agreement, such as appointment of directors and veto rights that were not in line with its 24 per cent stake.

Etihad proposes to acquire a 24 per cent stake in NRI Naresh Goyal-owned Jet Airways for Rs 2,058 crore. The scrip closed at Rs 395.5 on the BSE, up 17 per cent, on hopes that the re-worked deal will get cleared soon. The earlier agreement, despite defining Etihad as investor, contained clauses including that four directors (all Indian citizens) shall be nominated by the promoters, three by the investor, and that seven (at least six of them Indian citizens) shall be independent directors and their replacement will be appointed on the recommendations of the nomination committee.

VIABILITY

There is little scope for diluting the clauses in the deal at they are driven by commercial considerations, especially when the investment is being made into a loss-making entity, say experts.

Tejesh Chitlangi, Partner, IC Legal, said when such clauses are outlined it is with the intention of gaining operational control. Watering them down may not be a commercially viable proposition and this could have a bearing on the deal.

Etihad had made a commitment to invest $600 million to shore up Jet’s financials of which $379 million was for picking up a 24 per cent stake in the airline.

Even if Etihad had agreed to make an open offer as sought by SEBI, it may not be in a position to do so, as the minimum size for an open offer is for acquiring 26 per cent from public shareholders. The public shareholding is only 25 per cent.

(This article was published on July 26, 2013)
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