Market regulator SEBI has filed an appeal in the Supreme Court (SC) against a recent judgment by the Securities and Appellate Tribunal (SAT) involving the loan agreement between NDTV promoters — Pranoy and Radhika Roy — and lender Vishva Pradhan Commercial (VPCL). SEBI had arrived at a view that VPCL controlled NDTV but SAT had termed it as a figment of SEBI’s imagination. Now, SEBI has said in its appeal to the SC that SAT has wrongfully read the Takeover Code, which lays down the rules in cases of merger and acquisitions.
SEBI’s appeal to the SC is unlikely to have any bearing on the open offer by Adani Group to acquire additional shares of NDTV from the open market and also Adani’s buyout of VPCL that triggered the private loan agreement involving VPCL, RRPR Holdings and the Roys, a regulatory source told businessline. There is a view that SEBI’s appeal against the SAT order and Adani’s open offer were two separate matters.
In July, SAT had called SEBI’s conclusion that VPCL was controlling NDTV as imaginary and said the clauses in the agreement were merely to protect the lender. In 2009, VPCL had given an interest-free loan of ₹403 crore to the Roys for 10 years that ended in 2019. Investigations found the Roys did not return the money to VPCL and money was lent against convertible warrants that had NDTV shares as underlying. SEBI concluded that the loan agreement was disguised control over NDTV and had triggered the Takeover Code. Had SEBI’s case stood ground in SAT, VPCL would have had to make an open offer of NDTV shares, experts said. But SAT overturned SEBI arguments, after which VPCL was bought over by Adani Group, which triggered the clauses of the loan agreement and hence an open offer.
Bad precedent
SEBI officials were concerned that the SAT verdict could set a precedent and promoters of listed companies may secure loan by issuing unlimited convertible instruments at pre-negotiated price, including non-compete clauses and yet not trigger the Takeover Code. Also, SAT had not considered the written submissions by SEBI on various aspects of the case, merely on technical grounds that they were not vetted by the arguing counsel.
Quasi-judicial authority
SEBI is a quasi-judicial authority and its written submission has to be considered by the courts in the course of natural justice. The SC can take a strong view of SAT’s attitude of throwing out written submissions of a regulator on frivolous technicalities, sources close to SEBI said. Also, SEBI officials were worried that if the SAT order was left unchallenged, it would lead to other media company promoters borrowing money from private lenders in lieu of unlimited convertible option at twice the market price with the right to appoint a director and still not trigger the Takeover Code, which is what the regulatory officials said happened in the case of NDTV promoters.
Unusual clauses
The loan agreement between VPCL and Roy’s had unusual clauses like non-compete, right of first refusal to VPCL and interest free compulsorily convertible instruments, etc, all of which purely concern potential takeover of a company at a pre-negotiated price. SEBI’s Takeover Code is a special law that protects the rights of minority shareholders in listed companies. SEBI did not comment on an email query.
SEBI officials say it is very rare for loan agreements to have non-compete clauses and not demand the money on expiry of agreement. Before the loan, VPCL owned less than 10 percent of NDTV shares but a precondition to the loan was that VPCL would own 26 percent later. A trigger of Takeover Code requires an open offer to minority shareholders of a listed company and no return of money or exercise of the option was enough to perceive substance over form, officials say.
The Roys transferred 18 percent of their holding in NDTV to RRPR Holding at a nominal value (₹4) and thus, this transaction itself would trigger the Takeover Code as it is not a simple inter-se transfer but done as a condition to the loan agreement and the compulsorily convertible instrument (26 per cent), SEBI officials said. SEBI is also likely to use investigations by the Income Tax Department (IT) in the case since there is a fundamental difference in submissions of parties, the sources said. Sources say that the IT found that VPCL had “no business activity” and it gave a “zero coupon optionally convertible loan (interest free)” to RRPR (a company of Roy’s) as confirmed by VPCL to DG Investigations.