S Murlidharan

Delaying the take-off

S. MURLIDHARAN | Updated on June 19, 2013

The Jet-Etihad deal raises serious questions about effective control

The Companies Act, 1956 is caught in a time warp. It is blissfully oblivious to the possibility of board-room machinations and is ambivalent about who effectively pulls the strings in a company.

All that it prescribes is a minimalistic control regime — three-fourth majority for significant or seminal resolutions.

One thought the Companies Bill, 2011, would at least catch up with the present if not look into the future, but such hopes have been belied. Since the Bill is still before the Lok Sabha, it can and must be improved upon.



GUJARAT AMBUJA EPISODE

The issue of ‘effective control’ is not new, but is hogging the limelight in the context of the Abu Dhabi-based Etihad’s entry into Jet Airways.

With the government allowing 49 per cent equity stake in Indian aviation companies, Etihad has taken up 24 per cent of equity in Jet Airways.

It has obviously not fallen foul of the government’s Foreign Direct Investment (FDI) policy, but the government cannot be faulted for smelling something fishy in the whole thing.

For an infusion of upwards of Rs 2,000 crore, Etihad should be naïve to settle for a meek 24 per cent stake.

Intuitively, it must have reckoned with the SEBI’s takeover regulations, according to which it would have to make a public offer to acquire a further 26 per cent stake when it reaches the 25 per cent threshold.

It must have made a swift back-of-the-envelope calculations — if 24 per cent has cost Rs 2,000 crore, 51 per cent would cost more than Rs 4,000 crore.

Even an investor with deep-pockets does not fork out more than what is necessary.

Tatas sold 14.9 per cent stake to Gujarat Ambuja, which wanted to acquire ACC Cements Ltd more than a decade ago.

At that time, the cut-off point that triggered the public offer was 15 per cent. There was a howl of protest then, because by staying away from the dreaded figure of 15 per cent by a whisker, Gujarat Ambuja did not have to pay the same fancy price to the public that it paid to Tatas.

Clearly, small shareholders were given short shrift then.

The government perhaps does not want that to be repeated in the context of Jet Airways.

Even a rookie company law practitioner knew that Gujarat Ambuja was let off the hook even though it got effective control of the company just by taking over 14.9 per cent stake.

The government now seems to be having a lurking suspicion that Etihad wants to follow in Gujarat Ambuja’s footsteps.

The SEBI takeover regulations contemplate public offer to be made in two alternative eventualities — when the Rubicon is crossed in terms of percentage of stake acquired, or when effective control is handed over.

Unlike the percentage norm, effective control is easy to understand, but difficult to define. And it is this ambivalence that acquirers take advantage of. They can wriggle out of a huge public offer, hot on the heels of a negotiated deal with those in the saddle. This happens with the latter the two parties are in cahoots.

SHAREHOLDERS’ PACT

How does the acquirer acquire effective control without acquiring sufficient number of shares?

The answer lies in a secretive arrangement codified in a document called ‘shareholders’ agreement’, which is a misnomer because the only shareholders’ agreement the law countenances is the Articles of Association, which binds all the shareholders, as if each one of them had individually signed the Articles.

A shareholders’ agreement on the other hand is signed sub-rosa between two dominant shareholders and is effectively the norm in foreign collaboration agreements, especially where the foreign party brings in cutting edge technology. His is the last word.

The agreement would say that no further capital can be raised without the foreign collaborator’s nod, and it would be so even if the foreign collaborator is holding just 20 per cent.

More ominously, it can say, as it usually does, that the nominee of the foreign collaborator can veto any decision in the board meeting, and this too would be put into effect though it is violative of the company law.

The government thus clearly smells a rat. Etihad and Jet Airways have perhaps entered into a secretive shareholders’ agreement that perhaps confers effective control to the former in the latter, even though the former has only 24 per cent stake in the company.

Apart from conferring effective control, such a deal could also insulate Etihad from public offer obligations.

What is wrong in the government asking a foreign collaborator and his Indian counterpart to come clean and place everything on the table?

A government whose every economic decision is coming for close scrutiny, be it 2G licences or allotment of coal blocks, might fear being hauled over the coals if it allows the Etihad deal to go through without verifying what is there in the secretive private agreement whose sanctity remains suspect under the Indian laws.

A section of the media says the government should not intrude into the affairs of companies, as that could have the effect of scaring foreign capital.

Nothing can be more wrong.

(The author is a New Delhi-based chartered accountant)

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Published on June 19, 2013
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