Are SEBI & CCI Talking?
M&A transactions are perishable commodities. Delays could mean death in this business. With merger control coming into effect this June - how will deal making survive the timetables of both SEBI & CCI? Joining me, this week, on our continuing coverage on merger control - Sourav Mallik of Kotak Mahindra and Nischal Joshipura of Nishith Desai.
Below is a verbatim transcript of the interview. Also watch the video.
Menaka: This is not to alarm people that M&A is going to come to a standstill, but more to be able to identify what some of the core areas of divergence are because SEBI and CCI atleast are in conversation and both regulators look like they want to resolve the issues before deals, infact start facing them. So I will quickly run through several scenarios, not all of them, but several of them and you tell me where you see the problems coming up and what the possible solutions are and the first one that struck me was that SEBI allows you to creep at 5% per annum between 15% and 55%. CCI says if you creep between 15% and 50%, you have to file with us, it's only a filing and therefore there is a no regulatory issues so to speak, but it's still going to be a practical problem, isn't it?
Mallik: It's not an regulatory issue per se, but it's going to be a practical aspect that basically promoters or people in control will be required to disclose upfront that they want to increase their shareholding in their company and that may have an impact on the market price in itself and the ability to conclude (interrupted)
Menaka: You have a related point on preferential allotments Nischal here?
Joshipura: On the preferential allotment also there would be difference in the pricing because on one hand you are taking 30 days for the relevant date and going 6 months back on the other hand after special resolution within 15 days you have to issue the shares to the investor, which could be prolonged till the time the statutory approvals are obtained, which could stretch upto 210 days. So on one hand you are looking 7 months before the special resolution, on the other hand you are looking 7 months after the special resolution.
Mallik: It's a practical issue that if you have a 6 month timeline and after which you receive the approval and once you receive the approval, the investor may just very well turnaround and say now the market price has moved so much that I just don't want to do ahead with this particular transaction. So that's the other aspect.
Joshipura: Also it would be difficult for promoters to creep in case of a hostile situation because they can't wait for 210 days.
Menaka: Promoters I am told are allowed to creep because within a group it's not a problem? (interrupted)
Joshipura: Yes, but growth is only more than 51%. So if you are holding only 25% and you want to creep to 30% then in that case you are not a group and you don't get that exemption under schedule 1.
Mallik: That's a very interesting point, particularly in the context of a hostile situation. If somebody who made a bid on your company and they have gone to CCI for approval and how do you do market purchases in that context and here is a promoter who is in there, who wants to defend himself, he can't do market purchases, he has to file with CCI to get approval as well. So that's a (interrupted)
Menaka: So that's going to throw up one issue. How do you resolve that? What is the way to reduce this practical difficulty?
Mallik: The real way to reduce this practical difficulty to my mind is if a person is already deemed to be in control that should not (interrupted)
Menaka: So don't use a numerical threshold? Use a controlled threshold so to speak, which unfortunately we are lacking all through the guidelines. Let me move the next thing and this is do with open offer timelines, which is again one quite often discussed issue for the past several days. So what if you do not get a prima facie opinion or decision by the CCI within 30 days? Does that substantially alter your ability to do an open offer? Would it fall foul of SEBI prescribed timelines within which to do an open offer? Would it mean additional interest outgoes? What are the outcomes the one is looking at if you don't get that prima facie approval within 30 days?
Mallik: Let's for a moment also assume - let's look at the scenario. They actually, they don't comeback and process get's delayed. What really is happening? Now SEBI is basically - the takeover code says that if there are nonreceipt of statutory approvals then your process can get extended to that extent. (Interrupted)
Menaka: So SEBI is not going to comedown on you?
Mallik: SEBI is not going to comedown. SEBI is going to look at one thing that are you diligently following up to receive that statutory approval and secondly they will come and say that okay even if you are diligently pursuing it you must pay interest to shareholders because of delayed receipt of payment. Now this payment of interest brings about 2 other additional aspects. The moment you pay interest to even resident shareholders, there is an aspect from a tax point of view that tax has to be deducted source(check) before any such payment is made and when you are making payments to nonresident shareholders you have to again additionally seek RBI approval to make that payment as interest. So these brings about additional complexities, again not an regulatory issue, but an administrative complexity into the entire process (interrupted)
Menaka: But SEBI does allow you to defer the open offer or the completion of the open offer till you don't receive some form of a prima facie approval from CCI?
Mallik: That's correct because even in today's scenario there are other statutory approvals like FIPB, which could get potentially delayed and open offer have got delayed in the past on that account.
Menaka: How long can the interest clock tick for? Is there a SEBI prescribed outer limit saying you can actually delay this only by an X number of months and not beyond that because ultimately those shares are - the shareholder is deprived of being able to trade on their share, right if I understand it (interrupted by guest)?
Mallik: Not only is that, probably we would have to go into a situation in where we say that the open offer is - doesn't even open, so the shareholders will probably will have to remain with their shares and not really tendered them in and keep them locked in for 6 months that's what we are going to probably do from a practical point of view. But the other impact there happens is that when there is a open offer pending, the market price kind of get's stuck in a range, it doesn't move, it doesn't really reflect any further true value. So in that context if that happens for a long period of time a shareholder can say that okay, I am really deprived, not only am I not getting an exit, I don't know if a final approval is going to come. Okay, I will get interest if a final approval comes, if it doesn't come then what am I do? What am I going to do? I can even trade freely in the market.
Menaka: Can the lack of a prima facie decision, let's assume worst case scenario, CCI doesn't comeback within 30 days. We don't know when they are going to comeback on that transaction, can that be deemed as a statutory approval refused? And at that point then can you choose to withdraw the open offer?
Joshipura: I don't think so, as I mentioned earlier that section - that deemed approval concept is not there for 30 days.
Menaka: Right, absolutely.
Joshipura: So if CCI does not comeback within 30 days that does not mean it's a deemed approval or it does not mean that it is a deemed rejection also. So you will have to wait till the time CCI comes back on that issue. It could take few more days (interrupted by anchor)
Menaka: So now you are stuck, you are in this deal, you can't get out, you announced an open offer, but you cannot conclude it, nor can you withdraw it and you are paying interest and you have tax issues to face?
Joshipura: There is one section 29 in the Competition Act, which states that if CCI if forms a prima facie view that there is an appreciable adverse effect on competition then it can start investigation.
Menaka: That's where it goes into 210 days for, which is the second phase?
Joshipura: Technically if within 30 days, they don't form a prima facie view then can the acquirer go into that section 29 and say that because you have not comeback within 30 days you have no right to investigate the combination for that.
Menaka: That's the unclear part that deemed approval is available for 210, but not explicitly available for 30 days.
Joshipura: But it’s a bit aggressive view, someone could challenge it.
Menaka: Someone could challenge it, someone who got tired of listening to the interest clock ticking. So now I come to the core of the issue which is modification. CCI says we are investigating your transaction for appreciable adverse effect which goes from 30 days into the second phase of the transaction. They come back within 210 days and say we want you to modify your transactions, what are the various scenarios that will come up and how will it impact a deal?
Mallik: This is the major issue in the potential regulatory conflict between Takeover Code and CCI. If CCI comes back and says that I want a particular modification done to the transaction there are three or four scenarios. The acquirer could potentially say, yes I am happy with this and I go ahead all is well. If the acquirer says I don’t want to go ahead with this and I want to call of my deal, I am not so sure that that will be treated as a refusal as a statutory approval and you can withdraw the tender offer. You maybe able to withdraw your main transaction but you may not be able to withdraw your tender offer.
Menaka: Let me just clarify this, the reason you are saying that is because the conditions under which SEBI allows you to withdraw an open offer specifically states and is worded in this fashion saying, “ the statutory approval(s) required have been refused”.
Joshipura: I have a slightly different view on that because Section 31 sub-section 10 specifically mentions that if the acquirer does not agree with the modifications proposed by CCI then it will be deemed by CCI that the combination is causing appreciable adverse effect on competition and CCI will pass an order, the combination shall be declared void. And CCI will pass an order rejecting the combination which will be considered as not obtaining statutory approvals and hence you can withdraw the open offer.
Menaka: You don’t agree with that point of view?
Mallik: It is slightly grey and if you extend it one level more and say that they require certain modifications, some assets to be excluded and in that context let us say the acquirer says okay if I am not going to get these assets, I want to reduce the price of my offer. I am willing to go ahead but I want to reduce the price of my offer. You cannot revise the terms of your offer. So that is another complexity.
Joshipura: Also the other complexity which could come in is situation where the acquirer accepts the modification but it might take 6 months to carry out the modification then what do you do? Will you go ahead and consummate the transaction based on that conditional approval or will you wait for 6 months to carry out the modification and then consummate the transaction.
Menaka: It depends on what the modifications are, if the modifications are pertaining to the acquirers company, are they pertaining to acquirer target company, it will depend on that because you cannot make any changes to the target company till you have consummated the transactions.
Joshipura: The risk would be that if you are not able to carry out modification which you were very confident earlier, how you will unwind the transaction.
Mallik: Not only that, so that means that I have been granted an approval, I want to go ahead with this. SEBI says fine you have got it, you like it, you go ahead but you have to do these particular things which is related to the buyer as well. But later on if you are not able to do it CCI will come back and say okay you unwind this transaction. How do you unwind the open offer portion?
Menaka: You have to meet CCI’s requirements post the transaction being consummate. Now we are looking at really out there situation, suppose they are saying you have to sell this one cement unit in Andhra Pradesh because otherwise you will be dominating the South market. To say that what if you don’t find a buyer for that Andhra unit, is a little of a stretch?
Mallik: No, let me put it slightly differently. Okay I have tried to sell this particular asset and I have to be able to sell this asset before I can consummate the transaction, the Takeover Code should also allow me then an extended timeline to do that. Because if for example I am not able to do that within that timeline, then I will be foul of the regulations by consummating the transaction.
Joshipura: Also shareholders should also approve that, sale of the undertaking.
Mallik: That is very important because under the takeover regulations you have to make a specific statements that what are the assets that you want to really dispose when you make and open offer and if you are doing anything beyond that you need to seek shareholder approval. So what happens if the shareholder approval in that context is not achieved or received and you have told Competition Commission that I would like to go ahead with this particular transaction, so that is again an aspect.
Menaka: You want me to throw one more similar situation in the mix which is that if you are doing a merger you get High Court approval, you have got CCI approval, CCI comes back, modify your transactions but you have already got a High Court approval, what do you do – do you go back to the High Court or do you keep the approvals pending till you get CCI approved because High Court cannot clear it till all other regulatory approvals come in either?
Joshipura: High Court at times has cleared it subject to approval from other regulators. So if CCI proposes any modification which---- (interrupted)
Menaka: But wouldn’t the High Court wait till the CCI approval came in to actually give you a final clearance?
Joshipura: It is a chicken and egg situation, not necessarily.
Mallik: Not necessarily, even if you look at simple demerger and you are looking to list the shares. After you get High Court approval you have to approach Sebi and Stock exchange to obtain that approval and if that approval is not given to you then that transaction doesn’t go through.
Joshipura: And also if CCI is proposing a modification would the shareholders and creditors agree to it because they had earlier sanctioned the scheme of merger based on a different version.
Mallik: Really the crux of some of this, the real solution is a bit simplistically thinking about it, is that under the Takeover Code essentially if there is a provision instead of you read out that statutory approvals have been refused. If you extend it to what has been proposed even in the track recommendations for the modified Takeover Code. If there are certain conditions that are which are conditions precedent for the main transaction or if there are modifications which are suggested by a statutory authority, in all of such situations if the acquirer doesn’t really want to go ahead with the transaction he should be allowed to withdraw.
Menaka: So something as simple as conditional open offer will help ability to withdraw will help resolve all of this.
Mallik: Will resolve significant portion of this.
Menaka: If the TRAC were to come into effect infact the control threshold will move up to 25%, CCI will still require you to file 15% in higher acquisitions. Again practical issue, not a regulatory issue but regulators mean that this two regulators are looking at control from two very different points of view, is that going to be a problem or it can be easily resolved because if the TRAC is implemented CCI can infact come out with another circular, saying we are moving the 15% to 25%?
Mallik: I think that is the easy solution, ofcourse it depends on whether CCI agrees with the situation of thinking that 25% should be a threshold which should be allowed but if they agree with that, it is an easy fix which can be done that they can also move the threshold up to 25%.
Menaka: Otherwise it just remains a filing requirement as of now and nothing beyond that there is no regulatory ---
Mallik: That really brings about what TRAC try to achieve by allowing people to acquire upto 25%,
Menaka: You just have to file before you acquire.
Mallik: Before you acquire
Joshipura: And also that is only the shareholding threshold, the definition of control are again different between what CCI prescribes and what is there in the Takeover Code. That also if there is some harmony. There is a definition of Group, Group is 50% in CCI, but if you look at definition of Promoter Group under Takeover Code its 10%.