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SpiceJet & The Mystery Of The Missing Open Offer

Published on Sat, Feb 21,2015 | 08:51, Updated at Tue, Feb 24 at 17:20Source : CNBC-TV18 |   Watch Video :

In January, struggling aviation company SpiceJet saw a change in ownership and control. Erstwhile promoter Kalanithi Maran and his company Kal Airways proposed the transfer of ownership, management and control of the company to Ajay Singh. Mr. Singh happens to be the co-founder of SpiceJet but had exited the company many years ago. The transfer was pursuant to a ‘Scheme of reconstruction and revival for the takeover of ownership, management and control of SpiceJet Limited’ to be filed before the competent authority, the Ministry of Civil Aviation, Government of India. The scheme was filed with the Ministry and has since received Ministry Approval. On January 30th, the SpiceJet Board confirmed the takeover deal. Kalanithi Maran and his representatives stepped down from the SpiceJet Board and Ajay Singh’s appointment as Director is pending Home Ministry clearance. Now, there’s news that the deal is likely to have received CCI clearance as well. But there’s yet no mention of an open offer announcement nor any mention of an exemption. To solve this case of SpiceJet and the mystery of the missing open offer, CNBC-TV18’s Menaka Doshi speaks to Shuva Mandal of AZB and Sandip Bhagat of S&R Associates.

BSE Filing: Jan 15th

‘… the Board of Directors of the Company… has taken on record the proposal of the principal shareholder and Promoter, Mr. Kalanithi Maran and KAL Airways Private Limited to transfer the ownership, management and control of the Company to Mr. Ajay Singh pursuant to a ‘Scheme of Reconstruction and Revival for the takeover of ownership, management and control of SpiceJet Limited’ to be filed before the Competent Authority, the Ministry of Civil Aviation, Government of India.’

Takeover Timeline

Jan 15th: Spicejet Board takes Scheme on record
Jan 22nd: Ministry of Civil Aviation approves Scheme
Jan 29th: Share Sale & Purchase Agreement between company, Kalanithi Maran, Kal Airways & Ajay Singh

Takeover Timeline

Jan 30th: Spicejet Board takes Share sale & purchase agreement on record
                 Kalanithi Maran, Mrs Kalanithi & S Natrajhen resign from Board
Feb 3rd:  Spicejet informs BSE it is awaiting security clearance for appointment of Ajay
                Singh as Director

Takeover Regulations, 2011

Mandatory Open Offer Triggers
-    Acquisition of 25% or more voting rights
-    Acquisition of control

Spicejet Case
-     Ajay Singh to acquire 58.46%
-    Ajay Singh to acquire ownership, management & control

Doshi: This is a transaction that would otherwise attract the mandatory open offer as per the Takeover Code, isn’t it?

Takeover Regulations, 2011

‘The public announcement…shall be made... on the date of agreeing to acquire shares or voting rights in, or control over the target company.’

Spicejet Case
Jan 29th: Share Sale & Purchase Agreement between company, Kalanithi Maran, Kal Airways & Ajay Singh

Mandal: Unless exempt. The core of the issue is - given that an announcement has happened, there is a binding stock purchase agreement which is the subject matter of the Board recording. The trigger point for an open offer, if at all, has happened. So the only situation in which the open offer does not happen if it is an exempt transaction under Regulation 10 or Securities and Exchange board of India (SEBI) gives a specific exemption.

Takeover Regulations, 2011

General Exemptions
10 (1) (d) acquisition pursuant to a scheme,—
(ii) of arrangement involving the target company as a transferor company or as a transferee company, or reconstruction of the target company, including amalgamation, merger or demerger,
pursuant to an order of a court or a competent authority under any law or regulation, Indian or foreign;

Doshi: On what grounds could this transaction have availed of any of the general exemptions that are available in the Takeover Code?

Bhagat: It sounds like they have gone under the exemption which says that if there is a scheme of arrangement revival by a court or a competent authority then that transaction is exempt. The issue again is what is meant by a scheme of arrangement revival. There is no specific definition of that in the Takeover Code. You would look at other legislations and the way at least I would understand it commonly would be a scheme by which a particular court - it is a scheme of arrangement or a compromise as that is understood under the Companies Act.

Mandal: There is a default application of the definitions in the SEBI legislation and the regulations which is to fall back unto the Companies Act wherever it is an undefined term. So as Sandip is rightly explaining, it is a scheme of arrangement involving the target company as a transferor company or as a transferee company - that is exactly the wording in the specific exemption. So, if you were to put all these together arrangement is a well understood – there is a lot of judicial precedence under Section 391 of the Companies Act which speaks about it as being one which involves creditors, shareholders, the classic sense and arrangement or a court process and even this definition clearly captures within it the concept of a transferor company and a transferee company which completely blends into what the Companies Act talks about.

Doshi: I can’t see both in this transaction. I can see only one which is the target company here, which is SpiceJet.

Mandal: Correct.

Doshi: So, it is new that schemes get an exemption but typically the schemes that have got an exemption in this country are court administered schemes- schemes under 391, 395 of the 1956 Companies Act or BIFR. Now this is not a sick company- SpiceJet-  it cannot be because it is not an industrial undertaking, it hasn’t filed with BIFR. So that exemption is not available. This is going through a scheme which SpiceJet has gone to such pains to call the reconstruction and revival scheme or whatever but it is not a scheme that is administered by a court. It is simply a scheme that has received approval from the civil aviation ministry. Now, can such a scheme avail of this specific exemption which is 10 1D?

Mandal: The way this works is- from civil aviation rules you have got something called Civil Aviation Requirements (CARS) under the civil aviation ministry and under the civil aviation rules anything which involves change of management or takeover of an existing airline company- it is Chapter 3- which speaks about an approval of the Directorate General of Civil Aviation (DGCA) which is the civil aviation ministry. So here we can call it whatever we want- a scheme or an application- but at the essence of it what it is merely an approval for change of management which goes with any airline company in India. So, to then label it as a scheme and then to put it under the umbrella of a competent authority - it being nothing but a regulatory approval. So what we are going in now is a zone where we are mixing what is otherwise a regulatory approval with what is an arrangement or a scheme which deserves a special sanction from the shareholders, from court, from creditors which then deserves an exemption.

Doshi: So we are now faced with two grey areas here? Is this a scheme of arrangement as classically envisaged in the Takeover Code because there is no transferor and transferee company here and secondly can this ministry of any kind, civil aviation, transport, whatever, can a government department be considered authority? Sure, it is competent but under the takeover code can it be a competent authority whose approval is enough for an exemption from a mandatory open offer?

Bhagat: Yes, and the second question is the relevant one; is this the competent authority as the takeover code is talking about. It is a clever play on this if they are going under that but that is not the way I would look at the word competent authority. It is being used in conjunction with the court and the way I would look at it is a court or similar kind of authority. The Companies Act talks about a Tribunal which may have the same powers as a court. So maybe they meant that.

The 1997 Takeover Regulations didn’t have the word competent authority. They were introduced in the 2011 Regulations, but again the way it has been used here which is that you approach a ministry and the ministry is the one which is the competent authority. I don’t think that is what the way the Takeover Code was framed. What this means by analogy for example is I am a company, let’s say, in the road sector, I am in financial trouble in the road sector. The National Highways Authority of India (NHAI) is the one which approves change of control for me etc. All then I need to do tomorrow is approach the NHAI and say, look here is the scheme of revival and please approve it and if the NHAI approves it I don’t need to particularly care about the minority shareholders of the listed company which is in effect what this would mean if this were to go ahead.

Doshi: And that is where the controversy lies. Can this be something that passes muster with SEBI? Is this how the exemption was envisaged because competent authority has not been defined in the Takeover Code of 2011 anywhere

Mandal: Not everything has to be defined. A competent authority, as Sandip has well put it, it is a court or the CLB. So why the word competent authority was introduced it captures scenarios like Satyam where it was not necessarily a court but the Company Law Board.

Doshi: To add to that I was talking to a couple of the TRAC members, the other reason why they have seemed to put in competent authority is in the case of many foreign schemes or foreign mergers - typically those schemes are approved by registrars in those countries and not necessarily a court. So therefore they put in the phrase competent authority saying that would cover a registrar in the foreign country or a court in India.

Mandal: But again let us come back to the core of the issue. All this is good interpretation. The core of the issue today is, curiously again in airline company that the essence of a takeover code is being repeatedly violated in every which way. So if you want to go back to Jet Etihad deal what really happened was a situation where there was an agreement, there was a set of rights given - which the government of India, the FIPB, SEBI- in repeated reviews of those agreements finally took a view that well, those rights crossed a certain line and they had to be retraced back and only then will the transaction not trigger the open offer.

Doshi: Right, because foreign control is not allowed. In that case Etihad is a foreign acquirer.

Mandal: Forget foreign control, even the open offer. We are not talking about foreign controls here. We are just discussing the securities aspect which is about control from a SEBI aspect. Takeover is also trigger or a control even though the transaction (interrupted...)

Doshi: But you can’t have a control trigger in that case because if Etihad controlled it the deal would not take place.

Mandal: I agree with you. Let me take it further. So, what happened, let us go back to the Jet case, and it is almost a repeat here. If the agreements crossed the control test when they were entered into, they were scaled back. My submission is the rules do not allow you to test the water. So, what is happening here is exactly the same in a different way. Agreements has been entered into, somebody is claiming an exemption, now the regulator has not intervened yet by forcing the open offer. So this is a curious case in India where a regulator is just keeping quite. It is an actively traded stock, there ought to be an open offer on the face of it, there is no problem if there is no open offer. But somebody needs to say there is an open offer or there is no open offer.

Bhagat: I agree. The bigger picture if you look at it, fine, there is a Takeover Code issue, there will be additional consideration which an acquirer will have to pay. He may not be wanting to do it. You have a sick airline; you want to revive it, fair enough.

To take Shuva’s point what happened with the Jet-Etihad case. The regulators - whether it is SEBI or the FIPB- all said the way the agreements have today come before us there is control. They permitted the acquirer to change the contract. I wish I could do that on every deal I do. You are taking a call that it is more important at the end of the day for the airline to survive that has a public good. It is good for all of us that there are more airlines in the business and yes, there is a takeover code consequence and there are minority shareholders out there, but we will weigh one versus the other and give preference to the other. That is fine in itself; I don’t think it is an issue.

In this case what should have happened - in the particular SpiceJet case - is it is the same consideration but what should be happening is there should be a formal exemption which is being given by the regulator for the minority shareholder, which is SEBI. You get a formal exemption, you are through and the regulator justifies it is a sick airline or not sick, but it is ailing, it needs this money and it is all upfront and we all know where we stand and tomorrow somebody else in the same situation can do and get them.

Doshi: Is that also a good enough explanation because based on the illustration you gave of the road sector, or why just road, it could be steel, it could be cement, we have seen a bunch of industries right now suffer under debt. You may also say- look I have an acquirer lined up but he doesn’t want to do an open offer, he would rather put the money into the company, please exempt it. That is making mockery of the state of the Court.

Bhagat: But SEBI has given exemptions using its powers for people in… (interrupted...)

Doshi: That is fine, you have given exemptions, but what have you opened the door to if you are allowing this to be exempt?

Mandal: I don’t think there is a straight line rule here. What Sandip and I are saying is pretty much the same thing. Even historically if you go back to the erstwhile Takeover Code, there were cases where you could go to SEBI for specific exemptions from the takeover panel. There were several cases where sick companies were given exemption based on financial needs. Now, we are not sitting in judgment whether the regulator as a policy matter should give exemption to sick companies or not. There may be situations where they deserve it; there may be situation where they don’t.

Doshi: Then what does this open the door to?

Mandal: No, look, an exemption in one case does not open the door to all other cases. There is no general rule of exemption.

Doshi: You brought up the NHAI illustration. Are you saying it doesn’t open Pandora ’s Box with regards to other such transactions or acquisitions regarding troubled companies also seeking such exemptions. This is not bad news for minority shareholders?

Bhagat: The question is would I be advising a company which is in financial trouble that you don’t need to go to SEBI for a formal exemption, take advantage a scheme you file and hope that the regulator you are regulated by approves this as a scheme. That is the question and I don’t think I am still comfortable today to say it is fine.

Doshi: Shuva seems to agree with that but clearly there are lawyers who believe that it is enough to say that a ministry’s approval is a competent authority’s approval and therefore there is no need for an open offer.

Bhagat: A client is willing to say in this case, look, there is a business case here. It is a financially troubled company, I don’t want to spend my money buying out the minority, I will take the risk of regulatory action if it ever happens and the regulatory action could be penalty to do an open offer or it could be a monetary penalty and both of those are acceptable risks for me.


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