2018 (6) TMI 1837 - AT - SEBI

Tribunal finds control acquisition disguised as loan agreement, VCPL must comply with SEBI regulations

The tribunal found that the Loan Agreement and Call Option Agreements were structured to disguise the acquisition of control over NDTV, rather than being ... Acquisition of control - open offer obligation under Regulation 12 read with regulation 14(3) of SEBI (SAST) Regulations, 1997 - convertible warrants, purchase option and call option as mechanisms to effect indirect acquisition - substance over form / sham transaction - voting rights binding clause (Clause 20) and prior consent / ROFR covenants as effectuating control - right of inspection of documents in quasi judicial proceedings - SEBI's power to issue directions including public announcement and interest under Sections 11, 11B and 19 of the SEBI ActAcquisition of control - convertible warrants, purchase option and call option as mechanisms to effect indirect acquisition - voting rights binding clause (Clause 20) and prior consent / ROFR covenants as effectuating control - substance over form / sham transaction - Whether the Loan Agreement and the contemporaneous Call Option Agreements amounted to an acquisition of control over NDTV thereby attracting an open offer obligation under the SAST Regulations, 1997. - HELD THAT: - A conjoint reading of the Loan Agreement and the Call Option Agreements shows that the lender (VCPL) was conferred multiple, independent and open ended rights which, in substance, vested effective control over the 26% shareholding of NDTV (and, combined with other entitlements, up to 52% voting influence) in the lender or its affiliates. The convertible warrants (99.99% of RRPR) were exercisable at the sole option of the lender at any time 'during the tenure of the loan or thereafter', and the Purchase Option allowed acquisition of RRPR shares at par. The Call Option Agreements (entered with affiliates) conferred absolute discretion to purchase up to 26% of NDTV shares at a fixed strike, with no outer time limit or contingency, coupled with ROFR and non compete covenants and a requirement that proceeds be used to repay the loan. Clause 20 of the Loan Agreement obligated promoters/borrower to exercise voting rights in NDTV so as to give full effect to the Transaction Documents, thereby removing promoter discretion and effectively transferring the exercise of voting power to the lender's terms. The structure was not tied to repayment (conversion/purchase/call rights survived repayment or extended beyond maturity), the strike valuation was significantly above market without normal haircuts expected for collateral, and the covenants resemble share/ shareholders' agreements rather than ordinary lending protections. These features show the transaction was not a simple asset recourse loan but, in substance, a mechanism to acquire beneficial interest/control in the target without making a public offer. On these findings the Tribunal concluded that VCPL indirectly acquired control of NDTV and so was obliged to make a public announcement under Regulation 12 read with Regulation 14(3) of the SAST Regulations, 1997. [Paras 20, 21, 24, 27, 28]The Loan Agreement and the contemporaneous Call Option Agreements, when read together, resulted in VCPL indirectly acquiring control over NDTV, attracting the open offer obligation under Regulation 12 read with Regulation 14(3) of SEBI (SAST) Regulations, 1997.Right of inspection of documents in quasi judicial proceedings - natural justice and delay - Whether the preliminary objections raised by the noticee - that no investigation preceded the SCN, that specific action was not disclosed, and that proceedings were vitiated by delay - merit dismissal of the proceedings. - HELD THAT: - The Tribunal held that a formal investigation is not a mandatory prerequisite to issuing a show cause notice where examination of the agreements and submissions suffice to draw conclusions. The SCN need not specify every form of relief which SEBI may later pass; the regulator's power to issue appropriate directions in the interest of investors is settled. There is no statutory limitation bar to initiation of enforcement action; delay does not automatically defeat enforcement, particularly where alleged violations affect shareholders' right to an exit under the Takeover Regulations. Consequently, the preliminary contentions did not invalidate the proceedings. [Paras 28]Preliminary objections that the SCN was procedurally defective for lack of prior investigation, failure to specify proposed action, or undue delay were rejected.SEBI's power to issue directions including public announcement and interest under Sections 11, 11B and 19 of the SEBI Act - Whether SEBI may direct the noticee to make a public announcement and prescribe interest as part of remedial directions in exercise of its statutory powers. - HELD THAT: - Exercising powers under Sections 11, 11B read with Section 19 of the SEBI Act and relevant SAST Regulations, the Tribunal directed remedial measures upon finding a breach of the Takeover Regulations. The order reflects that SEBI may require compliance with open offer obligations and ancillary measures to protect shareholders (including interest on delayed payment) when a person is held to have acquired control without making the required public announcement. The directions were issued as appropriate relief to remedy the statutory breach and safeguard investor interests. [Paras 29, 30]SEBI is empowered to direct the noticee to make the public announcement and to pay interest; the Tribunal directed VCPL to make the public announcement within 45 days and to pay interest at 10% p.a. to affected shareholders.Final Conclusion: The Appellate Tribunal concluded that VCPL's Loan Agreement and the contemporaneous Call Option Agreements, taken together, amounted to an indirect acquisition of control over NDTV attracting an open offer obligation under Regulation 12 read with Regulation 14(3) of the SEBI (SAST) Regulations, 1997; SEBI's preliminary objections were rejected and directions were issued requiring VCPL to make the public announcement within 45 days and to pay interest as directed. Issues Involved:1. Nature of the Loan Agreement and Call Option Agreements.2. Acquisition of Control over NDTV.3. Procedural Issues Raised by the Noticee.4. Miscellaneous Issues.Detailed Analysis:1. Nature of the Loan Agreement and Call Option Agreements:The primary issue was whether the Loan Agreement between VCPL and RRPR, along with the Call Option Agreements, constituted a genuine loan transaction or an arrangement for acquiring control over NDTV. The agreements were scrutinized to determine their true nature.Key Findings:- The Loan Agreement was for Rs. 350 Cr. with a tenure of 10 years, without interest, and included convertible warrants for 99.99% of RRPR's equity.- The Call Option Agreements allowed VCPL's affiliates to purchase up to 26% of NDTV's shares at a fixed price of Rs. 214.65 per share.- The agreements included clauses that restricted the Promoters from selling or transferring their shares without VCPL's consent and mandated their voting rights to align with VCPL's interests.Conclusion:The agreements were found to be structured in a manner that disguised the acquisition of control over NDTV. The terms allowed VCPL to exercise significant control over RRPR and NDTV, indicating that the primary purpose was not merely a loan but to acquire beneficial interest in NDTV.2. Acquisition of Control over NDTV:The tribunal examined whether the execution of these agreements resulted in VCPL acquiring 'control' over NDTV as per Regulation 12 of the SEBI (SAST) Regulations, 1997.Key Findings:- VCPL had rights to convert warrants into RRPR shares, thereby indirectly acquiring 26% of NDTV's shares.- The Call Option Agreements provided VCPL's affiliates the right to purchase NDTV shares, further consolidating control.- The agreements included veto rights and non-compete clauses, indicating control over significant decisions and operations of NDTV.Conclusion:The tribunal concluded that VCPL indirectly acquired control over NDTV through these agreements, triggering the obligation to make a public announcement of an open offer under the SEBI (SAST) Regulations, 1997.3. Procedural Issues Raised by the Noticee:VCPL raised several procedural objections, including the lack of a prior investigation, the absence of specific proposed actions in the SCN, and the delay in proceedings.Key Findings:- The tribunal noted that a formal investigation was not mandatory if the examination of agreements and submissions sufficed to draw conclusions.- The SCN's primary objective was to ensure shareholders received an exit opportunity, which did not necessitate detailing specific actions.- There was no statutory limitation period for initiating enforcement actions, and the delay did not prejudice the proceedings.Conclusion:The procedural objections raised by VCPL were dismissed as they did not hold merit in the context of ensuring justice and regulatory compliance.4. Miscellaneous Issues:The tribunal addressed additional issues, including the comparison with Zero Coupon Convertible Bonds (ZOCDs) and the structure of the transaction.Key Findings:- The tribunal found that the transaction's structure, including perpetual conversion options and open-ended call options, was unusual and indicated an intent to acquire control.- The financial statements of VCPL and its affiliates did not support the claim of a genuine lending transaction, raising further suspicion.Conclusion:The tribunal concluded that the agreements were designed to acquire control over NDTV, and the comparison with ZOCDs was not applicable due to the unique transaction structure.Final Judgment:The tribunal directed VCPL to make a public announcement to acquire shares of NDTV within 45 days and to pay interest at 10% per annum from the date of the violation. This order aimed to ensure compliance with SEBI regulations and protect the rights of NDTV's shareholders.