2022 (7) TMI 1443 - AT - SEBI

Tribunal: No Control Acquisition by VCPL over NDTV, Emphasizes Transparency in Agreements

The Tribunal held that the loan agreement and call option agreements did not result in VCPL acquiring control over NDTV, thus no open offer was required ... Indirect control - open offer obligation under the SAST Regulations - positive (effective) control - protective rights versus control - convertible/options exercisability and trigger for open offer - material and price sensitive information - disclosure obligations under the Listing Agreement - Clause 36 - Code of Conduct disclosure obligation - Clause 49(I)(D) - penalty jurisdiction under Section 15HA of the SEBI Act and Sections 23A/23E of the SCRAIndirect control - positive (effective) control - open offer obligation under the SAST Regulations - convertible/options exercisability and trigger for open offer - protective rights versus control - VCPL did not acquire indirect control over NDTV by virtue of the loan agreement, warrant conversion option, purchase option and the call option agreements and therefore was not obliged to make an open offer under the SAST Regulations. - HELD THAT: - The Tribunal applied the definition of 'control' (inclusive but denoting positive/effective control) as explained in Subhkam and approved in Arcelormittal, and examined the contractual rights in commercial context. The loan transaction comprised a commercial loan with attendant protective rights and options which, unless exercised, do not result in acquisition of shares or confer de facto control. Protective covenants (pre-approval rights, non-compete, right of first refusal, restrictions on alteration of share capital) were held to be standard investor protections designed to preserve collateral value and do not enable VCPL to direct day-to-day management or policy decisions of NDTV. The warrant, purchase and call options were contingent and, in absence of exercise, did not trigger the open offer obligations; the word 'thereafter' did not render the conversion option exercisable after loan repayment in a manner that creates perpetual, independent control. The Tribunal found the impugned WTM conclusion that VCPL acquired control (including alleged control over 52% of shares) to be unsupported by evidence and legally unsustainable. [Paras 40, 41, 42, 56, 57]The direction to VCPL to make an open offer is quashed; VCPL did not acquire indirect control of NDTV and Regulation 12/14 obligations were not triggered.Code of Conduct disclosure obligation - Clause 49(I)(D) - material and price sensitive information - protective rights versus control - Prannoy Roy, Radhika Roy and RRPR breached the Code of Conduct (Clause 49(I)(D) of the Listing Agreement) by failing to disclose the loan agreement, but the non-disclosure did not amount to fraud on minority shareholders. - HELD THAT: - The Tribunal held that NDTV's promoters, as Board members/senior management, were obliged under the Code to disclose investments/arrangements that could create or appear to create conflicts of interest. The loan agreement qualified as an investment that ought to have been disclosed. However, having determined that VCPL did not acquire de facto control, the non-disclosure did not constitute fraud or an unfair trade practice. The restraints imposed by the WTM (market access ban and disqualification from directorship/KMP posts) were found disproportionate to the violation. The adjudicating officer's penalty under Section 15HA was excessive and was reduced after considering absence of quantifiable gain or demonstrable investor loss. [Paras 62, 65, 66, 68, 69]Finding of disclosure violation under Clause 49(I)(D) is affirmed in substance but the punitive directions are set aside; the penalty imposed under Section 15HA is reduced from Rs. 25 crores to Rs. 5 crores.Disclosure obligations under the Listing Agreement - Clause 36 - material and price sensitive information - penalty jurisdiction under Sections 23A and 23E of the SCRA - NDTV breached Clause 36 of the Listing Agreement by not disclosing the Board minutes of August 05, 2015 concerning the loan arrangements; however the penalty imposed under Section 23E was inappropriate and is reduced under the correct statutory provision. - HELD THAT: - The Tribunal found that, notwithstanding the conclusion that VCPL had not acquired control, the structure of the loan and the possibility that exercise of the warrant/call options would affect the company's operations meant the Board minutes discussing the matter were material/price-sensitive and should have been disclosed to the exchange. The Tribunal noted precedent that, when in doubt, disclosure is the safer course. While the AO had imposed penalty under Section 23E, the Tribunal held that Clause 36 violations attract penalty under Section 23A(a) (failure to furnish information to the exchange). Considering the absence of demonstrable quantifiable gain or investor loss and relevant mitigating factors, the Tribunal reduced the penalty to an appropriate lower amount. [Paras 77, 78, 79, 81, 83]Violation of Clause 36 is upheld; penalty imposed under Section 23E is set aside and reduced to Rs. 10 lakhs under Section 23A(a).Protective rights versus control - comparative precedents (Victor Fernandes / ZOCD) - The Tribunal applied and followed the reasoning in Victor Fernandes (ZOCD case) to hold that similar convertible/option arrangements and protective covenants do not per se trigger an open offer where control remains with promoters and options are unexercised. - HELD THAT: - Having examined the terms of the present agreements and the ZOCD arrangement in Victor Fernandes, the Tribunal found the transactions materially analogous. In both contexts, convertible instruments and protective/standstill clauses were interpreted as investor protections rather than conferring immediate de facto control. The Tribunal observed that the WTM's reasoning in Victor Fernandes was applicable and noted that no successful oral attempt was made to distinguish that authority during hearing. [Paras 50, 51, 52, 53, 54]Victor Fernandes is applicable; the present agreements do not trigger a control-based open offer obligation.Penalty proportionality and mitigation - adjudicatory discretion under Section 15HA and Section 23A/23E of the SCRA - Monetary penalties and ancillary directions imposed by the WTM/AO were excessive and have been proportionately reduced. - HELD THAT: - The Tribunal assessed proportionality in light of findings that no fraud or control acquisition occurred and that no quantifiable unfair gain or investor loss was shown. The AO's imposition of maximum penalties was reduced: penalties of Rs. 25 crores under Section 15HA were reduced to Rs. 5 crores (against PR/RR/RRPR jointly and severally), and penalties imposed on NDTV under Section 23E were reclassified to Section 23A(a) with reduction to Rs. 10 lakhs. Directions restricting market access and disqualification from office were set aside as disproportionate to the non-disclosure breach. [Paras 63, 69, 83, 85, 86]Excessive directions and penalties are set aside or reduced as indicated: penalty reduced to Rs. 5 crores for promoters (from Rs. 25 crores) and to Rs. 10 lakhs for NDTV (under Section 23A(a)); market-access and director/KMP bans are vacated.Final Conclusion: The Tribunal holds that the loan and allied option arrangements with VCPL constituted commercially motivated protective rights and contingent options, and did not confer positive or indirect control of NDTV on VCPL; the direction to make an open offer is quashed. Findings of non-disclosure by the promoters and by NDTV are affirmed in part: the promoters breached the Code of Conduct (Clause 49) and NDTV failed to disclose Board minutes under Clause 36, but neither act amounted to fraud. Consequential directions and excessive penalties are modified - promoter penalties reduced to Rs. 5 crores, NDTV's penalty reduced to Rs. 10 lakhs under Section 23A(a) - and market-access and disqualification directions are set aside. Issues Involved:1. Whether the loan agreement and call option agreements between VCPL and RRPR resulted in indirect control over NDTV, triggering an open offer under the SAST Regulations.2. Whether the appellants failed to disclose material information regarding the loan agreements, constituting a violation of SEBI Act, PFUTP Regulations, and Clause 49 of the Listing Agreement.3. Whether NDTV violated Clause 36 of the Listing Agreement by not disclosing the loan agreement details.Issue-wise Detailed Analysis:1. Indirect Control and Open Offer under SAST Regulations:The primary issue was whether the loan agreement and call option agreements between VCPL and RRPR resulted in indirect control over NDTV, necessitating an open offer under the SAST Regulations. The Tribunal held that the loan agreement did not result in VCPL acquiring control over NDTV. The Tribunal emphasized that the agreements were structured with commercial rationale, and the options (warrant conversion, purchase option, and call option) did not entail an acquisition of shares or control over NDTV unless exercised. The Tribunal referred to the precedent set in the Victor Fernandes case, where similar clauses were deemed protective and did not confer control. The Tribunal concluded that VCPL did not acquire direct or indirect control over NDTV, and thus, the direction to make an open offer was unwarranted.2. Non-disclosure of Material Information:The Tribunal examined whether the appellants failed to disclose the loan agreements, constituting a violation of SEBI Act, PFUTP Regulations, and Clause 49 of the Listing Agreement. The Tribunal found that the loan agreements were not material price-sensitive information as they did not transfer control of NDTV to VCPL. However, the Tribunal noted that under Clause 49(I)(D) of the Listing Agreement, the appellants were required to disclose the loan agreements as they were investments that could create a conflict of interest. The Tribunal held that the non-disclosure was a violation of the Code of Conduct under Clause 49 but did not amount to fraud or unfair trade practice. Consequently, the penalties imposed by the WTM and AO were deemed excessive and were reduced.3. Violation of Clause 36 of the Listing Agreement by NDTV:The Tribunal addressed whether NDTV violated Clause 36 of the Listing Agreement by not disclosing the loan agreement details. The Tribunal held that the loan agreement did not transfer control of NDTV to VCPL, and thus, the finding that the agreement was price-sensitive information was incorrect. However, the Tribunal noted that the peculiar structure of the loan agreement and its potential impact on NDTV's performance warranted disclosure under Clause 36. The Tribunal cited the ICICI Bank case, emphasizing that when in doubt, disclosure should be made to avoid violations. Consequently, the Tribunal upheld the violation of Clause 36 but reduced the penalty imposed on NDTV.Conclusion:The Tribunal quashed the order directing VCPL to make an open offer, upheld the violation of Clause 49(I)(D) by the appellants but reduced the penalties, and affirmed the violation of Clause 36 by NDTV, reducing the penalty accordingly. The Tribunal emphasized the importance of protective rights and commercial rationale in interpreting the agreements and highlighted the need for disclosure to ensure transparency and protect investor interests.