TaxTMI 
TaxTMI 
2018 (6) TMI 1837
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.... of the Target Company included RRPR Holding Pvt. Ltd. ("RRPR"), Prannoy Roy and Radhika Roy (hereinafter referred to as "Promoters"). An open offer was made by the promoters of NDTV Ltd. in the year 2008. It was observed that a loan of Rs.540 Cr. was taken by the promoters from M/s. Indiabulls Financial Services Ltd. to fund the aforesaid open offer. To repay the aforesaid loan, another loan of Rs.375 Cr. was taken from ICICI Bank. The loan taken from ICICI Bank was repaid in the year 2009 by taking another loan of Rs.350 Cr. from Vishvapradhan Commercial Private Limited ("VCPL"/ "the noticee"), vide an agreement dated July 21, 2009 (hereinafter referred to as "the Loan Agreement"). 2. Significant aspects/clauses of the Loan Agreement are as follows: i. The term of the loan is 10 years i.e. upto July, 2019. ii. The loan is an unsecured loan and without any interest payment. iv. RRPR will issue a convertible warrant to VCPL, convertible into equity shares aggregating to 99.99% of the fully diluted equity share capital of RRPR at the time of conversion, convertible at any time during the tenure of the loan or thereafter. v. VCPL shall have the ....
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....es of NDTV which results in aggregate valuation of NDTV being less than Rs. 1346 Cr. (valuation at which lender has put money into the company). (b) Merger, amalgamation or consolidation of NDTV with any other entity. (c) Cause NDTV to take any steps towards bankruptcy, insolvency or reorganization, arrangement, adjustment, winding up, liquidation etc. (d) Buyback of equity securities, reduction or alteration of share capital of NDTV. (e) Take any action to issue any equity securities or enter into any agreement as a result of which the promoters cease to be in sole control of NDTV. 3. Taking note, inter alia, of the above, a notice dated December 20, 2016 (hereinafter referred to as "the Show cause notice"/ "the SCN") was issued by SEBI to the Noticee alleging that the loan was not a normal investment transaction, that the primary purpose of the loan was to acquire the shares of NDTV Ltd. and that although VCPL had not acquired any shares of RRPR or NDTV directly, RRPR acquired shares from other promoters to increase its holding in NDTV to 26% as a precondition to the loan agreement. The SCN also stated that the loan has been granted by the N....
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....nding before Hon'ble SAT, a hearing notice dated July 03, 2017 was served upon the appellants communicating the scheduled date of personal hearing to be August 3, 2017. Upon hearing the parties in Appeal No. 144 of 2017 on July 27, 2017, the Hon'ble SAT directed that since the hearing is fixed on August 3, 2017, it would be open to the appellant (VCPL) to raise the plea of inspection of documents before the Whole Time Member("WTM") and if raised, the WTM of SEBI, after hearing the appellant would pass appropriate order thereon. However, while the hearing was scheduled for submissions on merits, the noticee chose to make submissions only on the issue of documents that in its opinion should have been made available to it in inspection. Pursuant to the same, vide letter dated October 03, 2017 issued with the confirmation and approval of the Whole Time Member, SEBI provided its comments on the documents sought after taking a decision with respect to the relevance of each of the documents sought. Upon receipt of the said letter, VCPL has sent another letter dated October 12, 2017 basically contending the following issues: i) That the direction of the Hon'ble SAT was to pass an ....
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....other procedural/interim/miscellaneous issues are dealt with and addressed by way of administrative notices sent by SEBI. If such orders are to be passed on every objection raised by each noticee in every proceeding, it will eventually result in a multiplicity of orders in one and the same proceeding and further result in delay and also clog the qausi-judicial and appellate fora with unwarranted litigations. Further, reasons earlier tendered for rejecting the request for additional documents were reiterated in the said order. Pursuant to hearing before the Hon'ble SAT dated January 04, 2018, additional documents were provided to the notice as directed in its order. 7. Subsequently, reply to the SCN was received vide letter dated February 20, 2018. During the personal hearing granted to the noticee on February 22, 2018, certain queries were raised with the noticee, to which it proposed to make a separate set of written submissions. Accordingly, reply dated March 09, 2018 was received from the noticee. In the said reply the noticee again sought an opportunity of a personal hearing which was granted on May 03, 2018. During the said hearing in response to the submissions made....
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....ed and RRPR, respectively, on 21 July 2009. These companies were associates of VCPL's shareholders at the relevant times. The call option agreements gave Subhgami Trading Private Limited the right to purchase from RRPR equity shares of NDTV, representing up to 14.99% of the equity share capital of NDTV and Shyam Equities Private Limited the right to purchase from RRPR equity shares of NDTV, representing up to 11.01% of the equity share capital of NDTV, in each case at a fixed price of Rs.214.65 per share (collectively, "Call Option"). The call option agreements are enclosed as Annexure 3 and Annexure 4 respectively. As per Clause 7 of the Loan Agreement, any money paid to RRPR to purchase NDTV's shares from RRPR under the call option agreements is to be used by RRPR only for repayment of the loan to VCPL. It is a well-known legal position that unless and until either the Conversion Option or the Purchase Option or indeed the Call Option are exercised, there is no question of triggering an open offer under the Takeover Regulations, 1997 or the Takeover Regulations, 2011. (vii)No person connected with VCPL either directly or indirectly has been appointed as director ....
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....cision whatsoever to be taken, whether it relates to day to day business or operations or management or policies, of RRPR or NDTV. VCPL does not even have veto rights in relation to management or policy decisions or the day to day business or operations of RRPR and NDTV. VCPL's rights in the Loan Agreement are only protective rights. (xi)It is clear from publicly available information that Dr Prannoy Roy, Mrs Radhika Roy and their Affiliates, from the date of Loan Agreement till date (i) have owned and controlled 61.45% shareholding of NDTV and are the major share-holders of NDTV (ii) voted on 61.45% shareholding in NDTV in all meetings (iii) are promoters of NDTV (iv) have appointed the directors of RRPR and NDTV (v) appointed the chairman of RRPR and NDTV in all the meetings and (vi) have exercised control and taken all policy decisions and managed the affairs of RRPR and NDTV. (xii)It is evident from the conduct of VCPL, and of RRPR, Dr Prannoy Roy and Mrs Radhika Roy, that the intention of providing loan to RRPR was not to acquire "control" over RRPR or NDTV and the Loan Agreement is a normal lending transaction to enable RRPR repay its then existing debt.....
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....he Conversion Option or Purchase Option were exercised in full, the Call Options would naturally lapse. This is because once the Conversion Option or Purchase Option is exercised, VCPL would indirectly hold 26% shares in NDTV, and it would be pointless then to exercise the Call Option. Further, if the loan is repaid in full, the Call Options would lapse. The call option would have been an effective mechanism if say NDTV share prices increased up to a price so as to give a return on the investment. For VCPL to be incentivized to exercise it, the market value would have to be such as it would give a return. There was no specific trigger for their exercise, and nor was there any specific contingency; except that, as explained above call option would have been an effective mechanism if say NDTV share prices increased up to a price so as to give a return on the investment. Otherwise, if VCPL did decide to take over RRPR's shares in NDTV, a more effective mechanism would have been to exercise either the conversion option or the purchase option. The net result is that exercise of any of the options in full will mean VCPL would not exercise any other option, because VCPL would already ....
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....in future, an interest in one of the largest media companies in the country. If and when, and as and when, such acquisition in fact occurs, whether such acquisition would trigger an open offer obligation would have to be considered at that point in time. (xxi) "At least" one (mentioned in clause 11 of the Loan Agreement) simply means that VCPL should not be left by the borrower in a position where VCPL is unable to have even one director nominated by it, to be appointed. (xxii) The absence of an interim repayment schedule is purely a matter of contract and it is quite conventional to even see prohibition on prepayment in loan agreements. (xxiii) The Maturity Date falls 10 years from the disbursement. That is a long time. In that time, VCPL has options and if it does not exercise them then the loan becomes repayable. VCPL took a longterm view on the investment. (xxiv) Since VCPL has provided the loan to RRPR, and it holds the options to the shares, it is but natural for VCPL to expect that any buyer of RRPR should be acceptable to VCPL and must be a 'stable and reliable' buyer. 8. Issue for Determination The Noticee has raised severa....
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....2 shall be made by the merchant banker not later than four working days after any such change or changes are decided to be made as would result in the acquisition of control over the target company by the acquirer." 10. A background of the loan transaction which is a matter of record becomes relevant for consideration. An open offer was made by the Promoters of NDTV (i.e. the RRPR Holding Pvt Ltd., Prannoy Roy and Radhika Roy) in the year 2008. For this purpose, the Promoters availed of a loan of Rs. 540 Cr. from M/s. Indiabulls Financial Services Ltd. To repay the said loan, another loan of Rs. 375 Cr. was taken from ICICI Bank. The loan taken from ICICI Bank was repaid in the year 2009 by taking another loan of Rs. 350 Cr from VCPL i.e. the Noticee, vide the Loan agreement executed on 21st July, 2009. 11. On 21st July, 2009, three simultaneous or co-existing agreements were executed by VCPL and its affiliates with RRPR as part of the financial transaction between VCPL and RRPR- (i) the Loan agreement between VCPL and RRPR; (ii) Call option agreement between VCPL and Shubhgami Trading Pvt Ltd (STPL) and; (iii) Call option agreement between VCPL and Shyam Equities Pvt. Ltd. (....
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....ights attached to the Equity Shares held by them in the Borrower and the Promoters together with its Affiliates and the borrower shall exercise the voting rights attached to the equity shares held by them in NDTV and NDTV Group to give full and complete effect to the provisions of the Transaction Documents including but not limited to give effect to the provisions contained in Schedule 3 read with Clause 12. The promoters together with their Affiliates shall amend the Charter Documents of the Borrower to give full effect to the provisions of the Transaction Documents." Transaction Documents of the loan Agreement means "(i) the Loan Agreement (ii) the Call Option agreements and (iii) all other documents and agreements relating to the above and or designated as such by the lender in relation to the Loan, as such documents may be amended or supplemented from time to time." 13. It is observed that the loan agreement was entered into between VCPL, the Noticee on one side and RRPR, Prannoy Roy and Radhika Roy, on the other side in the capacity of promoters of NDTV Ltd. The loan amounted to 350 crore rupees with a repayment period of ten years from the loan amount being drawn down. Acc....
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....hareholders of 26% of NDTVs equity, this right explicitly extending beyond the tenure of the Loan Agreement by the words "during the tenure of the Loan or thereafter". (iv) To summarise, the lenders' rights under (i), (ii) and (iii) above are absolute without being in any way connected to repayment of loan. Consequently, this certainly does not appear to be a case of a simple secured loan or an instance of asset-recourse lending as put forth by the noticee. (v) Even assuming the noticee's description of the asset as being 'collateral' were to be accepted, the valuation of the collateral seems very peculiar. The per share value of NDTV's shares quantified based on the loan agreement and call option agreements was Rs 214.65 (the number having been arrived at by dividing the number of shares in NDTV from the 'loan' amount advanced to RRPR). I note that at the time of the execution of the loan agreement, the market value of NDTV's shares was substantially lower than the value of the collateral of the loan agreement. On the 21st of July, 2009, market price touched a high of Rs 130 and closed at around Rs 127. Therefore the collateral was valued around R....
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....PR appear only to be a façade for a loan transaction. Moreover the loan agreement did not have a clause of termination upon repayment and this was raised to the Noticee during the hearing proceedings. The query and reply are extracted hereunder: "Query : Which provision in the Loan Agreement confer RRPR or its promoters the right to terminate the Loan Agreement in the event of them having repaid the loan back to VCPL? The Loan Agreement clearly is a loan for the period between the execution date and the Maturity Date. If the loan is repaid in full, the Loan Agreement would cease to be in effect. Please see Clause 8 which points out that the agreement would be in force and effect until the date of the re-payment of the loan. So also, if the Call Option were exercised in full it would follow under clause 7 that the proceeds would be utilized to repay the full loan which would in turn lead to the agreement ceasing to have force and effect." Although the noticee has made the above assertion, a careful reading of the terms of the agreements reveals the contrary. Clause 8 of the loan agreement clearly alludes to the agreement being in full force till the repay....
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....nt to have a call option in the context of an under collateralised loan that was dependant on the valuation of shares of NDTV. 17. An examination of the covenants in the Call Option Agreement also becomes relevant to ascertain the true intention of the parties. The crux of the agreement is in clause 2 by which the Noticee purchased the Call option rights and it reads as follows -"...the Purchaser shall have the right but not the obligation, to purchase at any time all or part (at the sole discretion of the purchaser) of the Call shares from RRPR". The detailed procedure of formalities to be followed for such exercise is elaborated thereafter. Clause 3 dealing with "Right Of First Refusal" provides that "The Promoters and their Affiliates are not permitted to sell or transfer either directly or indirectly in any manner whatsoever their Equity Securities in NDTV to a third person prior to the expiry of five years from the date of this Agreement without the prior written consent of the Purchaser. The Purchaser and its Affiliates are not permitted to sell the Call shares prior to the expiry of five years from the date of this Agreement without the prior written consent of the Promot....
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....strar of Companies and that SEPL had merged with Shinano Retail Pvt. Ltd. vide orders of the Hon'ble Bombay High Court dated September 28, 2012 and Hon'ble Karnataka High Court dated March 09, 2013. I also note that in terms of the Call Option Contracts (clause 2(a)) the Purchaser may nominate an Affiliate or a third person for the purpose of exercise of the Call Option and in such case such third person would become the 'Option Holder'. Consequently the right to exercise options could get transferred to a third person as determined by the Purchaser, thereby effectively leaving the obligations in relation to the Call Option Contracts on RRPR and the Promoters of NDTV, unchanged. 19. It is not clear why the lender (VCPL) had to resort to execution of Call Option agreements in addition to the Loan Agreement if it was an outright lending transaction. The explanation offered by the noticee is that the call option agreements protected the lenders interest in acquiring NDTVs shares in case the price of NDTVs shares increased beyond the strike price. This infact reinforces the opposite argument i.e. the primary purpose of the Loan Agreement and related agreements was to....
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....se 20 of the Loan Agreement, as discussed in the foregoing paragraphs, would indicate that the 'control' over the 26% of NDTV shares has effectively passed on to the lender and that the borrowers are only acting to the dictates of the lender. Moreover, the agreements do not provide that upon repayment of the loan amount within 10 years, the Call option agreements would cease to exist or lapse. The explanation is now being furnished by the Noticee (i.e. at the stage of the present quasijudicial proceedings) as an afterthought that "if the loan is repaid in full, the Call Option would lapse." This explanation is not acceptable as it amounts, infact to rewriting the original terms of the agreement. Clause 3(a)of the Call Option Agreement dealing with 'Right of First Refusal' binds both the borrower and the lender and restricts them from selling or transferring the equity securities in NDTV to a third person prior to the expiry of five years from the date of the Call Option Agreement. From the said clause 3(a) of the Agreement, it appears that VCPL through its affiliate has an ascertainable or enforceable right over the shares that prevents the borrower from selling the said 26% of NDT....
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....mally seen in Share Purchase Agreements or Share Holders Agreements. These clauses are out of place in connection with a lending transaction, as sought to be portrayed by the Noticee. 21. The Loan agreement also provides that in the event the call option was exercised by the associates of the lender, the money received by RRPR from the said purchase would be used to repay the loan to VCPL, thereby the money moving from one associate to another, all the while the shares of NDTV being acquired directly or indirectly by one of the said associates. Similar to the Loan Agreement, the call option agreements are open ended i.e. those neither envisage the contingency based on which the call option is exercised nor do the said agreements circumscribe the period within which call option may be exercised. When the loan agreement itself binds the borrowing transaction thereunder along with the transactions under the call option agreements, it strengthens the assumption that this is not a simple case of lending. Though questions regarding the call option agreements were specifically put to them, the Noticee has not contested this aspect in detail except to submit that the net effect of the t....
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....ry of advancing such loans nor do they appear to have had the financial wherewithal to advance loans on such liberal terms. Further, assuming the shares of NDTV did form the collateral for the loan, despite the loan being substantially under-collateralised, the lender/noticee has not sought any repayment despite market value having almost continuously eroded till date. A prudent person would not expect that a financial lender would be so unperturbed as to not seek repayment of its protected principal amount till date. 23. All the aforestated concerns attached to the manner in which the loan agreements and call option agreements were entered into and the subsequent conduct of the noticee do not substantiate its argument that the transaction was only in the nature of a loan. Instead, it appears that the loan agreement and call option agreements were used to shroud the true nature of the transaction which was acquisition of beneficial interest in NDTV Ltd. The elaborate mechanism adopted by the noticee and its associates appear to be solely to deflect attention from this acquisition and thus covetously overcome the obligations imposed by the Takeover Regulations. 24. In effect, ....
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....ssuances are not before me for a detailed comparison. As such, any comparison with normal ZOCD kind of convertibles, can in this case be only applicable to the part of convertibles of RRPR held by the Noticee and not to the extent of 26% of NDTV shares covered under the call option agreement. It is clear that the Noticee's call option rights over 26% of the NDTV shares held by the Promoters, overshadowed the comparable points with ZOCDs narrated in para 8.1.13 of the Noticee's reply dated 21st May 2018 , viz., the aspect of interest free loan; ability to convert at preagreed rate and the right of repayment to the extent of the uncoverted part. Thus the call option rights coupled with the voting rights in Clause 20 of the Loan Agreement in the instant case would bear no resemblance to any other case involving ZOCDs as convertibles in the course of transactions. 27. A close look at the structure of the transaction revolving around the conversion option and the purchase option (outlined in the loan agreement) on the one hand and a call option on the other clearly reveals that the transaction structure is unusual and peculiar to say the least. The conversion option which entitles th....
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....s or acquisition of control in a listed company, it is a settled position of law that the first and foremost responsibility of the regulator is to ensure that shareholders get an exit opportunity in accordance with the provisions of the Takeover Regulations. However this does not preclude SEBI from passing additional or alternative directions in the interest of investors and the securities market. The ambit of directions that can be passed in such cases is already well settled and therefore specifics of directions which are appropriate in a given case do not require mention in the show cause notice. Thirdly, there being no statutory limitation period on initiation of enforcement action, the claim that the proceedings must be dropped due to efflux of time runs contrary to the objective of ensuring justice; particularly so when the alleged violation contravenes the rights of the investors in a listed company. In the instant case, if the Noticee is held to have had acquired control, statutorily it was required to provide an exit opportunity. Not providing that opportunity would be a serious violation of the statutory rights of shareholders. The Noticee has addressed several other rela....