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July 13 To July 19, 2019 u Taxmann’s Corporate Professionals Today u Vol. 45 u 43ciation of NDTV shares was sufficient
to suggest that the principal purpose
of the loan was to acquire beneficial
interest in the shares of NDTV rather
than receive financial returns from the
loan.2.3.5 Exercise of warrants/call option - VCPL
contended that despite the Agreements permit-
ting exercise of call options/warrants at any
point even after repayment of loan, legally
this should not construe exercising control
since those rights were not exercised till date.
2.3.5.1 SEBI’s Analysis - The right to exercise
the warrants/call option is so open-ended and
uncircumscribed by any prerequisite that it
is as good as having control over the shares
in one’s hands without any further act.
2.3.6 Voting Rights - According to VCPL, the
terms of the Loan Agreement which required
the Promoters to exercise their voting rights
in NDTV to give effect to the terms of the
Loan Agreement is merely an assurance clause.
This does not result in VCPL acquiring the
voting rights of the NDTV shares held by
RRPR.
2.3.6.1 SEBI’s Analysis - This clause has the
effect of the Promoters ceding their voting
rights in favour of VCPL, at least to the ex-
tent of 26% shares of NDTV held by RRPR
and the 26% shares of NDTV covered under
the Call Option Agreements. Hence, VCPL
has acquired positive decision making rights
over NDTV.
Based on the above, fact SEBI concluded that
the Loan Agreement and Call Option Agree-
ments resulted in VCPL acquiring ‘control’
over NDTV, and ordered VCPL to make an
open offer as per the SAST Regulation.
“Control” under SAST Regulation
- Section 2(1)(e) of the SAST Regulation
defines that the control includes the right to
appoint majority of the directors or to control
the management or policy decisions exercisable
by a person or person acting individually or
in concert, directly or indirectly, including by
virtue of their shareholding or management
rights or shareholders agreements or voting
agreements or in any other manner.
Under the SAST regulation the definition of
control is inclusive and sufficiently vague in
nature. It confers significant discretion on
SEBI to interpret the term. Hence, parties are
required to exercise caution while entering
into arrangements relating to shares of listed
companies, lest they unwittingly trigger the
mandatory takeover offer requirements. In
some cases, for instance take the Jet-Etihad
case, parties have even been willing to give
up on rights under contractual arrangement
lest they invoke the mandatory offer trigger.Does call option amount to control under
SAST regulation- In case of call option arrangements ‘con-
trol’ is not acquired until the call option is
actually exercised. Hence, SEBI’s contention,
that mere execution of open ended call option
agreements results in deemed exercise of the
call option was devoid of any legal backing.
This is the standard practice which most of
lenders follow for protecting their rights by
having some protective rights under agree-
ments and insist on borrowers to exercise
their voting rights for giving effect to the
rights and obligations under the executed
agreement. For instance, it is standard for
lenders to have certain protective rights
against the borrower and its assets, and insist
on that borrowers vote their shares (in the
underlying portfolio company) in a manner
that does not prejudice the lender’s interests.
Since the call option and conversion option
in the Loan Agreement with VCPL were not
absolute, it was for securing interest in the
underlined assets of borrower. Therefore, it
should not be construed as exercising control.
SEBI V. NDTV - DOES FINANCING ARRANGEMENTS AMOUNTS TO EXERCISING ‘CONTROL’