What’s holding up Gautam Adani’s takeover of NDTV?

[By Chirag200201 (CC BY-SA 4.0), via Wikimedia]

On Monday, November 7, SEBI’s petition against the Adani-owned shell company Vishvapradhan Commercial Pvt Ltd (VCPL) is listed to be heard by a two judge bench in the Supreme Court. Justice S Abdul Nazeer and Justice V Ramasubramanian will be the two presiding judges.

VCPL has been at the centre of attention in Adani’s takeover of NDTV, ever since the news broke on August 23. Adani signalled their intent by announcing that they had bought out the entire stake in VCPL, owned first by Reliance and later their business associate Mahendra Nahata. For Adani, VCPL was the key to gaining control of NDTV, arguably a prized asset in the India media business. 

(The genesis: In 2009, the Roys’ holding company, RRPR, had taken a Rs 402 crore interest-free loan from the Reliance group, funded through VCPL. In return RRPR offered 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.)

The operation was expected to be quick and clinical.

Two-and-a-half months later, Gautam Adani is realising that the plot hasn’t exactly gone to plan. Prannoy and Radhika Roy, who founded NDTV 38 years ago, have found ways to delay the warrant conversions that would have given Adani the crucial 29% stake in NDTV. It has generated an unprecedented spate of disclosures and letters from both NDTV and Adani Enterprises to the markets regulator, almost like a ping-pong match.

And now, SEBI’s Supreme Court petition presents the latest twist in the tale. It harks back to the regulator’s discomfort with the structure of the loan agreement that the Roys entered into with the Ambanis, who owned VCPL at that time, before it changed hands.

So what’s this hearing all about?

First, here’s the chronology of how the events played out.

On September 19, SEBI challenged the Securities Appellate Tribunal (SAT) order of July 20, 2022.

In a significant judgement, SAT had overturned SEBI’s earlier order. SEBI had ruled that VCPL had acquired control of NDTV when it decided to enter into a loan agreement with RRPR, the holding company set up the Roys.

This issue has repeatedly been a thorn in the side of the Ambanis. Both the Roys and the Reliance-Nahata combine, which owned VCPL till as recently as August this year, have faced close scrutiny from the markets regulator. It resulted in bitter, protracted legal battles between the combine and SEBI.

SEBI had taken the view that both the Roys, through their holding company, RRPR, and VCPL should have disclosed the transaction since it amounted to a change in control. In its order, SEBI held that “VCPL had acquired veto rights in RRPR and NDTV indirectly over the 26% shareholding held by RRPR and NDTV which resulted in the acquisition of “control” in RRPR and indirect control in NDTV by VCPL. Further, VCPL on account of indirect acquisition failed to make a public announcement of an open offer in terms of Regulation 12, read with Regulation 14(3) of the SAST Regulations, 1997.”

In his order, SEBI’s then whole-time director G Mahalingam found many irregularities. Among other things, there was no clause in the loan agreement for terminating the agreement upon repayment of the loan.

Following an appeal by VCPL, SAT ruled that an open offer was not necessary. It cited two precedents: Subhkam Ventures (India) Pvt. Ltd. vs. SEBI (2010) and Victor Fernandes vs. Network 18, on 15 November 2019, where Mahalingam had himself held there was no grounds for an open offer. And yet in the VCPL case, SEBI took the view that an open offer was required, when the structure of the loan was quite similar. In fact, the SAT order of July 20 (pages 67/68) explicitly lays out the facts of the Victor Fernandes case. The order also talks about why even Janak Dwarkadas, senior advocate and VCPL’s counsel, when asked about the earlier precedent, said he did not see any difference between the two cases.

That’s why SAT overturned the SEBI order, leaving the regulator red-faced. SEBI was forced to appeal against the SAT order, if it needed to regain any semblance of legitimacy. The regulator is likely to reiterate the same stance it took at the tribunal and argue that the facts of the VCPL vs SEBI case are different from the Victor Fernandes vs SEBI case.

Which way will this case go?

At this early stage, it is impossible to predict the outcome of the Supreme Court hearing. The two judge bench will listen to arguments from both sides. It will have to go into some depth on the two main precedents that SAT relied upon in its decision on the VCPL case. And a judgement could take at least three to six months at the very minimum.

If the Supreme Court dismisses the SEBI petition, it could be a source of relief for the Adanis, the new owners of VCPL. Its open offer can still go ahead, albeit with expected delays on account of the Roys raising multiple issues, which they say needed to be addressed, before they issue shares arising out of the conversion of warrants.

However, if the SEBI petition is upheld, it could open a can of worms for the Adani group. Here’s how it could work. Adani had pegged their open offer price at Rs 294 per share. It is based on a formula that the Takeover Code lays out.

In case SEBI wins, what is the open offer price likely to be? SEBI may have had a specific open offer price in mind for the VCPL open offer it wanted done. But its inner workings are not available in the public domain. Except that by all indications, it is likely to be much higher than Rs 294.

Here’s why. In all likelihood, SEBI could ask VCPL to use the call option price it negotiated with RRPR as the benchmark. (The call option price was the price at which VCPL had the right to convert its 29% stake in NDTV by exercising the warrants it holds at the stated price of Rs 214.65 per share.)

Now, since this dates back to 2009, there is the matter of adding the interest that’s accrued over 13 years. If SEBI has its way, it could ask VCPL to use this new higher benchmark price for the Adani open offer, and not Rs 294. It will merely increase the cost of acquisition for Adani, which has already forked out around Rs 600 crore to buy out VCPL and open the mandatory escrow account for the open offer. And it still doesn’t own a single share in NDTV.

So what’s the upshot?

The double-quick takeover attempt mounted by the Adani’s remains stuck in the mud. If they expected a quick capitulation, that’s been effectively nullified. On their part, the Roys haven’t indulged in sabre-rattling or a shrill, public battle. Instead they have found legal methods to delay the takeover. The Roys haven’t revealed their cards just yet, except to clearly signal that they don’t plan to hand over the keys to NDTV to Adani on a platter.

But make no mistake: this still has all the makings of a hostile takeover. On that fateful evening of August 23, when the Adanis first, announced their takeover attempt, a gaggle of stock market analysts, lobbyists and some business journalists portrayed it as a cakewalk. They were at great pains to flatly refute the possibility of a hostile takeover. They felt that the Roys had no legal grounds left to defend their turf. Plus, they may have understandably assumed that it would be a battle of unequals, given the extent of power that the Adani group wields in the country.

However, the fact is that the Roys have maintained from the beginning that they weren’t consulted about Adani’s intent to acquire control, despite a legal clause which insists on prior consent. And they proceeded to lay out a series of reasons why it would not be possible for it to complete the transaction to convert the warrants held by VCPL into shares in NDTV.

So far, the Adani group have successfully negated one of the many unexpected googlies thrown by the Roys. 

The Roys, through NDTV, had contended that the income tax department in 2017 provisionally barred the network's founders from selling a part of their stake as part of a reassessment of their taxes.

The very next day, the Adani group said no such approval was required and that the founders tried “to further inordinately delay” the deal. To support their contention, Adani even furnished a letter from the Income Tax department, supporting their claim.

There are a few unresolved issues that need to be sorted out before the Roys are forced to carry out the warrant conversion. How long that process could take is anybody’s guess. But one thing is certain: this won’t be a quick kill, as many people assumed.

What is the status of the Adani open offer?

That’s yet another interesting question. The open offer was to be launched on October 17, according to the disclosure to the bourses and the ad campaign put out by JM Financial, Adani’s merchant banker. Yet till date, the Adani group does not own a single NDTV share. On October 18, Adani group reiterated its commitment to acquire NDTV and wrote to SEBI asking for its feedback on the draft open offer, in line with the process laid down in the Takeover Code.

SEBI may have already sent a reply to JM Financial, Adani’s merchant banker. But that is not available in the public domain. However, as on October 28, SEBI’s processing status on open offer documents maintains the VCPL open offer is still “in process”. Though it is entirely possible that the markets regulator will not take a decision on the open offer till the Supreme Court passes its verdict. Besides, in the current circumstances, where Adani still does not own a single share of NDTV so far, SEBI’s hands will also be tied.

Does Gautam Adani have any other option to push ahead?

By all indications, Gautam Adani is a man in a hurry. As a hard-charging entrepreneur, well-versed in pulling off such hostile takeovers, he is unused to playing a waiting game.

Right from the start of this takeover drama, Adani’s gambit has raised more questions than answers. What prompted the Ambani-Nahata combine to offer their stake in VCPL on a platter to Adani? Did Gautam Adani approach the Roys before VCPL changed hands to have his overtures rebuffed? Or did he actually believe he could take majority control and leave the Roys out in the cold?

There’s reason to believe that the delaying tactics used by the Roys are an overt signal to ensure that Adani meets them at the negotiating table. For reasons best known to him, Gautam Adani has chosen to ignore it.

Perhaps he has other aces up his sleeve. If the rumour mills are to be believed, the Adani group is scanning a plethora of M&A opportunities across the media and entertainment space. A M&A team from consulting firm EY is scanning the market for acquisition targets in the media and entertainment space. For instance, for more than a month now, speculation has been rife in journalistic circles that Gautam Adani has been in talks with media moghuls Samir and Vineet Jain, who own one of the largest media conglomerates in the country.

While all of this is difficult to authenticate, there are several stories about the two Jain brothers going through an elaborate process of mediation. The initial attempts at splitting the group’s considerable media assets between the two brothers have proven to be difficult. One of the options is to devise a sell-off plan and share the spoils. In fact, that might turn out to be the only real way out. If the Jains decide to sell some of their key assets, there’s a possibility that Adani might look to carve out a mega brand like The Economic Times, with its print edition, television brand ET Now and its digital avatar economictimes.com. (Provided of course, they are able to agree on the valuation.)

What options are the Roys left with?

Shortly after the open offer, the Roys had argued that they were unable to convert the warrants because of a two year ban imposed on them by SEBI which prohibited them from trading in any kind of securities in June 2019. The Roys had appealed against this ban with SAT. 

SEBI is yet to clarify whether the ban affects this transaction between RRPR and VCPL, two unlisted companies. Since the matter is sub-judice, it is unlikely that SEBI will be in a position to decide whether Adani can go ahead with their warrant conversion and thereby gain 29% stake in NDTV.

The Roys’ appeal with SAT is still being heard. If SAT is unable to arrive at a decision by November 26, the SEBI ban on the Roys will automatically be lifted. And once that happens, apart from the Income Tax matter, the Roys will have one less reason not to convert the VCPL warrants into shares. If they are forced to go ahead with the warrant conversion, the Adanis can push for majority control, as long as their open offer price is attractive enough for other shareholders to tender in their shares. At Rs 294, the open offer price is still way below the prevailing market price of Rs 334.

After the warrant conversion, the Roys will still have a 32% stake in NDTV. But the Adani group could push for control through either the open offer route or through open market purchases.

But it doesn’t end there. The Roys possibly have one more card up their sleeve. Once they can no longer avert warrant conversion, the Roys could raise the issue of NDTV’s uplinking and downlinking licence. The Ministry of Information and Broadcasting (MIB) had granted the licence to the Roys because they hold 61.45% stake in NDTV. Now, under MIB regulations, an Indian entity is expected to hold more than 51% in any news television channel.

In case the Roys’ stake slips below 51%, NDTV will no longer be compliant with MIB guidelines, since the licence was granted to the Roys as the Indian entity owning more than 51%.

Unless of course, the Roys sign a “single unit” agreement with Adani. This is what Reliance and Raghav Bahl did in 2014, before Reliance took charge of Network18 and then initiated an open offer. So far, there has not been public disclosure from either NDTV or the Adani group on this front.

Finally, the outcome of the Supreme court hearing that starts on Monday could provide an unexpected twist. In the unexpected outcome that SEBI actually wins its appeal, as directors on the board of NDTV, the Roys have a fiduciary responsibility on behalf of their shareholders, to ask SEBI to clarify if the Adani open offer price would now need to be recalibrated in line with the benchmark price back in 2009. If the Roys choose to tender in their shares as part of the open offer, that difference could be quite substantial.

The Roys are well aware that they are carrying a knife to a gunfight. It will be well nigh impossible for them to block the deal. So they have no option but to use whatever limited legal means they have to delay the inevitable.

So what are the key events worth tracking that could influence the course of this high-profile takeover battle? 

From Monday onwards, all eyes will now be on the Supreme Court case. Plus, November 26 will be another important marker for both Adani and the Roys. That’s when the two year securities trading ban on the Roys will end.

Clearly, the end game may still be some time away. But we’re now entering the middle game. This phase is likely to be a lot quieter and more predictable. No major attention grabbing moves, like the high-pitched ones in the opening game. it is unlikely to throw up too many surprises. 

Dig Deeper: 

• SAT Order of July 20, 2022 (PDF)
• Gautam Adani’s midnight raid at NDTV—a developing story (Founding Fuel’s first story as the news broke in August)
• A battle of unequals