Roys v. Adani: Does the Indian Takeover Code Offer a Level Playing Field?

The ongoing tussle for the control of New Delhi Television (NDTV) is certain to once again bring the corporate lawyers’ attention to the working of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011¹ (the Takeover Code). A few days back Indian conglomerate Adani Group initiated the attempt to indirectly gain control of the media company NDTV through one of its fully owned subsidiaries, namely, Vishvapradhan Commercial Private Ltd. (VCPL). VCPL is said to have lent a certain sum to Dr Prannoy Roy and Ms Radhika Roy of NDTV. As part of the loan agreement, VCPL held warrants that can be converted into equity in RRPR Holding Private Ltd. (RRPR). RRPR in turn holds 29.18% equity in NDTV. VCPL has now invoked the warrant, which if allotted will grant 29.18% indirect ownership in NDTV to Adani.²

As required under the Takeover Code, VCPL and Adani Group Companies (as persons acting in concert) have issued a public offer to purchase an additional 26% of the shares from the other shareholders.³ If the public offer succeeds, the Adani Group will be firmly in control of NDTV with a majority of its shares. NDTV has responded to the public offer stating that since its founder promoters Dr Prannoy Roy and Ms Radhika Roy are prohibited by SEBI from dealing directly or indirectly with securities in any manner, prior approval of SEBI is required to carry the deal through.⁴ Adani Group on the other hand has taken the position that no such regulator’s prior permission is required as RRPR was not a party to the proceeding. Hence, the prohibition applies only to the Roys; not to RRPR.⁵ The loan agreement is between private parties, and it is not immediately clear whether the loan agreement stipulates any precondition for invoking the warrant, and if so, whether VCPL has met any such condition. If the shares are not issued as demanded by the Adani Group, the matter could lead to a long-drawn legal battle for control.

But what brought the Roys to the brink of unceremonious ouster from NDTV? The near absolute ban of takeover defences under the Indian law is the root cause of the ordeal the Roys find themselves in. Indian Takeover Code practically leaves the target board defenseless against a hostile takeover bid. A takeover defence that could have saved the Roys in the present situation is a share warrant that is popularly known as a poison pill. A poison pill empowers the Board to issue shares at a substantial discount to all shareholders other than the acquirer when the acquirer crosses a certain percentage of shares without the Board’s consent. Since the offer is at a discount most of the shareholders would subscribe to it, but the acquirer is excluded. In the case of NDTV, a poison pill would have diluted Adani’s shareholding making the hostile takeover unattractive. But the Takeover Code prohibits poison pills and many other well-known forms of takeover defences.⁶

So, what is wrong with the Takeover Code not permitting the incumbents the chance to defend? From the standpoint of the shareholders, hostile takeovers help in replacing inefficient management with more efficient ones. But the assumed better efficiency of the acquirer must not be the sole criterion in permitting a hostile takeover. For instance, in tech companies and media companies, a change in management is not just a matter for the shareholders; but the change can have a wider impact on many other constituencies, such as creditors customers, employees, journalists, and viewers. For such companies, the founder’s vision or editorial policies are of special importance. It stands to reason that such companies have some power to resist a hostile takeover if the acquisition is likely to harm their corporate vision or policies.

One might wonder why India witnessed so few hostile takeovers if the Takeover Code favours acquirers. The answer is majority or very high shareholding of the promoters.⁷ But at what cost do the promoters maintain such a high level of shareholding? In a more globalised world, to be competitive, one requires a large capital investment. For a company that investment can broadly come from either equity or debt. Both have their advantages. But a promoter opting for the equity mode should either invest his own money or dilute his shareholding. Shares with differential voting rights that could help the founders maintain control exceeding their investment is a non-starter in India because of the severe restrictions in issuing such shares. Effectively lack of takeover defence drives founders to choose debt. For example, the Adani Group itself was in the news recently for excessive reliance on debt to finance its rapid expansion.

The Takeover Code prohibits a target’s board from adopting defensive mechanisms to ensure that the Board, for fear of losing control, does not deny the shareholders the benefit of takeovers. The idea behind the mandatory public offer is to the extent a fair opportunity for the public shareholders to exit the company at a fair price because of the change in control. But the Code does not stipulate that the acquirer must offer to buy all the shares so all the shareholders (if they want) can exit the company completely. The acquirer needs to offer to purchase only 26% of the shares. In case the shareholders’ tender exceeds the quantity, the acquirer offered to purchase, the acquirer needs to purchase only the shares she offered to purchase.

Even for the 26% share the acquirer offers to purchase, the price determined as per the Code may not be a fair one. In this case, Adani has offered Rs 294 a share of NDTV, while the NDTV share’s market price is nearly Rs 400.⁸ Except for a few shareholders who are close to the acquirer, for none the offer would make any sense. By offering a price that public shareholders are unlikely to accept, it appears that the purpose of the deal is to merely displace the present promoters. In short, the Code not only ties the hands of the target’s Board but also fails to protect the very public shareholders it stands to protect. It is a code that best serves the acquirer’s interests; neither target’s incumbents nor its shareholders count as much as the acquirers.