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Acquisition of control on execution of call option agreement

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In a recent order on June 26, 2018, SEBI held that by entering into various agreements, Vishvapradhan Commercial Pvt. Ltd. (VCPL) had acquired control over M/s. New Delhi Television Ltd. (NDTV). SEBI further held that by failing to make an open offer on acquisition of such control, VCPL had violated Regulation 12 read with Regulation 14(3) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Regulations), which requires an acquirer acquiring control over a target company to make a public announcement and provide an exit offer to the shareholders of such target company.

Relevant facts in the present matter are: On July 21, 2009, VCPL and its associates executed three agreements with the Promoters of NDTV: Prannoy Roy, Radhika Roy and RRPR Holding Pvt. Ltd. (wholly owned by Prannoy and Radhika Roy). Under these agreements, VCPL granted a zero-interest unsecured loan for financing the repayment of another loan of ₹350 crore taken by RRPR from ICICI Bank Ltd., which in turn, was taken to fund an open offer made by the Promoters in 2008. The said agreement granted following rights to VCPL: (i) to purchase 99.99% shares of RRPR conferred through issue of warrants, convertible at any time during the tenure of the loan or thereafter, (ii) veto rights in the key management decisions of NDTV and RRPR, (iii) right to purchase up to 26% shares of NDTV at an unusually enhanced strike price of ₹214.65 per share (at a premium of approx. 51%).

SEBI, inter alia, found that the tenure of warrants and the option agreements was independent of the loan repayment, as the agreements allowed exercise of options even after the loan was repaid in full. Further, the agreement also contained a ‘Right of First Refusal’ which restricted the Promoters from transferring their shareholding in NDTV without the consent of VCPL and from engaging in any other business activity which was similar to the then broadcasting activities of NDTV, without the consent of VCPL. SEBI noted that if the rights under these agreements were exercised, then VCPL will exercise voting rights over 52% shareholding of NDTV, thus holding control over it. SEBI also observed that as on March 2017, VCPL had a mere revenue of ₹60,000, however, it had given advances up to ₹400 crore. It was found that the said loan amounts were sourced from another entity which was a wholly owned subsidiary of Reliance Industries Limited. On the basis of the above findings, SEBI held that VCPL had violated Regulation 12 of the Takeover Regulations and directed it to make an open offer to acquire shares of NDTV in accordance with the Takeover Regulations within a period of 45 days, and to pay an interest at the rate of 10% p.a. from the date of such violation.