Adani Group through AMG Media Networks Limited (AMNL) and its parent company Adani Enterprises Limited (AEL) has acquired New Delhi Television Limited (NDTV). This acquisition was done by Adani Group acquiring Vishvapradhan Commercial Private Limited (VCPL). VCPL had lent Rs. 350 crores to Roys in July 2009. Roys borrowed this money repay the loan that Roys had taken from ICICI Bank. Here, it is pertinent to note that VCPL had lent the money to Roys as an interest free loan. However, this loan had a caveat that Prannoy Roy and Radhika Roy must first transfer 11,563,683 shares of NDTV representing 26% of the shareholding to RRPR Holding Private Limited against the first loan of Rs. 350 crores advanced by VCPL to RRPR. Subsequently, additional 72,50,245 shares of NDTV held by Mr. and Mrs. Roy were transferred to RRPR when VCPL lent additional Rs. 53 crores to RRPR. In total 1,88,13,928 shares of NDTV representing 29.18 per cent of the shareholding were transferred to RRPR Holding Private Limited (RRPR). This is how RRPR became one of the promoters of NDTV. Later VCPL lent Rs. 350 crores to RRPR in July 2009. Subsequently, VCPL lent another Rs. 53 crores to RRPR in January 2010. Agreements for both these loans of Rs. 350 crores and Rs. 53 crores were entered into on July 21, 2009 and January 25, 2010 respectively. It is important to know that AMNL is 100 per cent subsidiary of AEL and AMNL acquired 100 per cent stake of VCPL from Mr. Mahendra Nahata’s companies Eminent Networks and Nextwave Televentures.
If this agreement has to be interpreted and underlying intent had to be understood, then in simple non legal words, VCPL through RRPR and Mr. and Mrs. Roy indirectly controlled everything in NDTV that pertained to ownership of NDTV.
While delving into the merits of NDTV’s argument that the transfer of Nahata’s shareholding in VCPL to AMNL was done without its consent and hence it tantamount to hostile takeover, it is imperative for everyone to know the covenants in VCPL’s loan agreement signed by promoters of NDTV and RRPR – i.e. Prannoy Roy and Radhika Roy.
The loan agreements were entered into between the VCPL – then the lender and now the acquirer and RRPR. As per the agreement VCPL gave a loan of Rs. 403 crores to Roys against RRPR issuing 10 crore warrants of RRPR to VCPL. Loan agreement also gave VCPL the right to exercise any or all of the 10 crore warrants issued to it by RRPR. Upon exercise of all 10 crore warrants, VCPL would get 99.99 per cent of the equity share capital of RRPR by paying Rs 10/- per share for such equity shares. In addition to this VCPL also has the right to purchase from Mr. and Mrs. Roy, all the 10,000 equity shares of RRPR held by them Promoter Individuals for Rs.10/- per share.
This loan agreement between VCPL on one side and RRPR and Mr. and Mrs. Roy on the other side had become a subject of controversy of covert or indirect sale of Mr. and Mrs. Roy’s stake in NDTV to VCPL. This was because of various terms and conditions in the said agreement that implied that the transfer of powers of promoters and directors of NDTV were transferred to VCPL. First term is that at the sole option of the lender (VCPL), the warrant can be converted into the underlying equity shares at any time during the tenure of the loan or thereafter without requiring any further act or deed on the part of the lender. This condition makes it very clear that NDTV’s argument that acquirer i.e. VCPL and Persons Acting in Concert i.e. AMNL and AEL did not require any prior consent of NDTV and / or its promoters i.e. Mr. and Mrs. Roy for exercising the option to convert warrants into equity. As per the Public Announcement by Adani Group, VCPL has the sole option without any consent of NDTV and / or Mr. and Mrs. Roy. At the same time the agreement between VCPL and RRPR stated that VCPL and its affiliates cannot purchase shares of NDTV which will increase their holding to more than 26% in NDTV without the consent of the promoters. However, this clause would be the subject of debate in the courts, if NDTV and its promoters Mr. and Mrs. Roy opt to challenge the acquisition.
It is imperative to understand that the aforementioned clause has to be read with other terms and conditions in the agreement. Other condition in the agreement stated that RRPR shall have three directors. Out of these three directors, VCPL shall have the right to nominate one person as a director on the board of RRPR. Now here comes the catch. As per the loan agreement, quorum is possible only when the nominee director of VCPL is present at each and every board meeting. In other words, any meeting of the board of directors and decisions taken in the meeting is invalid without the nominee of VCPL being present at the meeting. This indirectly made Mr. and Mrs. Roy dependent on VCPL’s nominee on the board of RRPR who became the most powerful person in RRPR and thereby in NDTV also.
The most important clause in the said agreement between VCPL and RRPR was that over the next three to five years VCPL and RRPR would look for a buyer for RRPR. This in other words clearly meant that the final objective and intent of this loan agreement was transfer or sale of 29.18 per cent stake in NDTV to another buyer. This also meant that this “loan agreement” was effectively a “stake sale agreement” and not really a loan agreement.
As per SEBI’s order, by virtue of the said agreement, VCPL acquired the power to decide on following issues, and Mr. and Mrs. Roy and the board of directors of NDTV couldn’t decide on the following issues without the consent of VCPL:
(a) Issue or agreement to issue any equity securities in RRPR.
(b) Buyback of equity securities, reduction or alteration of share capital of RRPR.
(c) Borrowing or raising money or issue of any debenture or assumption of debt.
(d) Amending the charter documents of RRPR
(e) Merger, amalgamation or consolidation of RRPR with any other entity or any entity with RRPR.
(f) Set up any subsidiary.
(g) Cause RRPR to take any steps towards bankruptcy, insolvency or reorganization, arrangement, adjustment, winding up, liquidation, dissolution, com-position or other relief with respect to it or its debts or seeking appointment of a receiver, trustee, custodian or other similar official for it or all or any substantial part of its property.
(h) Sell or otherwise dispose of any asset of RRPR or transfer any equity securities of NDTV or create any encumbrance on the equity securities of NDTV.
(i) Sell, transfer or create any encumbrance on the equity securities of RRPR.
(j) 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 RRPR.
The following matters relating to NDTV would require prior written consent of VCPL:
(a) Issue any equity securities 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 reor-ganization, 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 agree-ment as a result of which the promoters cease to be in sole control of NDTV.
If this agreement has to be interpreted and underlying intent had to be understood, then in simple non legal words, VCPL through RRPR and Mr. and Mrs. Roy indirectly controlled everything in NDTV that pertained to ownership of NDTV. Most glaring point in this loan agreement is that Mr. and Mrs. Roy and NDTV couldn’t do anything relating to mergers and acquisitions, sell off, divestiture of subsidiaries or group companies or stake held by Mr. and Mrs. Roy without prior permission of VCPL. In other words, Mr. and Mrs. Roy had lost all control over NDTV’s corporate decisions which were now vested with VCPL by virtue of this agreement, barring its editorial policies and internal functioning.
The most important clause in the said agreement between VCPL and RRPR was that over the next three to five years VCPL and RRPR would look for a buyer for RRPR. This in other words clearly meant that the final objective and intent of this loan agreement was transfer or sale of 29.18 per cent stake in NDTV to another buyer. This also meant that this “loan agreement” was effectively a “stake sale agreement” and not really a loan agreement. This was also observed by SEBI in its order dated 26th June, 2018, wherein it said that “It was thus concluded in the SCN (Show Cause Notice) that VCPL had acquired veto rights in RRPR and NDTV and indirectly rights over the 26% share-holding held by RRPR in NDTV which resulted in VCPL’s acquisition of indirect control over NDTV.” The same order later stated that the noticee i.e. VCPL must “pay interest at the rate of 10% per annum from the date when they incurred the liability to make the public announcement till the date of payment of consideration, to the share-holders who were holding shares in the target company on the date of violation and whose shares are accepted in the open offer, after adjustment of dividend paid.”
The order also states that “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 the Noticee to 99.99% of RRPR shares has a perpetual existence not circumscribed by the tenure of the loan. The Noticee has a right to exercise his conversion option even after the loan is settled. In essence, it means that the entitlement of the notices to 99.99% of RRPR shares is absolute, and not contingent upon any event or bounded by limitations of time. The absence of an explicit clause in the Loan Agreement rendering the conversion option void on repayment of loan is strikingly abnormal and it clearly lays out an unfettered path for the noticee to stake its access to NDTV, albeit through the medium of RRPR. The call option construct is also strangely devoid of any time limitations and it endows the noticee (and its affiliates) the right to acquire 26% of NDTV shares from RRPR, at any time with no linkage to the loan. The strike price of the call option has been set so high (at a premium of 51% to the then average market price by noticee’s own admission in its reply dated May 21, 2018) that it renders the whole exercise of collateralization of the loan a non-starter. Given the price history of NDTV shares, the argument of the noticee about the call option serving as a collateral seems very hollow.”
While Adani Group would seek refuge in SEBI order and also that VCPL and NDTV couldn’t find any suitable buyer for the shares within the stipulated period of three to five years, and the term of warrants expired in January 2020 and NDTV couldn’t repay the loan, hence VCPL executed the option to sell it to the buyer of its choice. However, NDTV has only one argument to oppose this sale by harping on only one clause in the agreement that VCPL and its affiliates cannot purchase shares of NDTV which will increase their holding to more than 26% in NDTV without the consent of the promoters.
Now it remains to be seen how courts interpret this issue and what their judgment would be. While the judiciary is accused by both sides for being biased, with the Left-Liberals accusing judiciary for its decision in Ram Mandir case and Nationalists accusing judiciary for plethora of issues from opening court rooms in midnight to hear Yakub Memon’s case to commuting capital punishment of a rapist of a child by quoting Oscar Wilde’s famous statement “every sinner has a future”. However, in this case, repercussions are much beyond the ideological battle between Left-Liberals and Nationalists and how the judiciary should take a stand when it is about “fighting rising communalism and fascism and standing for secularism, liberalism, and idea of India”.
The implications of the judgment in this case would extend in the realm of business and investments. The judgment in this is case would become a precedent, that would later be used by many other corporates who have taken money from investors and lenders. Whether that would have an impact on the investment climate and confidence of investors, especially foreign investors, while investing in India, only the judicial verdict and time can tell.