Earlier this week, the Competition Commission of India
(CCI) passed an order
involving a transaction between the Reliance Industries group and the TV18
group of companies.
(CCI) passed an order
involving a transaction between the Reliance Industries group and the TV18
group of companies.
What otherwise appears to be a complex transaction can
be described in a nutshell as follows. About 40% shares of Network18 and (indirectly)
TV18, both of which are listed companies, are held by Mr. Raghav Bahl and his
affiliates. It is proposed that the said 40% shares will be transferred to a
group of private limited companies, which are collectively referred to as the “target
companies”. In turn, Independent Media Trust (IMT), a trust established
exclusively for the benefit of Reliance Industries Limited (RIL), would
subscribe to Zero Coupon Optionally Convertible Debentures (ZOCDs) of the
target companies.
be described in a nutshell as follows. About 40% shares of Network18 and (indirectly)
TV18, both of which are listed companies, are held by Mr. Raghav Bahl and his
affiliates. It is proposed that the said 40% shares will be transferred to a
group of private limited companies, which are collectively referred to as the “target
companies”. In turn, Independent Media Trust (IMT), a trust established
exclusively for the benefit of Reliance Industries Limited (RIL), would
subscribe to Zero Coupon Optionally Convertible Debentures (ZOCDs) of the
target companies.
The reason why the transaction had to be tested against
the touchstone of the Competition Act is because both the RIL group and the
TV18 group are said to be involved in similar businesses, viz:
the touchstone of the Competition Act is because both the RIL group and the
TV18 group are said to be involved in similar businesses, viz:
– supply of television channels;
– event management services; and
– broadband Internet services through 4G technologies
and the contents accessible through such services.
and the contents accessible through such services.
IMT’s application to the CCI was cleared, as it was
found that the transaction is not likely to give rise to adverse effect on
competition in India. This conclusion was arrived at after considering the
nature and size of the market on all three counts listed above, and the
participation of the RIL group and TV18 group in those markets. While the
substance of the transaction and its effects on competition were resolved with relative
ease, it is the CCI’s observations on a jurisdictional matter that may have the
effect of rocking the boat on the interpretation of the expression “control”, a
term which never ceases to provoke debate and discussion.
found that the transaction is not likely to give rise to adverse effect on
competition in India. This conclusion was arrived at after considering the
nature and size of the market on all three counts listed above, and the
participation of the RIL group and TV18 group in those markets. While the
substance of the transaction and its effects on competition were resolved with relative
ease, it is the CCI’s observations on a jurisdictional matter that may have the
effect of rocking the boat on the interpretation of the expression “control”, a
term which never ceases to provoke debate and discussion.
Let us first absorb the position adopted by the CCI through
its own words:
its own words:
14. In terms of the Investment Agreement, holder of
each ZOCD has the option to convert the ZOCDs into equity shares of the target
companies with voting rights at any time during a period of ten years from the
date of subscription. Since the conversion option contained in each ZOCD
entitles the holder to receive equity shares of the target companies, the ZOCDs
are shares within the meaning of sub-clause (i) of clause (v) of Section 2 of
the Act and the subscription to ZOCDs amounts to acquisition of shares of the
target companies.
each ZOCD has the option to convert the ZOCDs into equity shares of the target
companies with voting rights at any time during a period of ten years from the
date of subscription. Since the conversion option contained in each ZOCD
entitles the holder to receive equity shares of the target companies, the ZOCDs
are shares within the meaning of sub-clause (i) of clause (v) of Section 2 of
the Act and the subscription to ZOCDs amounts to acquisition of shares of the
target companies.
15. In the event of conversion of all the ZOCDs, IMT
would hold more than 99.99 percent of the fully diluted equity share capital of
each of the target companies. Acquisition of such a right to convert the ZOCDs
into equity shares, at any time before the expiry of ten years from the date of
subscription, confers on IMT the ability to exercise decisive influence over
the management and affairs of each of the target companies and the same amounts
to control for the purposes of the Act. Therefore, in the facts and
circumstances of the instant case, the subscription to the ZOCDs amounts to acquisition
of control over the target companies for the purposes of the Act. Since
control over the target companies is being acquired by IMT, the subscription to
ZOCDs in-turn would also result in indirect acquisition of control over
Network18 and TV18 as these companies would be under the control of the target companies.
would hold more than 99.99 percent of the fully diluted equity share capital of
each of the target companies. Acquisition of such a right to convert the ZOCDs
into equity shares, at any time before the expiry of ten years from the date of
subscription, confers on IMT the ability to exercise decisive influence over
the management and affairs of each of the target companies and the same amounts
to control for the purposes of the Act. Therefore, in the facts and
circumstances of the instant case, the subscription to the ZOCDs amounts to acquisition
of control over the target companies for the purposes of the Act. Since
control over the target companies is being acquired by IMT, the subscription to
ZOCDs in-turn would also result in indirect acquisition of control over
Network18 and TV18 as these companies would be under the control of the target companies.
[emphasis added]
Two aspects become clear. First, the very fact that the holder of a convertible instrument
has the ability to convert the securities into equity shares itself amounts to
control on the ground that the holder has the “ability to exercise decisive
influence over the management and affairs” of the company. In other words, even
if the actual conversion is distant into the future, the mere possibility (or
to borrow the usage in the context of hostile takeovers under Delaware law, the
“omnipresent specter”) that the holder could convert into equity is sufficient
to constitute control. Second, such
control is acquired at the time of investment into the convertible instruments
at the outset, and not deferred until the time that the conversion actually
occurs. In other words, what matters is the mere possibility of control and not
the actual availability or exercise of control. This approach arguably pushes
the boundaries of what amounts to control, and may even result in unintended
consequences if adhered to scrupulously.
has the ability to convert the securities into equity shares itself amounts to
control on the ground that the holder has the “ability to exercise decisive
influence over the management and affairs” of the company. In other words, even
if the actual conversion is distant into the future, the mere possibility (or
to borrow the usage in the context of hostile takeovers under Delaware law, the
“omnipresent specter”) that the holder could convert into equity is sufficient
to constitute control. Second, such
control is acquired at the time of investment into the convertible instruments
at the outset, and not deferred until the time that the conversion actually
occurs. In other words, what matters is the mere possibility of control and not
the actual availability or exercise of control. This approach arguably pushes
the boundaries of what amounts to control, and may even result in unintended
consequences if adhered to scrupulously.
A number of issues arise:
1. Query whether it was necessary for the CCI to
have made these observations regarding control because it ultimately derived
jurisdiction through section 5(a) of the Competition Act which applies when
there is an acquisition of control, shares, voting rights or assets. In other
words, mere acquisition of shares may trigger the said provision, and “shares”
is defined under the Act (section 2(i)(v)) to include “any security which
entitles the holder to receive shares with voting rights”, thereby ensnaring
convertible securities such as ZOCDs.
have made these observations regarding control because it ultimately derived
jurisdiction through section 5(a) of the Competition Act which applies when
there is an acquisition of control, shares, voting rights or assets. In other
words, mere acquisition of shares may trigger the said provision, and “shares”
is defined under the Act (section 2(i)(v)) to include “any security which
entitles the holder to receive shares with voting rights”, thereby ensnaring
convertible securities such as ZOCDs.
2. This discussion also accentuates possible incongruities
in the concepts of acquisition of shares and control under the competition law (regulated
by CCI) on the one hand and takeover law (regulated by SEBI) on the other,
although a large-sized M&A transaction involving a takeover is likely to trigger
both sets of laws simultaneously.
in the concepts of acquisition of shares and control under the competition law (regulated
by CCI) on the one hand and takeover law (regulated by SEBI) on the other,
although a large-sized M&A transaction involving a takeover is likely to trigger
both sets of laws simultaneously.
First,
while the competition law seems to be triggered merely upon the acquisition of
shares (which includes convertible instruments), the mandatory open offer
obligations under the SEBI Takeover Regulations arise only when the acquisition
of shares entitles the acquirer to exercise voting rights beyond prescribed
thresholds (Reg. 3). In other words, the acquisition of voting rights is
crucial from the perspective of the Takeover Regulations, while it is not so
for competition law.
while the competition law seems to be triggered merely upon the acquisition of
shares (which includes convertible instruments), the mandatory open offer
obligations under the SEBI Takeover Regulations arise only when the acquisition
of shares entitles the acquirer to exercise voting rights beyond prescribed
thresholds (Reg. 3). In other words, the acquisition of voting rights is
crucial from the perspective of the Takeover Regulations, while it is not so
for competition law.
Second,
there is a distinct time difference regarding the operation of the triggers
under both the laws. While the Competition Act gets triggered upon acquisition
of convertible securities, the mandatory open offer obligations under the
Takeover Regulations get triggered only upon conversion. This is expressly
clarified in Reg. 13(2).
there is a distinct time difference regarding the operation of the triggers
under both the laws. While the Competition Act gets triggered upon acquisition
of convertible securities, the mandatory open offer obligations under the
Takeover Regulations get triggered only upon conversion. This is expressly
clarified in Reg. 13(2).
Third, the
definitions of “control” also vary between the Competition Act and the Takeover
Regulations, although the fluid nature of the concept may allow for some
judicial or regulatory harmonization of the concept across the two sets of
laws. It remains to be seen whether SEBI will take the cue from the extended application
of “control” set out in the present order of the CCI. However, it is important
to bear in mind that the concepts need to be applied in the context and recognizing
the purpose of each legislation rather than universally.
definitions of “control” also vary between the Competition Act and the Takeover
Regulations, although the fluid nature of the concept may allow for some
judicial or regulatory harmonization of the concept across the two sets of
laws. It remains to be seen whether SEBI will take the cue from the extended application
of “control” set out in the present order of the CCI. However, it is important
to bear in mind that the concepts need to be applied in the context and recognizing
the purpose of each legislation rather than universally.
Some of these issues will add to the complexity of structuring
significant takeover transactions that will likely trigger both the sets of
laws.
significant takeover transactions that will likely trigger both the sets of
laws.
3. Finally, simply by way of analogy, it is interesting
to note that the foreign investment policy of the Government of India and the
RBI does not even recognize optionally convertible instruments such as ZOCDs as
equity instruments in the first place. Optionally convertible instruments are
treated as debt and swept into the external commercial borrowings policy. It cannot
be any farther from exercising control over a company.