[Basil and Prithvi are students at National Law University, Jodhpur.]
The recent takeover of New Delhi Television (NDTV) by Adani’s group has become a commercial hot potato. In order to acquire an additional 26% stake in NDTV, Adani’s group launched an open offer which was available from 22 November – 5 December 2022. An open offer is an invitation by the acquirer to the target company’s shareholders to tender their shares for a specific price. This acquisition has been termed as a 'hostile takeover' as 29.18% shares of NDTV had been first acquired by the Adani group without “discussion, consent or notice”.
Hostile takeover means acquisition of a company by another corporate group against the wishes of the former. Example: There are two companies A and B. B submits a bid to acquire majority stake in A, however, the Board of Directors of A rejects the offer claiming that it would not be in the best interest of their shareholders. So, now, B could force this deal through a proxy vote, a tender offer, or by buying necessary stocks of company A in the open market. In the present case, Adani’s group has done so by acquiring necessary stocks in NDTV.
However, NDTV could probably have used the method of buyback of shares in order to counter this hostile takeover. Section 68 of the Companies Act 2013 prescribes buyback of shares as a tool of protection in corporate governance to prevent hostile takeovers.
Legal Justification for Buyback
The commercial viability of buyback may differ according to changing market circumstances. The process may be anew to Indian corporates, but the rationale behind buyback in the context of a takeover is that the company keeps the shares which it buys back, so that fewer shares are available for purchase in the market, which in turn results into each investor’s share of ownership going up. Thus, an acquirer is prevented from taking over the company. The present article discusses the viability of buyback in the NDTV takeover vis-à-vis Section 68 of the Companies Act 2013 and the SEBI (Buy-Back of Securities) Regulations 2018 which currently regulate the procedure of buybacks in India.
Section 68 and SEBI Regulations 2018: A Proportional Barrier or Burden?
The relevant regulations for buyback were enacted by SEBI under powers conferred under SEBI Act 1992, thereby amending the earlier regulations of buyback. The new regulations have defined the term ‘buyback period’ to bring more clarity in the provisions of Section 68 and ensure better compliance. Secondly, the regulations have been made more in line with the main provision under the Companies Act i.e., Section 68, to avoid any conflict between the two.
The regulations have made the buyback process more inclusive by allowing for unregistered shareholders to take part in the process. They rightly allow converting the cash proportion of escrow account to an interest-bearing one, given that the merchant banker guarantees that the funds are available when shareholders are paid. This would keep the money flowing with interest bearing, thereby encouraging shareholders to sell their shares to the company. However, effecting the reduction of share-capital of company has been mandated as a precursor to buyback of shares.
The new regulations have effectively balanced public interest by not giving the company too much space to use buyback to misrepresent financials and share values of the company. Simultaneously, they have allowed changes to encourage shareholders to sell back their shares to make the process easier.
Giving effect to a buyback which is generally used to lift low share prices does require some free hand to entities to incentivise their shareholders to return their stake to the company. However, any more discretion than that given under Section 68 and the relevant SEBI regulations could allow for misuse of the practice becoming a major concern of public interest in case of listed companies. Therefore, the provisions under Section 68 and the regulations provide a proportional safeguard to keep the practice of buyback in check.
Analysis of Legal Process of Buyback through the NDTV Case Study
The process of buyback given under Section 68 and the SEBI Regulations provides for different requirements at each stage of buyback for it to be given legal effect. The process has been discussed below by analysing whether NDTV could have gone for buyback of its shares as a defence against the takeover bid by Adani group.
NDTV Takeover
NDTV was taken by surprise when the Adani group took control of Vishvapradhan Commercial Private Limited (VCPL) which had convertible warrants amounting to 29.18% equity capital in NDTV by way of a loan extended to NDTV by VCPL back in 2009 through Radhika Roy Prannoy Roy Holding Private Limited. The Adani group by acquiring VCPL converted all the warrants to shares, thereby acquiring more than 25% control in the company. This obligated the Adani group to make an offer of 26% shares of NDTV in the open market as per the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.
Possibility of Buyback: Counter to Adani’s Offer
NDTV could have made buyback of shares through three processes – tender process, open market and odd lot process. As the process of odd lot shares buyback is not backed with past practice by any major entity, it could be precarious to make the repurchase from an odd lot of shares which could mean more problems for the media giant.
The other process i.e. buyback through open market would allow for only making 15% offer of the equity capital as SEBI regulation provides for only offering 15% of paid-up share capital as buyback in open market. NDTV’s paid up share capital as of 2022 is 25.8 crores out of 173.3 crores [approx.] which equates to its 100% shareholding. Hence, NDTV could only make an offer up to 3.87 crores [15% of paid-up capital] which would be substantially less than Adani group’s open offer of 26% shares. Thus, the only option left with NDTV was to go for buyback through tender process where they could buy shares from existing shareholders on a proportional basis through tender offer.
As Adani group already has 29% equity retrieved from promoter shareholding of NDTV through conversion of warrants into shares, the media group would have needed to buy back at least 20% shares through tender process to gain back majority stake in the company. For giving legal effect to this process, the entity would have had to work through the procedure under Section 68 of the Companies Act along with the SEBI (Buy-Back of Securities) Regulations 2018.
Requirements of Buyback
The process of tender buyback of shares would have firstly needed an authorisation under the Articles of Association (AoA) of NDTV, and if the AoA does not provide such prior authorisation, the same would have had to be added through alteration of the AoA under Section 14 of the Companies Act 2013. Subsequently, a board resolution would have had to be approved for the tender buyback. As the company would have had to make a substantial offer as a counter to Adani’s open offer, the same would have required a special shareholder resolution under Section 68(2)(b) of the Companies Act 2013, requiring more than 75% votes by shareholders.
The requirement of special resolution would have created an inevitable stop for the NDTV buyback as the Adani group is already in control of 29% equity which makes it able to halt any special resolution passed to such effect. Even assuming that NDTV would have been able to pass a resolution to that effect, it would have had to comply with other ancillary requirements under Section 68 including but not limited to material disclosure and necessity of buyback at tabling resolution, intimating SEBI, the Central Government and the Registrar of Companies before and after the buyback.
Conclusion
The essential requirements and difficulty in passing the resolution due to major pie of equity being with the Adani group would have made it materially impossible for NDTV to make a successful buyback offer before several months’ time-period. It was a given fact that the Adani group’s open offer only stood from 22 November to 5 December 2022. Hence, any possible offer of buyback would not have been possible to be made as counteroffer against the group in such limited time period.
The above analysis of NDTV making a possible counter bid of buyback demonstrates that even if the practice of buyback is financially viable and suitable for a company in a given situation, the stringent regulations in place can become a bee sting for entities wanting to complete the buyback process expeditiously. The regulations behind the buyback process safeguard public interest and the interest of shareholders. However, when entities in good faith want to expedite the process, there should be some space for companies to do the same subject to approval of the SEBI and the Central Government.