[Aditi and Saloni are students at Damodaram Sanjivayya National Law University, Visakhapatnam.]
The Adani-NDTV takeover has re-kindled the debate regarding hostile takeovers in India. As the takeover continues to be discussed based on its validity and procedure, questions regarding its effect on the market alarm the economic regulators. The article engages with its implications on the competition between existing media players. The legal aspects of "back-door" takeovers in the Indian market are analyzed alongside the Competition Act 2002 and its interplay with a hostile takeover. The authors analyze how the Competition Commission of India (CCI) can prevent hostile takeovers and present a suggestive framework to prevent market monopoly.
Decoding the Adani-NDTV Takeover
The Adani-NDTV takeover was Adani's "back-door" entry into the NDTV management. Adani's failure to take the directors' consent before acquiring a majority stake in the company has made it a hostile takeover for the Indian market. The other side of the coin can be viewed through a contractual lens. The takeover by the Adani Group through AMG Media Networks Limited (AMNL) is merely implementing the penalty and failure to fulfil the contractual obligations.
The loan agreement between Vishvapradhan Commercial Private Limited (VCPL) and RRPR Holding Private Limited (RRPR) was duly signed by both promoters. The promoters voluntarily entered into a contract whose breach would cause a loss to the company. The unusual design of the loan arrangement and the fact that if exercised, the warrant or call option would impact the company's operations was the beginning of the rocky road of the Adani-NDTV takeover. As signed by the promoters, the loan agreement was in the guise of a "stake sale agreement". By giving their consent to the unfavorable yet legal provisions of the loan agreement, the promoters agreed to a conditional share purchase agreement. They were accepting a loan worth INR 403 crores against INR 10 crore warrants of RRRR to VCPL. This, along with the right to purchase, resulted in an indirect sale of the equity shares, thus making a condition precedent for implementing the sale purchase clause.
The NDTV-Adani takeover was not only a power struggle among the companies but also caught the attention of the securities board. The failure to disclose the ramifications of the loan agreement, and the transfer of shares without requisite public announcement, incurred a liability and penalty upon the conglomerate. VCPL, acquiring a 26% stake in RRPR without appropriate disclosure, brought the transaction under SEBI's radar. The order dated 26 June 2018 directed VCPL to pay a 10% interest from the date of incurring liability to issue a public notice to the date of payment of consideration, to those who were holding shares in the target company.
At this juncture, the acquisition of NDTV with Adani has a majority stake of more than 55%. The indirect acquisition of 29%, along with the "open-offer" tactic, has led to NDTV being majorly controlled by Adani through its subsidiary AMNL.
The NDTV-Adani takeover has got the much-needed nod from the SEBI. The regulators have given a green flag, suggesting the deal is not problematic for the Indian market. Back-door entries as seen in the Adani-NDTV deal raise questions about competition in the market. The substantial control of a company, without preemptive measures, makes the market susceptible to monopoly. Thus, such takeovers need to be adequately monitored and regulated.
Hostile Takeover and the Competition Act 2002 Interplay
According to the Competition Act 2002, any potential merger or acquisition that falls within the criteria under Section 5 must be compulsorily notified to the CCI. Section 6 prohibits any person from engaging in a combination that is likely to have an adverse effect on competition in the relevant market in India, and such a combination shall be void. If the CCI determines that the acquisition will hinder competition, it can order the acquiring company to sell off some of its assets or terminate the acquisition. The CCI has the authority to impose penalties on businesses that violate competition laws. The regulations related to hostile takeover can be found in the CCI (Procedure in regard to the Transaction of Business relating to Combinations) Regulations 2011. Regulation 9 of these regulations states that it is the responsibility of the acquirer to notify of an acquisition or a hostile takeover. Regulation 5(8) alters the 'other document' requirement under Section 6(2)(b) of the Competition Act 2002 for a hostile acquirer to notify the CCI of its intent to acquire an enterprise without the assent. In addition, Regulation 9(2) implicitly acknowledges that an acquirer may not be able to obtain all of the information required by the CCI to render a decision under Section 6 and therefore permits the acquirer to provide the available information.
As an example of a hostile takeover, consider the hostile takeover of Quidsi, in which Amazon monitored baby products sold on its platform and forcibly acquired diapers.com pursuant to an unpleasant price war. This was achieved by undercutting Quidsi's prices and compelling Quidsi to sell its business to Amazon. Small competitors will be compelled to transfer their businesses to Amazon or risk being driven out of the market. This hinders innovation and eliminates any incentive to invest further in R&D, considering these tech titans' threat of hostile takeovers.
The acquirer submitted an application for CCI approval on 19 March 2019, in Combination Registration Number C-2019/03/652 for the L&T-Mindtree takeover, identifying the following markets as relevant, namely, (a) the broad relevant market for the provision of information technology (IT) and information technology enabled services (ITES) in India; or (b) the narrow relevant markets for the provision of the following services in India: (i) IT consulting; (ii) hardware support services; (iii) IT implementation services; (iv) customer software support services; (v) IT outsourcing services; and (vi) IT engineering services.
The CCI decided to leave the precise delineation of the relevant market open because it has determined that the proposed combination is unlikely to have a significant adverse effect on competition in any of the potential alternative relevant markets. CCI further observed that the combined market share of L&T and Mindtree in India's IT and ITES sectors is negligible and between 0% and 5%. It was noted that there are other significant market participants, such as Tata Consultancy Services, Wipro, Infosys, HCL, Tech Mahindra, and others. In light of the foregoing, the CCI approved the proposed transaction and determined that it was unlikely to impact competition in India significantly. The CCI approval was received as of 4 April 2019.
Although this sanction was granted relatively quickly, it prompted competition policymakers, specifically the Competition Law Review Committee (CLRC), to investigate possible competition law obstacles in hostile takeovers in India.
In its report published in July 2019, shortly after the CCI's order in the L&T-Mindtree case, the CLRC determined that “…mandating a standstill on acquiring of shares pending the approval of the combination may hamper the viability of acquisitions via public bids”. Currently, the Competition Act 2002 prohibits parties from acquiring any interests in a proposed combination pending CCI approval. To facilitate such transactions and promote business convenience in India, the CLRC suggested that the standstill obligations be weakened during hostile takeovers.
Hostile takeovers in India are majorly governed by SEBI and under the Companies Act 2013, and the considerations emanating from the Competition Act 2002 need to be addressed. Market regulation must also be followed when the target company is taken over without consent.
Companies often prevent hostile takeovers through various defence tactics. For example, the bid offered by the Adani Group could be countered through the buyback of shares. Section 68 of the Companies Act 2013 legalizes the buyback of shares. Similarly, the tender offer process is another defence scheme adopted by companies. It is similar to the buyback of shares, only at a price the shareholders can tender. In the case of NDTV-Adani, the open offer might have failed. Still, the tender offer process could have worked with the collaboration of all the shareholders allowing proportional buyback of the respective shares.
Preventing hostile takeovers through open offers looks good in theory. However, the authorization for the same becomes tedious through the articles of association or a special resolution backed by 75% of the shareholders. Thus, in companies where more than 50% stake has been acquired, it becomes practically impossible for the target companies to regain their control. Further, the ancillary disclosure and compliance requirements envisioned in the Companies Act 2013 and the SEBI regulations make the passage of buyback of shares a far-fetched reality for companies in India.
SEBI must make compliance and penalty provisions more stringent to prevent takeovers of this nature. To prevent hostile takeovers, businesses and investors must be open with all parties involved, including shareholders, customers, and workers.