Time to rethink takeover regulations

As this column goes to print, millions of column-centimetres of newsprint would have been inked with analysis of the lenders trying to save Jet Airways. Some would argue that a business that is insolvent should simply be allowed to fail, regardless of the immediate impact on the system. Others would argue that the state must bail out infrastructure companies. Yet others would argue that regulators have been arbitrary and have discriminated for and against airlines for reasons best known to them.

Cutting through the noise and the clutter, one facet of regulatory policy stands out when it comes to the aviation industry. The industry stands between a rock and a hard place when it comes to dealing with regulatory policy. Under exchange control laws governing foreign investment in aviation, no foreign airline is permitted to hold more than 49 per cent in an Indian airline. Under securities laws (takeover regulations), any acquisition of 25 per cent or more in any listed company requires the acquirer to make an open offer to buy at least another 26 per cent from other shareholders.

In other words, one law would require a foreign airline to stay below 50 per cent equity ownership while another law would force a foreign airline to potentially go above 50 per cent. An inherent contradiction in vision of regulations — talk about the “ease of doing business in India”.  

Airline after airline has tripped between these hurdles. No foreign airline could effectively take a close look at Kingfisher to take it over and run it, thanks to this situation. Acquirers in SpiceJet side-stepped the very obligation to make an open offer right under the nose of the capital market regulator. Relying on a provision that exempts open offer obligations on acquisitions pursuant to a scheme of arrangement approved by a competent authority (then, high courts; now, the National Company Law Tribunal), a revival plan for SpiceJet approved by the aviation ministry was held out to be a “scheme of reconstruction” approved by a “competent authority”. The audaciously creative interpretation did not meet with even a whisper of interest, much less objection, from the Securities and Exchange Board of India, the capital market regulator, despite extensive media coverage.  

Now, it is the turn of Jet Airways — Etihad, already owning 24 per cent appears to have been tripped by this dichotomy while the lenders who have pumped in money (they had accommodated with Kingfisher too) will do their best to sell this asset to someone who can run the company well. They will be hamstrung by the very same piquant (some may say, pungent) regulatory dichotomy — different regulatory requirements pulling the deal in different directions.

While exchange controls seek to protect ownership of vital Indian assets in Indian hands — not just majority ownership, but substantial management too must vest in Indian hands — securities laws seek to protect shareholder interests by providing an exit opportunity to shareholders when there is a substantial change in ownership of a listed company.  Being unable to meet either would render the transaction illegal. Therefore, when it comes to a listed aviation company, it has the worst of both worlds.  

A simple way to reform this situation is by providing a regulatory framework to help shareholders choose whether they indeed want to avail of the right given to them under the securities laws, or if they would waive such a right. Called a “whitewash” provision in other jurisdictions, essentially, this would entail a proposed transaction to be put to the shareholders asking them to vote on whether they want an open offer to be made to buy their shares. If a high percentage of shareholders (say, 90 per cent) were to confirm that they do not want an open offer and would rather have their company bailed out, the obligation to make an open offer would stand waived.  

In other words, shareholders, whose interests are protected by the open offer obligation, suffer by holding on to dud shares of a company that no one can bail out. The whitewash regime enables an option to bail out companies with the owner of the right to an open offer (shareholders) choosing to waive their right for their own choice of a bigger and better deal that would potentially preserve the value of their investment.  

The Takeover Regulations Advisory Committee (Disclosure: the author was a member) did recommend such a regime, but it has been mothballed for nearly a decade now. It is time to dust off.

The author is an advocate and independent counsel. Tweets @SomasekharS

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