NDTV case: SEBI likely to challenge SAT order in SC

Market regulator SEBI is likely to challenge in the Supreme Court (SC), the recent judgment by the Securities and Appellate Tribunal (SAT) involving the loan agreement between NDTV promoters — Pranoy and Radhika Roy — and lender Vishva Pradhan Commercial (VPCL), a company belonging to Mukesh Ambani associate Mahendra Nahata.

Last week, SAT called SEBI’s conclusion that VCPL was controlling NDTV as imaginary and said the clauses in the agreement were merely to protect the lender.   SEBI officials are concerned that the verdict could set a precedent and promoters of listed companies may secure loan by issuing unlimited convertible instruments at pre-negotiated price, including non-compete clause and yet not trigger the Takeover Code. Moreover, SAT did not consider written submissions by SEBI on various aspects of the case, merely on technical grounds that they were not vetted by the arguing counsel. SEBI is a quasi judicial authority and its written submission has to be considered by the courts in the course of natural justice. The SC can take a strong view of SAT’s attitude of throwing out written submissions of a regulator on frivolous techanilities, sources close to SEBI said. Also, SEBI says that if the SAT order is left unchallenged, it would lead to other media company promoters borrowing money from private lenders in lieu of unlimited convertible option at twice the market price with the right to appoint a director and still not trigger takeover code, which is what the regulatory officials said happened in the case of NDTV promoters. To repay a loan to ICICI Bank, the Roys borrowed ₹403 crore interest-free from VPCL for 10 years that ended in 2019. Investigations found the Roys did not return the money to VPCL. SEBI officials say the loan had unusual clauses like non-compete, right of first refusal to VPCL and interest free compulsorily convertible instruments, etc, all of which purely concern potential takeover of a company at a pre-negotiated price.  SEBI’s takeover code is a special law that protects the rights of minority shareholders in listed companies. SEBI officials say it is very rare for loan agreements to have non-compete clauses and not demand the money on expiry of agreement. Before the loan, VCPL owned less than 10 percent of NDTV shares but a precondition to the loan was that VCPL would own 26 percent later. A trigger of takeover code requires an open offer to minority shareholders of a listed company and no return of money or exercise of the option was enough to perceive substance over form, officials say. The Roy’s transferred 18 percent of their holding in NDTV to RRPR Holding at a nominal value (Rs 4) and thus this transaction itself would trigger the takeover code as it not a simple inter-se transfer but done as a condition to the loan agreement and the compulsorily convertible instrument (26%), SEBI officials said. SEBI is also likely to use investigations by the Income Tax Department (IT) in the case since there is a fundamental difference in submissions of parties, the sources said. Sources say that the IT found that VCPL had “no business activity” and it gave a “zero coupon optionally convertible loan (interest free)” to RRPR (a company of Roy’s) as confirmed by VCPL to DG Investigations.

VCPL had no funds of its own and it took money from Shinano Retail P Ltd (a RIL Group company). Shinano, in turn, took funds from Reliance Ports and Terminals and Reliance Ventures. Shinano, with a turnover of mere ₹15 crore had raised ₹1,569 crore as preference capital and ₹1,522 crore as unsecured loans from various entities to give “zero coupon convertible loan” to VCPL of ₹403.85 crore for investment in RRPR. VCPL was specifically questioned by DG Investigation as no security for loan taken or interest was being charged to RRPR for ₹403.85 crore and why such an amount was given against “not in conformity of business practices”. In its reply, VCPL stated that it has “not taken any security since the loan agreement gave it an option to convert such number of equity shares at par aggregating to 99.99 percent of fully diluted equity of RRPR at any time.