Sebi move takes the Bharti-MTN deal backwards: Mohit Saraf

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Sebi move takes the Bharti-MTN deal backwards: Mohit Saraf

Mohit Saraf of Luthra & Luthra said that sebi move takes the Bharti-MTN deal backwards. He further added that sebi retracking on informal guidance doesn’t reflect well.

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Excerpts from Your World at 10 on CNBC-TV18 Watch the full show » RELATED NEWS Bharti-MTN fallout: Good or bad for stock? ALSO READ See latest News about Bharti Airtel See previous management interviews See what other Experts & Brokerages are saying about Bharti Airtel Bharti Airtel BSE | NSE 29/05/12 Are Mutual Funds betting on Bharti Airtel?

The Securities Exchange and Board of India (SEBI) today decided to amend the takeover regulations, to provide that where Global Depository Receipts (GDR) and American Depository Receipt (ADR) holders are entitled to exercise voting rights on the shares underlined (GDRs/ADRs by virtue of clauses in the depository agreement or otherwise), open offer obligations shall be triggered upon crossing the threshold limits set out under Chapter III of the regulations. What impact will this have on Bharti - MTN deal?

Commenting on it Mohit Saraf, Senior Partner of Luthra & Luthra said that Sebi's move takes the Bharti-MTN deal backwards. He further added that Sebi retracking on informal guidance doesn't reflect well. "International investors will get wary of investment climate in India."

Here is a verbatim transcript of an excluisive interview with Mohit Saraf on CNBC-TV18. Also watch the accompanying video.

Q: What do you think prompted Sebi to make this announcement today because like Mr Shroff was saying these depository agreements have been changing for many years, so suddenly to come out a week after they appointed a review panel on the takeover code and to say we are changing the rule, why do you think they did that?

A: I don't think I can tell you why did they do that but I definitely feel that if you look at the informal guidance Bharti did go to Sebi and asked for informal guidance and it said that it would have a customary agreement which is normal in a situation like that where the depository holders exercise certain voting rights through depository bank and they made that clear disclosure and Sebi came back and said that is fine, it doesn't trigger an open offer. So after that I definitely feel its little bit of flip-flop attitude that we agree to a transaction, then we go back and change the law, I think it does not reflect very good to the international community about investment climate in India. And I would say that is definitely a concern and rest we all can speculate.

Q: A few months ago when Sebi did give Bharti informal guidance on a deal structure that was put out in the public and in that request that Bharti sent in; Bharti used the words customary agreements between depositories and GDR holders- I don't know what they mean in terms of customary, do they mean new age or old age and if they mean new age would the GDR/ADR holders or GDR holders in this case actually have specific rights, I am not sure what that word means but at that point in time Sebi had clearly  said that unless GDRs are converted into shares, it will not trigger an open offer as part of its informal guidance. Today they have changed the rule. Do you see this having any kind of substantial impact on the Bharti-MTN deal because this was probably the first deal of its kind that was going to use GDR as a big instrument in making this deal happen?
A: In past also you would see number of private equity investors who were existing investors in company have bought ADRs and GDRs and it is not something which is first time. But in an merger and acquisition (M&A) transaction if you look at the entire press release because that is all we have about this transaction. It talks about an ADR and GDR and the representation on the board came through the merger of the company which is still an exempted transaction. Then suddenly the economic interest got changed in newspaper reports etc which we don't have a clue that whether it really happened or it is conjecture. But to the extent contemplation of the party is to have a certain customary exercising voting right through the depository agreement. I feel this release; this recommendation of the board takes the deal backward. 

Q: Here is how I read it, in its original press release all Bharti had said was MTN would acquire approximately 25% post transaction economic interest in Bharti, it doesn't mention voting rights there- so if I was to take that into cognizance and assume that the customary agreements they were talking about did not give MTN voting rights because they refer to it only as economic interest, then this structure if it holds would be untouched by the rules that have changed today in any sense. If it is all that they are giving MTN is economic interest then Bharti has no cause to worry right?
A: I agree with you, but I don't know how the deal has evolved. If you look at press release it talks of economic interest then there was communication between Bharti and Sebi. Maybe when lawyers get on the negotiating table they expect that can we get a voting right also. Maybe that could be one thing which they were contemplating and maybe that was not part of the deal but parties thought if Sebi approves it, it is better to have it during the interim period before the merger happens. Maybe that is still not an essential part of the deal but it is one thing which probably parties contemplated. As Cyril said that earlier take over code did not contemplate triggering an open offer in case if ADR or GDR holders till the time they did not convert under the underlying voting rights.

Q; So the takeaway from this is that they now have no scope to contemplate giving away economic interest plus voting rights, they can give only economic interest otherwise they will trigger the takeover code and that in a sense Sebi has changed its point of view on this issue altogether by amending the law?
A: Absolutely, I would say yes. If you look at the communication between Sebi and Bharti and the press release it is has gone backward.