Are SEBI & CCI Talking?

M&A transactions are perishable commodities. Delays could mean death in this business. With merger control coming into effect this June - how will deal making survive the timetables of both SEBI & CCI? Joining me, this week, on our continuing coverage on merger control - Sourav Mallik of Kotak Mahindra and Nischal Joshipura of Nishith Desai.

Below is a verbatim transcript of the interview. Also watch the video. Menaka: This is not to alarm people that M&A is going to come to a standstill, but more to be able to identify what some of the core areas of divergence are because SEBI and CCI atleast are in conversation and both regulators look like they want to resolve the issues before deals, infact start facing them. So I will quickly run through several scenarios, not all of them, but several of them and you tell me where you see the problems coming up and what the possible solutions are and the first one that struck me was that SEBI allows you to creep at 5% per annum between 15% and 55%. CCI says if you creep between 15% and 50%, you have to file with us, it's only a filing and therefore there is a no regulatory issues so to speak, but it's still going to be a practical problem, isn't it? Mallik: It's not an regulatory issue per se, but it's going to be a practical aspect that basically promoters or people in control will be required to disclose upfront that they want to increase their shareholding in their company and that may have an impact on the market price in itself and the ability to conclude (interrupted) Menaka: You have a related point on preferential allotments Nischal here? Joshipura: On the preferential allotment also there would be difference in the pricing because on one hand you are taking 30 days for the relevant date and going 6 months back on the other hand after special resolution within 15 days you have to issue the shares to the investor, which could be prolonged till the time the statutory approvals are obtained, which could stretch upto 210 days. So on one hand you are looking 7 months before the special resolution, on the other hand you are looking 7 months after the special resolution. Mallik: It's a practical issue that if you have a 6 month timeline and after which you receive the approval and once you receive the approval, the investor may just very well turnaround and say now the market price has moved so much that I just don't want to do ahead with this particular transaction. So that's the other aspect. Joshipura: Also it would be difficult for promoters to creep in case of a hostile situation because they can't wait for 210 days. Menaka: Promoters I am told are allowed to creep because within a group it's not a problem? (interrupted) Joshipura: Yes, but growth is only more than 51%. So if you are holding only 25% and you want to creep to 30% then in that case you are not a group and you don't get that exemption under schedule 1. Mallik: That's a very interesting point, particularly in the context of a hostile situation. If somebody who made a bid on your company and they have gone to CCI for approval and how do you do market purchases in that context and here is a promoter who is in there, who wants to defend himself, he can't do market purchases, he has to file with CCI to get approval as well. So that's a (interrupted) Menaka: So that's going to throw up one issue. How do you resolve that? What is the way to reduce this practical difficulty? Mallik: The real way to reduce this practical difficulty to my mind is if a person is already deemed to be in control that should not (interrupted) Menaka: So don't use a numerical threshold? Use a controlled threshold so to speak, which unfortunately we are lacking all through the guidelines. Let me move the next thing and this is do with open offer timelines, which is again one quite often discussed issue for the past several days. So what if you do not get a prima facie opinion or decision by the CCI within 30 days? Does that substantially alter your ability to do an open offer? Would it fall foul of SEBI prescribed timelines within which to do an open offer? Would it mean additional interest outgoes? What are the outcomes the one is looking at if you don't get that prima facie approval within 30 days? Mallik: Let's for a moment also assume - let's look at the scenario. They actually, they don't comeback and process get's delayed. What really is happening? Now SEBI is basically - the takeover code says that if there are nonreceipt of statutory approvals then your process can get extended to that extent. (Interrupted) Menaka: So SEBI is not going to comedown on you? Mallik: SEBI is not going to comedown. SEBI is going to look at one thing that are you diligently following up to receive that statutory approval and secondly they will come and say that okay even if you are diligently pursuing it you must pay interest to shareholders because of delayed receipt of payment. Now this payment of interest brings about 2 other additional aspects. The moment you pay interest to even resident shareholders, there is an aspect from a tax point of view that tax has to be deducted source(check) before any such payment is made and when you are making payments to nonresident shareholders you have to again additionally seek RBI approval to make that payment as interest. So these brings about additional complexities, again not an regulatory issue, but an administrative complexity into the entire process (interrupted) Menaka: But SEBI does allow you to defer the open offer or the completion of the open offer till you don't receive some form of a prima facie approval from CCI? Mallik: That's correct because even in today's scenario there are other statutory approvals like FIPB, which could get potentially delayed and open offer have got delayed in the past on that account. Menaka: How long can the interest clock tick for? Is there a SEBI prescribed outer limit saying you can actually delay this only by an X number of months and not beyond that because ultimately those shares are - the shareholder is deprived of being able to trade on their share, right if I understand it (interrupted by guest)? Mallik: Not only is that, probably we would have to go into a situation in where we say that the open offer is - doesn't even open, so the shareholders will probably will have to remain with their shares and not really tendered them in and keep them locked in for 6 months that's what we are going to probably do from a practical point of view. But the other impact there happens is that when there is a open offer pending, the market price kind of get's stuck in a range, it doesn't move, it doesn't really reflect any further true value. So in that context if that happens for a long period of time a shareholder can say that okay, I am really deprived, not only am I not getting an exit, I don't know if a final approval is going to come. Okay, I will get interest if a final approval comes, if it doesn't come then what am I do? What am I going to do? I can even trade freely in the market. Menaka: Can the lack of a prima facie decision, let's assume worst case scenario, CCI doesn't comeback within 30 days. We don't know when they are going to comeback on that transaction, can that be deemed as a statutory approval refused? And at that point then can you choose to withdraw the open offer? Joshipura: I don't think so, as I mentioned earlier that section - that deemed approval concept is not there for 30 days. Menaka: Right, absolutely. Joshipura: So if CCI does not comeback within 30 days that does not mean it's a deemed approval or it does not mean that it is a deemed rejection also. So you will have to wait till the time CCI comes back on that issue. It could take few more days (interrupted by anchor) Menaka: So now you are stuck, you are in this deal, you can't get out, you announced an open offer, but you cannot conclude it, nor can you withdraw it and you are paying interest and you have tax issues to face? Joshipura: There is one section 29 in the Competition Act, which states that if CCI if forms a prima facie view that there is an appreciable adverse effect on competition then it can start investigation. Menaka: That's where it goes into 210 days for, which is the second phase? Joshipura: Technically if within 30 days, they don't form a prima facie view then can the acquirer go into that section 29 and say that because you have not comeback within 30 days you have no right to investigate the combination for that. Menaka: That's the unclear part that deemed approval is available for 210, but not explicitly available for 30 days. Joshipura: But it