Can Ajay Singh avoid open offer post SpiceJet takeover?

Ajay Singh, the potential new owner of SpiceJet has been very ambivalent about doing an open offer to company's shareholders after assuming control of the airline. That's because there is a window of exemption available that Singh maybe hopeful of using.

The general exemption available under takeover code includes certain schemes of arrangement, subject to conditions. SpiceJet has called its scheme as "scheme of reconstruction". Does this qualify as scheme that could avail the exemption?

Sandip Bhagat, Partner at S&R Associates, discuss on the issue.

Below is the transcript of Sandip Bhagat's interview with CNBC-TV18's Menaka Doshi and Senthil Chengalvarayan.

Menaka: This is a general exemption available under the takeover code which is available to certain schemes. SpiceJet has called its scheme a scheme of reconstruction. Would it qualify as a scheme that could avail of that kind of general exemption?

A: The way I have understood the takeover code exemption would be that it relates to a scheme of arrangements involving the target company but to me that, at least the way I have read it is a scheme which is a scheme under the companies act which would therefore you need to go to the court and before you go to the court Securities and exchange board of India (SEBI) today says the scheme needs to be approved by SEBI in a common process. That is the way I have understood the exemption to be.

Menaka: And that exemption would apply to a scheme of reconstruction?

A: It would apply to a scheme or reconstruction, correct.

Menaka: So this is what Ajay Singh can avail of if he doesn't want to have to spend money on an open offer so to speak. He can avail of doing this transaction through a scheme of reconstruction that could avail of such a general exemption under the takeover code?

A: Yes, correct he could technically, but again the process today for a scheme is that before you file a scheme with the court you have to actually go the stock exchanges, they review it and give comments, SEBI reviews it and gives comments and SEBI does, even at that point, have the ability to look at a scheme and say, wait a minute, I don't believe this scheme should go through because you are going around the open offer obligation. So, there is that initial block itself which somebody has to go through to get a scheme approved.

Menaka: The management hasn't been forthcoming with too much detail on how or what exemption they are looking at if they are looking at one, but it doesn't seem like they are looking at an open offer because every question about an open offer side stepped. If using or availing of this general exemption through the scheme method is going to be so difficult is there anything else available to them?

A: There are two things; one is in the exemption itself under the takeover code. There is a reference to a competent authority. So I am not too clear if the plan of action here is that they will not go even to the court but they will say that look, the exemption states that I can get approval from a competent authority. The authority here is the Ministry of Civil Aviation and therefore I don't need to do anything more once I get that approval.

Menaka: So, the scheme could be approved by the Ministry of Civil Aviation and once having received that approval it could be eligible for an exemption?

A: I don't know if that is what they are planning, I am not too clear.

Menaka: But if that was what they were planning hypothetically?

A: Again I am not too sure the Civil Aviation Ministry has the ability to look into; it is looking at what is happening with the aviation industry. This is a question of whether minority public shareholders need to get the benefit of an open offer or not. So, I am not too clear how an order of the Ministry of Civil Aviation would be an order from a competent authority to give you an exemption. There is an overall exemption which SEBI has which the regulator can exempt any transaction from an open offer but then the regulator has to then internally think about why I am exempting this offer. Yes, I understand this is a distressed airline but there will be other companies which will come to me and ask me for the same exemption, then I would have to treat everybody at par. So, there is the other exemption available to the regulator.

Menaka: Even under general exemptions, if they were declared a sick company who had filed under Sick Industrial Companies Act (SICA) they could avail of an exemption but I don't know if aviation comes under industrial undertaking and therefore file under SICA and therefore avail of this exemption at all.

A: So, overall if you look at it there are both time and cost issues relating to it. If you are going to go through a scheme through a court process you are looking at a three-six month process; if you are going through an open offer even that is another three month process. Meanwhile you are looking at a company which needs money today; it needs it in the next month. how are you bridging the two and is this one way of saying that, look, we aren't going to do an open offer because we believe we are covered, we are also not going to go to court because we believe that there is a reference to competent authority and therefore we believe we can wrap this up pretty quickly and conclude the transaction and go ahead and put them in line.

Menaka: Just on the basis of a nod from the Civil Aviation Ministry?

A: Yes, correct.

Senthil: But SEBI can come and ask them later?

A: SEBI can question if they do not do an open offer and I would assume that they have already had some level of discussions with all the regulators to get a sense of where they are before they take the decision not to do an open offer.

Menaka: If they went through the court route shareholders would get a chance to vote on this scheme?

A: They would.

Menaka: Shareholders and creditors?

A: Yes.

Menaka: If they go through a competent authority i.e. Ministry of Civil Aviation route shareholders have no say in this transaction?

A: Correct.

Menaka: I am not suggesting that shareholders would not want the Marans out and Ajay Singh in because they want this airline to get back on it's feet but I am just pointing out to shareholders the options available right now. What do think the way they seem to be structuring this?

A: Right now at least the public statements seem to be we are not going to do an open offer. It is subject to what the lawyers are advising them. If they are going to take advantage of the exemption in the takeover court the conservative reading would be it is a scheme of arrangement, you have to go through the court process. Before that you actually have to go to SEBI and the current SEBI regulations say that any scheme you need majority of the minority also to approve a scheme.

So, public shareholders have a big say in that, it is a timing issue also. You are not looking at getting this transaction done in the next month. You are looking at a timing later than that.

Menaka: You are almost making a case for how they are going about this and therefore not doing an open offer.

A: I am analysing it, I don't necessarily agree with the fact that the particular exemption under the takeover code means that one particular regulator can say this scheme, it is a scheme, it is fine with me and therefore I don't need to necessarily follow the open offer exemptions or not.

Menaka: So, if SEBI were to be faced by an approval from the ministry of civil aviation on the basis of which Ajay Singh and the Marans say, look, please give us an exemption from an open offer. What do you think SEBI's position could be? I am asking you to base this on the past precedent?

A: They will then go to SEBI and say, look you have general powers of exemption. Don't look at the specific exemptions relating to schemes etc. You have generally powers to exempt us. We are an airline, we are in distress, it is for the public good.

Menaka: How will SEBI react?

A: It is a difficult question to answer. Usually the regulator will say, I can't give one company an exemption without then having to look and say that tomorrow any other company in the same position should not be able to approach us with the same or slightly different facts, but should be able to avail of them exemptions. So, the regulator will be in a difficult spot.

Senthil: So, who is the competent authority then who can take that call?

A: The way the competent authority here has been phrased in the regulations related to the company law tribunal which was originally supposed to be in place or if there was a foreign regulator I am not so sure the competent authority which they have referred to is only the Ministry of Civil Aviation.

Menaka: It would be a novel situation if on the basis of a ministerial nod a scheme is able to avail of an open offer exemption.

A: Right, it would be.

Menaka: I don't think I have heard of it before. I am wondering if you have?

A: Yes, it would be because again the Ministry of Civil Aviation is saying, look I need to have this scheme approved for XYZ reasons relating to that industry. The ministry isn't looking and it does not looking at, okay well, minority public shareholders, what is going on with them. That is what the SEBI is there for.

Menaka: SEBI could take a view that this is good for the minority shareholders because otherwise you would have this airline collapse. You have a new investor coming in who is willing to put in fresh capital and revive the airline and get it back on it's feet. So just on those grounds if SEBI was to offer some latitude that in itself would also be an interesting precedent?

A: It would be but you are right. SEBI can overall say, look, that is fine but I will look at each on a case by case basis. I have the power as long as I am exercising it reasonably. They may refer the matter to an internal body of experts and say, look, what do we think this is a fit case and we have the power and why not use it. It is entirely possible but that is again then the regulator taking a view that tomorrow if somebody else comes up, third acquisition or a fourth acquisition comes up how am I going to say a yes or no or differentiate. That is again, you have given yourself the power under the regulation. Use it if you can.