India: The Curious Case Of Spice Jet: Why Is SEBI Quiet?

On February 23, 2015, Ajay Singh ("AS") acquired a controlling stake of 58.46% in the ailing budget airline, Spice Jet, from Mr. Kalanithi Maran and Kal Airways ("Existing Promoters"). While the deal is a temporary savior for both the aviation industry in general and Spice Jet in particular, it has triggered an interesting debate on some intricate aspects of the Indian takeover code specifically general exemption from an open offer in the case of a scheme of reconstruction.

THE DEALS

On January 15, 2015, Spice Jet informed the Bombay Stock Exchange ("BSE") that the Spice Jet board had recorded the transfer of a controlling stake by the Existing Promoters to AS pursuant to a Scheme of Reconstruction and Revival for the takeover of ownership, management and control of Spice Jet ("Scheme") to be filed before the Competent Authority, the Ministry of Civil Aviation, Government of India ("MCA").

Thereafter on January 22, 2015, Spice Jet informed the BSE that Spice Jet had received the approval of the MCA for the Scheme. On January 29, 2015 AS executed a share purchase agreement with the Existing Promoters of Spice Jet for the acquisition of 58.46% stake in Spice Jet. However, interestingly public announcement of an open offer was not made by AS.

While the details of the Scheme have not been made public, it appears from the board resolutions made available in the public domain and the media reports that the Scheme is (a) to transfer the management, ownership and control from the Existing Promoters to AS, (b) recapitalize the company and (c) improve operational efficiency by reorganizing the routes in which the airline operates.

THE CONTROVERSY

Unless exempted under the takeover code or by the Indian securities regulator ("SEBI"), (i) an acquisition of 25% stake or more or (ii) the acquisition of control requires the acquirer to make a mandatory offer to the public shareholders for atleast another 26% stake of the target company. Therefore, prima facie AS's acquisition should have triggered the mandatory open offer under the takeover code. The takeover code envisages two broad categories of exemption, one which is expressly provided for under the takeover code and others where SEBI specifically exempts the acquirer(s) from making an open offer. In this case, it appears that AS has not approached SEBI for a specific exemption. On the contrary, AS has contended that the acquisition is pursuant to the Scheme approved by a competent authority (in this case the MCA) under law and therefore is expressly exempt under the Indian takeover code.

Regulation 10(1)(d)(ii) of the Indian takeover code exempts an acquisition pursuant to a scheme of arrangement involving the target company as a transferor or a transferee company or a reconstruction of the target company including amalgamation, merger, demerger pursuant to an order of the court or a competent authority under any Indian or foreign law (emphasis supplied) ("Exemption"). Therefore, to qualify for an exemption under this Exemption two tests must have to be met-(i) the acquisition of shares or control is pursuant to a scheme of reconstruction and (ii) it is approved by a court or a competent authority under any law.

The controversy in this case is (a) whether the Scheme qualifies as a scheme of reconstruction and (b) whether the MCA is a competent authority under law to approve the Scheme.

THE ANALYSIS

Is the Scheme a scheme of reconstruction?

It has been argued that the scheme of reconstruction that is exempt under the Exemption code is limited to schemes undertaken under s. 391-394 of the Companies Act, 1956 ("Cos Act") and since the Scheme in the case of Spice Jet is not a scheme undertaken under s. 391-394 of Cos Act it does not squarely fall within the Exemption. This argument may have some merit based on the following propositions-:

  1. General principle of exemptions-: The Indian takeover code envisages limited instances wherein a general exemption from an open offer is provided and such instances can be conceptually categorized to acquisition(s) (a) wherein no real change of control takes place (for e.g. inter-se transfer between promoters) (b) undertaken in the ordinary course of business (for e.g. acquisition by underwriters and stock brokers) or (c) which requires the prior approval of the shareholders and a special mechanism is provided under law for the same (for e.g. acquisition pursuant to SICA, CDR, delisting offer). Therefore, the scheme of arrangements or reconstruction also must necessarily fall under one of these buckets and since it does not fall under (a) or (b), it must conceptually fall under (c) in line with the spirit of the Indian takeover code and broader principles of governing general exemption from an open offer.
  2. Historical construction-: Similar exemption was available under the old takeover code ("1997 Takeover Code") and based on the discussions of 2002 Bhagwati Committee Report ("2002 Report") it is abundantly clear that the Exemption is limited to schemes of reconstruction undertaken under s. 391-394 of the Cos Act as such schemes are statutorily contemplated and require the approval of the shareholders and courts thus conferring adequate protection to the shareholders (this is perhaps the reason why originally preferential issue of shares was exempt under the 1997 Takeover Code).

While the argument seems attractive, legally sustain it may not be entirely straightforward. Firstly on a plain reading of the exemption there is nothing to suggest that the scheme of reconstruction contemplated under the Exemption is limited to schemes undertaken under s. 391-394 of the Cos Act. In fact the phrase "including" and "any law" in language of the Exemption envisages schemes of reconstruction which may not be in the form of mergers, amalgamations or demergers under s. 391-394 of the Cos Act. Secondly, the historical construction of the Exemption in (b) above can be controverted on the ground that neither 1997 Bhagwati Committee Report nor the 2002 Report expressly states that acquisition pursuant to scheme of arrangement or reconstruction for which an exemption from an open offer is granted is limited to schemes undertaken under s. 391-394 of the Cos Act. In fact it can be potentially argued that the 2010 Report of the Takeover Regulati on and Advisory Committ ee contemplates an exemption for any scheme of reconstruction which transforms the target company and does not allude to only schemes of reconstructions undertaken under s. 391-394 of the Cos Act.

Therefor AS and Spice Jet may very well argue that the Scheme involves a change in control of the company, recapitalization and operational changes and therefore may by itself qualify as a reconstruction and should be exempt under the Exemption so long as it is approved by a competent authority under any law.

Is MCA a competent authority under law?

In order to satisfy the Exemption it is not sufficient to demonstrate that the acquisition is made pursuant to a scheme of reconstruction of the target company, the acquirer will also have to demonstrate that such reconstruction is contemplated under some law or regulation and is approved by a competent authority. The exemption is not available in cases where the parties undertake a voluntary reconstruction of the target company and approach the regulatory authorities for necessary approvals. It may well be argued that no law or regulation expressly mandates or empowers MCA to initiate or approve the reconstruction of a scheduled air transport company such as Spice Jet and therefore MCA is not a competent authority for the purposes of the Exemption.

It is correct that the Aircrafts Act, 1934 ("AA") or the Aircraft Rules, 1937 ("AR") does not expressly contemplate a scheme of reconstruction or revival. However, on a closer analysis of the scheme of the AA and AR, the argument that MCA is a competent authority to approve a reconstruction for the purposes of the Exemption may have some force. Under the AA, the MCA has the power to monitor and regulate the operation of all air transport services and specifically regulate tariffs. Further, introduction of new routes or alteration in existing routes or change in ownership or control of a scheduled air transport passenger airline also requires an approval of the MCA (through Directorate General of Civil Aviation). The MCA has the power to temporarily suspend an airline carrier's licence/permit if the MCA is of the view that the airline does have the financial resources to undertake regular operations and this power has been recently e xercised in the case of Kingfisher Airlines. The suspension may be lifted if the airline carrier is able to submit a revival plan to the MCA.

On the basis of the above, AS and Spice Jet may well argue that Spice Jet was financially distressed and could have lost its license and therefore had to undertake the Scheme which was mandatorily required to be approved by the MCA and therefore such the Scheme is undertaken under a specific law (AA read with AR) and approved by a competent authority (MCA) for the purposes of the Exemption.

Is the Controversy Puerile?

It may well be argued that the entire discussion is puerile as none of the shareholders of Spice Jet seem to be agitated. However, such an argument may not be accurate as the takeover code does not contemplate a whitewash provision (shareholders agreeing to waive an open offer in certain circumstances) and therefore the duty is upon the SEBI to enforce the provisions of the takeover code in case there is a violation. In this case, tacitly SEBI seems to have taken the view that AS is exempt from making an open offer. However, given the controversy and possible a potential misuse of the Exemption given its wide ambit, some guideline/clarification from the regulator should certainly help.

This article was published on the CNBC - The Firm dated March 10, 2015. The same can be accessed from the link.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.