SEBI rules Etihad has no “effective control” over Jet Airways, exempted from making open offer; Janak Dwarkadas, Gagrats for Jet while Ravi Kadam, Amarchand for Etihad

The market regulator, Securities and Exchange Board of India (SEBI) yesterday ruled that Etihad wouldn’t get effective control of Jet Airways with respect to the 24% stake purchase in Jet Airways and exempted Etihad from making an open offer to public shareholders of Jet Airways, clearing the last hurdle on the deal.

SEBI ruled that Etihad does not have control over Jet Airways and Etihad is not ‘Person acting in Concert’ either.

In its 17-page order, SEBI said Jet and Etihad had made necessary changes to their commercial cooperation agreement (CCA) to ensure the deal didn’t result in change of control. “All of these voluntary changes (including deletion of Schedule I to the CCA, with regard to governance procedures) have been made to ensure there is absolute certainty ‘effective control’ of Jet is and continues to vest in Indian nationals and the board of Jet”.

SEBI had issued a show cause notice to Etihad in February 2014 for alleged violation of the Takeover Code, based on the Competition Commission of India (CCI)’s observation that Etihad is acquiring  “joint control” through the deal, although CCI had held that the deal was not anti-competitive in nature and the transaction had no appreciable adverse effect on the relevant market in India.

Under SEBI norms, an entity acquiring control in a listed company has to make an open offer to the target company’s shareholders.

The carriers submitted that control under the Competition Act and Takeover Regulations are entirely different with the CCI having a lower threshold for control than SEBI.

The SEBI, unlike CCI, considered independent directors in computing board strength and not just shareholder directors. The regulator observed that the entire board strength of Jet i.e. 12 (and not only 6 shareholder directors) needs to be considered in order to determine whether Etihad has the power to appoint the majority of the board.

“In this case, Etihad could only appoint 2 out of 12 directors, and this did not result in conferring control on Etihad”, held SEBI.

The definition of control under the FDI Policy is in pari materia with the definition of control under the Takeover Regulations, 2011.

SEBI in its order at para 16 said,

“… one regulatory agency may be guided by the findings of other regulatory agency on a particular issue only if the two laws are pari materia in their substance and are being applied on the same set of facts and circumstances.”

SEBI observed that it is very clear that the definition of ‘control’ under Section 5 of the Competition Act, 2002, is different from that in Regulation 2(1)(e) of the Takeover Regulations, 2011, in meaning, scope, and purpose.

SEBI further held that the CCI’s observation in its order dated November 12, 2013 that Etihad has joint control over Jet cannot ipso facto lead to the conclusion that Etihad has joint control over Jet within the meaning of the Takeover Regulations, 2011.

“The fact that existing promoters hold 51 per cent shares and voting rights in Jet strengthen the stand of SEBI as communicated to the ministry of finance vide letter dated September 25, 2013 that Etihad cannot be termed as a person acting in concert along with the existing promoters of Jet under Takeover Regulations, 2011,” the regulator said in its 17-page order.

In conclusion, the SEBI held that,

“It never was Etihad’s intention to acquire control in any manner over Jet. In fact, the Shareholders Agreement and the other Transaction Documents were amended accordingly and the concerned Regulatory Authorities were satisfied that “effective control” was vested in Indian nationals before approving the FDI in Jet by Etihad.”

Senior Advocate Janak Dwarkadas along with Gagrat & Co Senior Partner Rustom Gagrat acted for Jet while Senior Advocate Ravi Kadam along with Amarchand Mangaldas Mumbai Partners Vijayendra Pratap Singh and Nisha Kaur Uberoi represented Etihad.