Earlier this week, the Competition Commission of India (CCI) passed an orderinvolving a transaction between the Reliance Industries group and the TV18 group of companies.
What otherwise appears to be a complex transaction can be described in a nutshell as follows. About 40% shares of Network18 and (indirectly) TV18, both of which are listed companies, are held by Mr. Raghav Bahl and his affiliates. It is proposed that the said 40% shares will be transferred to a group of private limited companies, which are collectively referred to as the “target companies”. In turn, Independent Media Trust (IMT), a trust established exclusively for the benefit of Reliance Industries Limited (RIL), would subscribe to Zero Coupon Optionally Convertible Debentures (ZOCDs) of the target companies.
The reason why the transaction had to be tested against the touchstone of the Competition Act is because both the RIL group and the TV18 group are said to be involved in similar businesses, viz:
- supply of television channels;
- event management services; and
- broadband Internet services through 4G technologies and the contents accessible through such services.
IMT’s application to the CCI was cleared, as it was found that the transaction is not likely to give rise to adverse effect on competition in India. This conclusion was arrived at after considering the nature and size of the market on all three counts listed above, and the participation of the RIL group and TV18 group in those markets. While the substance of the transaction and its effects on competition were resolved with relative ease, it is the CCI’s observations on a jurisdictional matter that may have the effect of rocking the boat on the interpretation of the expression “control”, a term which never ceases to provoke debate and discussion.
Let us first absorb the position adopted by the CCI through its own words:
14. In terms of the Investment Agreement, holder of each ZOCD has the option to convert the ZOCDs into equity shares of the target companies with voting rights at any time during a period of ten years from the date of subscription. Since the conversion option contained in each ZOCD entitles the holder to receive equity shares of the target companies, the ZOCDs are shares within the meaning of sub-clause (i) of clause (v) of Section 2 of the Act and the subscription to ZOCDs amounts to acquisition of shares of the target companies.
15. In the event of conversion of all the ZOCDs, IMT would hold more than 99.99 percent of the fully diluted equity share capital of each of the target companies. Acquisition of such a right to convert the ZOCDs into equity shares, at any time before the expiry of ten years from the date of subscription, confers on IMT the ability to exercise decisive influence over the management and affairs of each of the target companies and the same amounts to control for the purposes of the Act. Therefore, in the facts and circumstances of the instant case, the subscription to the ZOCDs amounts to acquisition of control over the target companies for the purposes of the Act. Since control over the target companies is being acquired by IMT, the subscription to ZOCDs in-turn would also result in indirect acquisition of control over Network18 and TV18 as these companies would be under the control of the target companies.
[emphasis added]
Two aspects become clear. First, the very fact that the holder of a convertible instrument has the ability to convert the securities into equity shares itself amounts to control on the ground that the holder has the “ability to exercise decisive influence over the management and affairs” of the company. In other words, even if the actual conversion is distant into the future, the mere possibility (or to borrow the usage in the context of hostile takeovers under Delaware law, the “omnipresent specter”) that the holder could convert into equity is sufficient to constitute control. Second, such control is acquired at the time of investment into the convertible instruments at the outset, and not deferred until the time that the conversion actually occurs. In other words, what matters is the mere possibility of control and not the actual availability or exercise of control. This approach arguably pushes the boundaries of what amounts to control, and may even result in unintended consequences if adhered to scrupulously.
A number of issues arise:
1. Query whether it was necessary for the CCI to have made these observations regarding control because it ultimately derived jurisdiction through section 5(a) of the Competition Act which applies when there is an acquisition of control, shares, voting rights or assets. In other words, mere acquisition of shares may trigger the said provision, and “shares” is defined under the Act (section 2(i)(v)) to include “any security which entitles the holder to receive shares with voting rights”, thereby ensnaring convertible securities such as ZOCDs.
2. This discussion also accentuates possible incongruities in the concepts of acquisition of shares and control under the competition law (regulated by CCI) on the one hand and takeover law (regulated by SEBI) on the other, although a large-sized M&A transaction involving a takeover is likely to trigger both sets of laws simultaneously.
First, while the competition law seems to be triggered merely upon the acquisition of shares (which includes convertible instruments), the mandatory open offer obligations under the SEBI Takeover Regulations arise only when the acquisition of shares entitles the acquirer to exercise voting rights beyond prescribed thresholds (Reg. 3). In other words, the acquisition of voting rights is crucial from the perspective of the Takeover Regulations, while it is not so for competition law.
Second, there is a distinct time difference regarding the operation of the triggers under both the laws. While the Competition Act gets triggered upon acquisition of convertible securities, the mandatory open offer obligations under the Takeover Regulations get triggered only upon conversion. This is expressly clarified in Reg. 13(2).
Third, the definitions of “control” also vary between the Competition Act and the Takeover Regulations, although the fluid nature of the concept may allow for some judicial or regulatory harmonization of the concept across the two sets of laws. It remains to be seen whether SEBI will take the cue from the extended application of “control” set out in the present order of the CCI. However, it is important to bear in mind that the concepts need to be applied in the context and recognizing the purpose of each legislation rather than universally.
Some of these issues will add to the complexity of structuring significant takeover transactions that will likely trigger both the sets of laws.
3. Finally, simply by way of analogy, it is interesting to note that the foreign investment policy of the Government of India and the RBI does not even recognize optionally convertible instruments such as ZOCDs as equity instruments in the first place. Optionally convertible instruments are treated as debt and swept into the external commercial borrowings policy. It cannot be any farther from exercising control over a company.