SpiceJet’s distress might help case for open offer exemption

Fund infusion into budget airline SpiceJet reportedly also includes an application to the Securities and Exchange Board of India (Sebi) for exemption from an open offer. This is made when an acquirer buys more than a certain percentage stake in a company. The rule is designed to help minority shareholders exit companies in the case of such an acquisition.

With SpiceJet, the requirement for one would make it more expensive for an investor willing to provide funds in exchange for a stake in the company.

Investors are, therefore, seeking an exemption, according to reports.

The regulator can consider a distress situation favourably when evaluating an application for an exemption, according to experts.

“In situations of distress and if the condition of the company is indeed grave, then such factors could be considered if an application for exemption is made. This would apply if the attempt is fundamentally to rescue the company, and that an open offer would otherwise result in a much greater amount of cash being required to carry out such a rescue act,” said Raja Lahiri, partner, Grant Thornton.

“From the point of view of minority shareholders, one has to weigh their interest in any potential open offer against the emerging backdrop that their stake would otherwise be completely wiped out if the airline itself ceases to exist. An exemption would not be out of place here,” said S N Ananthasubra-manian, former president, ICSI, and a practising company secretary who also advises on governance matters.

An open offer would mean that the acquirer would have to offer to pick up an additional 26 per cent from other shareholders.

It has been reported that Ajay Singh and JP Morgan are likely to invest about Rs 600 crore, later bringing in other investors for further growth capital.

However, some say that the regulator would be careful about setting a precedent in such cases.

“Sebi can grant an exemption to the acquirer from making an open offer, post recording the reasons in writing and whilst prescribing any conditions it deems fit. However, from a practical perspective, the proposed acquirer will have to showcase exceptional circumstances warranting such an exemption,” said Tejesh Chitlangi, partner, IC Legal.

He added in the case of SpiceJet, if the acquirer is able to showcase that he is not in a condition to buy the additional shares if an open offer were to be made and hence will not infuse money unless an exemption is granted, then Sebi might in the interest of investors evaluate whether the infusion of money is critical to the survival of the listed company.

“If Sebi arrives at such a conclusion, then probably may grant an exemption. Regulators are ultra careful in creating precedents like these. So, it will be interesting to see the approach adopted by Sebi if such a request is made,” said Chitlangi.

Exceptions to the rule

Previous instances of exemptions from open offers

JET AIRWAYS (May 2014)

• Sebi required substantial changes in the original agreement before deciding that Etihad’s acquisition of 24 per cent stake did not trigger an open offer
• It was earlier debated if Etihad’s acquisition amounted to gaining joint control of the airline

IFCI (Sep 2012)

• The government converted debentures worth Rs 923 crore. Its stake went up from  0.0000011% to 55.57%, resulting in it acquiring control of IF

IDBI BANK (Mar 2012)

• The government converted Tier-I bonds. Its stake went up from 65.13% to 70.73%.
• This breached the creeping acquisition limit of 5%

HINDUSTAN COPPER (Oct 2004)

• The government picked up shares worth Rs 365 crore
• No open offer was required

This article appeared in The Business Standard on 15th January, 2015.