Pranoy Roy, Chairman, NDTV speaks during a session at the India Economic Summit in New Delhi. (Photographer: Sanjit Das/Bloomberg News)

Who Gains From SEBI’s Order For An NDTV Open Offer?

They say good things come to those who wait. Investors who have held onto NDTV shares since July 21, 2009 will benefit the most from a SEBI-mandated open offer that’s running nine years late.

Last week, a Securities and Exchange Board of India order directed Vishvapradhan Commercial Private Ltd., a then associate company of Reliance Strategic Investment Ltd, a wholly owned subsidiary of Reliance Industries Ltd., to make an open offer to public shareholders who held shares in New Delhi Television Ltd. in July 2009.

The SEBI order pertains to a loan transaction between VCPL and NDTV's promoters – Prannoy and Radhika Roy. The Roys needed money to discharge an earlier loan. And VCPL loaned them Rs 350 crore on July 21, 2009 via convertible instruments with covenants, according to information in the SEBI order.

The unsecured 10-year loan was given to the Roys’ investment company – RRPR Holding Pvt. Ltd. The investment arm issued convertible warrants to VCPL, which on conversion at par would amount to 99.99 percent of the fully diluted equity share capital of RRPR. The investment arm held 26 percent equity in the listed broadcaster.

As per the loan agreement, VCPL had the option to convert these warrants from time to time (in tranches) into equity shares of RRPR at par. If and when the conversion of warrants were fully exercised, VCPL would own RRPR and in turn also own a 26 percent stake in NDTV. Thus, the SEBI order said, VCPL indirectly controlled NDTV via the loan agreement and accompanying call option agreements entered into on July 21, 2009.

As per SEBI’s takeover regulations any change in control requires the acquirer to make a tender offer to public shareholders of the target company. And so, last week the market regulator ordered VCPL to make an open offer to those NDTV public shareholders who held shares in the company on July 21, 2009. The offer, of up to 20 percent of outstanding shares as on July 21, 2009, must be made within 45 days of the order, SEBI said.

As for open offer pricing – in determining the conversion value of the warrants VCPL valued RRPR’s 26 percent stake in NDTV at Rs 350 crore. That worked out to a 51 percent premium over the then market price of Rs 214.65 per share. SEBI also ordered the payment of 10 percent interest per year since 2009, amounting to Rs 193 per share. That takes the total open offer price close to Rs 407 apiece.

Had it been launched then (in 2009) the open offer would have provided a handsome exit for some shareholders. Since then NDTV’s stock price has only declined. Last traded price on Tuesday was Rs 51.

Who Gains From SEBI’s Order For An NDTV Open Offer?

To be clear, the Roys have contested SEBI’s interpretation that control changed hands on account of the loan agreement.

“There has been no change in control as Dr. Prannoy Roy and Mrs. Radhika Roy individually and through their company, that is, RRPR Holding Pvt Ltd. continue to own and hold 61.45 percent of the total paid up share capital of , and control NDTV,” the company said in a statement to the stock exchanges.

So Who Gets To Participate In The Open Offer?

Assuming that the open offer proceeds - the shares of the original shareholders will be accepted first, in case of a proportionate allotment, SEBI had ruled in May 2014 in a similar case – Arun Goenka and others.

In that case, SEBI clarified original shareholders as those persons who were shareholders of the target company as on the triggering date, and continue to be shareholders of the target company till the date of tendering their shares in the offer.

New shareholders, those who bought after the trigger date (July 21) and continue to hold the shares, will also be eligible to participate in the open offer but second to original shareholders.

New shareholders will not receive any interest payment.

How Will Interest Be Paid Out?

Original shareholders, or those who held NDTV shares on July 21, 2009 and continue to do so, will get Rs 407 per share accepted including over Rs 190 per share in interest.

Those who acquired NDTV shares after the trigger date and still own them will be eligible to participate in the offer at Rs 214.65 per share. As laid down by the Supreme Court in the Clariant International Ltd. case in 2004, they will not be eligible to receive interest payment.

Unallocated interest will be transferred to SEBI's Investor Protection and Education Fund.

Who Gains From SEBI’s Order For An NDTV Open Offer?

The prospects of tendering shares at at least Rs 214.65 apiece has boosted the NDTV stock price – it’s risen over 30.9 percent since the SEBI order on June 26.

Who Will Pay For The NDTV Open Offer?

Since the change in control in 2009 occurred in favour of VCPL, it would have to do an open offer then and, by extension, the burden of doing one now is also theirs, according to takeover regulations. VCPL will have to foot the open offer plus interest bill of Rs 511 crore.

But, the ownership of VCPL itself changed hands in financial year 2012. The former Reliance Industries associate is now owned by the Nextwave Televentures Pvt. Ltd. (formerly known as Infotel Televentures Pvt. Ltd.), according to information on the Ministry of Corporate Affairs website. VCPL used convertibles in December 2011 to raise funds and payback loan it owed to Reliance arm. It turns out that the ultimate holding company for Nextwave is Trendy Building Solutions Pvt. Ltd.

That throws up another interesting question –- if control was triggered when VCPL made the loan to the Roys, then wasn’t control triggered again when the ownership of VCPL changed? Shouldn’t there be two open offers?

SEBI’s order makes no mention of the change in control at VCPL. But one lawyer, speaking on condition of anonymity, said a second open offer would be triggered.