[By Rohan Kohli]
The author is a 5th year student of NLIU Bhopal and the Co-convenor of CBCL.
The Indian corporate story that took off in the 1991 liberalisation reforms to its success today has had a great part to thank the paradigm shift in the Indian regulatory behaviour. From the License-Raj era protectionist and red-tape bureaucracy to today’s times where the regulators actively engage in consultations with stakeholders, the Indian regulator has morphed into a modern beast that has by and large kept in-tune with the changing times, even if a little belatedly. However, a slew of recent examples in the past few months has threatened to undo these years of liberal outlook that the regulators have developed at great pains. I will analyse three such recent examples playing the devil’s advocate to the regulators.
Larsen & Toubro (L&T), which is currently in news for a hostile takeover bid by one of its subsidiary L&T Infotech in IT company Mindtree, was earlier also in news for a stunning derailment of its ambitious buyback attempt. L&T Board on 23 August 2018 approved a buyback proposal of 4.29% of its shares amounting to INR 9000 crore, the first in the company history.  The draft letter of offer was submitted to SEBI, which inexplicably took 102 days to reject this buyback proposal with the reason that the post-buyback debt-equity ratio would exceed 2:1.  This decision has taken the corporate world by surprise and been widely criticized by foreign and Indian media alike, the unanimous opinion being that the regulator erred in its opinion.
The reason why this is being questioned is because neither section 68, Companies Act, 2013 nor SEBI Buyback Regulations make any mention of whether the consolidated group financials or the standalone financials of the entity be taken to calculate the ratio of secured and unsecured debts vis-à-vis paid-up capital and free reserves (which both mandate it to be maximum 2:1). SEBI took the former approach – where L&T Financials (one of the group companies), which has a debt-equity ratio of 6:1, brings the group’s debt-equity ratio to above 2:1 both pre and post-buyback – which is a very strict and literal interpretation and contrary and singularly opposite to its past practice. L&T has accordingly filed for a review of the decision instead of approaching SAT. If this does not fall through, L&T may have to go ahead with a special dividend to return money to its shareholders, which attracts significantly higher tax implications.
The troubled aviation giant Jet Airways recently saw a resolution plan under the 12 February RBI Circular  with equity infusion for the lenders and exit of its promoters and other management (nominee of Etihad Airways) from the Board.  While it promises to be a close-knit fight now for the company once the bidding deadline are invited on 9 April as banks exit the company,  this entire process could have been pre-empted if not for the regulators’ hawkish and unyielding stance. When the first reports of Jet’s troubles began to emerge, it was Etihad who was expected to step in and assume the majority of the equity in Jet by increasing its 24% (at that time) stake. But SEBI’s move to deny open offer exemptions changed the story and finally pulled the plug on Etihad’s plans.
SEBI declared that any exemptions from applicability of conditions for preferential issue and making a mandatory open offer under Takeover Code for corporate debt restructuring made other than under IBC, will only be given to banks and financial institutions.  This effectively removed Etihad’s option of seeking an open offer exemption by referring to SEBI under Regulation 11 of the Takeover Code. Further, SEBI also removed any exemptions pursuant to scheme of arrangement pursuant to order of competent authorityunder any law, removing Etihad’s option of seeking open offer exemption under Regulation 10 (1) (d) (iii). The latter seems to be a belated admission of SEBI’s earlier mistake to SpiceJet’s open offer exemption done under similar circumstances in 2015 that brought Ajay Singh in majority of the company.  SEBI’s present move makes it difficult for Etihad to even make a future bid for Jet Airways, since the FDI Policy allows for a maximum of 49% FDI under automatic route . This would mean that Etihad cannot make an open offer for singlehandedly replacing the lenders (since 26% offer beyond the threshold of 24% would breach the 49% mark), and thus Etihad would have to make a joint bid with another Indian entity to keep them with in the 49% mark.
If Etihad would still want to make an individual bid without attracting open offer obligations, they would have to structure the transaction as an internal corporate restructuring under Section 230, Companies Act which would mean seeking approval of NCLT and fulfilling the condition of a scheme of arrangement pursuant to order of Tribunal under Regulation 10 (1) (d) (iii).  All this process could have been pre-empted if not for SEBI’s outdated approach in this regard. This entire process of lenders’ having to take up equity, then opening up bids would not have been needed to be done in the first place if Etihad would have been allowed to increase its stake, saving substantial amount of time and legal and economic costs. However, we will see in the example below that another regulator may make it even more difficult for Etihad to do this.
Renuka Sugars is another classic ongoing case that continues in the same vein of regulatory overreach as above. Shree Renuka Sugars was a company undergoing debt restructuring in 2018, in Wilmar Sugar Holdings increased its stake from 27.24% to 38.57% as part of the restructuring process and finally to 58.34% through an open offer.  Interestingly, this restructuring was done after the 12 February 2018 RBI Circular came into force, which mandates all accounts above INR 2000 crore (the present case falls under this bracket) and where restructuring may have been initiated under any scheme, to be declared as non-performing asset (NPA).  RBI has given two reasons for this move, firstlythat the current promoter Wilmar was already a stakeholder in Renuka Sugars and is thus hit by the bar of section 29A of IBC (the RBI Circular mandates that the acquirer must not be a person disqualified by section 29A). Secondly RBI states that even though the erstwhile CEO was changed, Wilmar’s higher stake does not amount to change in management and ownership as required under paragraph 13 of the Circular.
RBI’s hawkish stance here is reminiscent of older hurdles created by them in implementing the Tata-Docomo arbitration award, and their interpretation of the 12 February Circular here is in continuation of their obstinate refusal to tone down the reading of the Circular such as refusing to exclude power sector NPAs from it. While Renuka Sugars have refused rumours of Wilmar taking RBI to court over this as per their exchange filings on 27 March 2018,  there is full probability of this happening soon. The final result of this will also impact the Jet Airways bidding discussed earlier, because Etihad also has an existing 12% stake in Jet, and as of a few days ago it also had a board seat. In case the RBI’s stance finds favour with the court, Jet’s lender might face a situation where if Etihad emerges as the winning bidder, they might have to still categorise it as an NPA and make provisions for it. This could be inspite of the account having been restructured and resolved, because in RBI’s opinion there will be no “change in management and ownership” as Etihad (just like Wilmar) is merely increasing its stake. Hence, along with SEBI, RBI as a regulator may also create troubles for Jet Airways due to their strict interpretation of the laws.
The takeaway from all these examples is that while we are emerging as a sophisticated and advanced jurisdiction finding favour with corporates globally, sometimes the regulators act opposite to this emotion. Regulators’ actions like these have deep impacts on future actions when large potential investors are scouting locations and gauging a jurisdiction as destination for their investment. While we have made deep and rapid strides in trying to make our laws simpler and attracting foreign capital, such retrograde actions take us two step backwards and frustrate these efforts. It would be in everyone’s best interests that the regulators’ act in a coherent and consistent manner which gives a sense of security and assurance to corporate India.
 Intimation of L&T Board meeting to Stock Exchange, 23 August 2018. http://investors.larsentoubro.com/upload/Announcements/Intimation2308181.pdf.
 SEBI Comment on Buyback, 18 January 2019. http://investors.larsentoubro.com/upload/Announcements/SEBI_comment_on_Buyback.pdf.
 Resolution of Stressed Assets – Revised Framework RBI/2017-18/131, 12 February 2018. https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=11218.
 The shareholdings of promoters and Etihad were also decreased as banks assumed majority of the equity. Intimation of Jet Airways Board meeting to Stock Exchanges, 25 March 2018. https://www.jetairways.com/doc/InvestorRelations/BoardOutcome250319.pdf.
 As of writing this blog, there are a number of potential bidders for Jet Airways. https://www.moneycontrol.com/news/business/companies/tata-group-tpg-etihad-airways-may-bid-for-jet-airways-3723881.html.
 SEBI Board Meeting, 1 March 2019. https://www.sebi.gov.in/media/press-releases/mar-2019/sebi-board-meeting_42260.html.
 In SpiceJet’s case, the compitent authoritywas the Ministry of Civil Aviation. https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/civil-aviation-ministry-approves-spicejets-reconstruction-revival-plan/articleshow/45988714.cms.
 Consolidated FDI Policy of India, 28 August 2017, https://dipp.gov.in/sites/default/files/CFPC_2017_FINAL_RELEASED_28.8.17_0.pdf.
 The SEBI Board Meeting removed the words competent authority from Regulation 10 (1) (d) (iii), but the mention of Court and Tribunal is still intact, making this a remedy available to Etihad.
 Renuka Sugars Letter of Offer. http://www.renukasugars.com/pdf/letter-of-offer.pdf.
 Supra Note 3, paragraph 8 read with Annex – 1 (A). Once the NPA has undergone the resolution plan as per the Circular, it shall then be upgraded to a standard account.
 Corporate Announcement to NSE dated 27 March 2018. https://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuote.jsp?symbol=RENUKA.