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Vodafone-Idea merger: Sebi looks at open offer possibility

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MUMBAI: The Securities and Exchange Board of India (Sebi) is examining whether the proposed merger between Vodafone India and the Kumar Mangalam Birla-owned Idea Cellular will trigger an open offer under the takeover rules. Sebi is also said to have asked for clarifications regarding purchases of Idea stock by Pilani Investment and Industries Corp, part of the Aditya Birla Group, ahead of an official announcement regarding merger discussions.

As per the plan submitted to Sebi, in the new combined entity, Vodafone will initially hold a 50% stake, while the Aditya Birla Group and public shareholders will hold 21.1% and 28.9%, respectively. Vodafone will then divest a 4.9% stake to the Aditya Birla Group. This will take the Aditya Birla Group’s stake from 21.1% to 26%, thus crossing the threshold for an open offer.

“Sebi is examining whether the deal would trigger an open offer (by the Aditya Birla Group) under the takeover code,” said a person familiar with the development.

The takeover code stipulates that if an entity acquires 25% of a listed firm, it has to make an open offer for an additional 26% from public shareholders.

“Sebi’s concern, which it expresses in cases like these, is the possibility of such a merger bypassing the takeover regulations,” said Sandeep Parekh, founder of Finsec Law Advisors.

“Where nearly half the shareholding is moving into another set of hands and with a movement from sole to joint control, usually Sebi sees a court-approved process as a means to bypass shareholders’ exit rights.

They will then either ask for an open offer to be made or oppose the merger in court.”

Idea Cellular submitted the scheme of arrangement with Vodafone to Sebi on April 18.

“There is an increasing scrutiny of acquisition agreements at Sebi’s end these days,” said Sumit Agrawal, partner, Suvan Law Advisors. “(That’s) thanks to innovative industry structures and agreement drafting, where convenient structures are planned many times to enhance indirect equity stakes, attain controlling rights or allow potential acquirers to acquire equity stakes through options, thereby avoiding the open offer obligation altogether.”

Under the agreement, Vodafone will own 45.1% of the combined company after transferring a 4.9% stake to the Aditya Birla Group for Rs 3,900 crore in cash, concurrent with completion of the merger.

The Aditya Birla Group will then own 26% of the combined company and Idea’s other shareholders will own the remaining 28.9% stake.

Beyond this, it can pick up another 9.5% stake from Vodafone under an agreed mechanism with a view to equalising the shareholdings over time.

“If the Aditya Birla Group does not equalise its stake, Vodafone will reduce its holding in order to equalise its ownership with that of the Aditya Birla Group,” Idea said in the filing. “Until equalisation is achieved, the additional shares held by Vodafone will be restricted and votes will be exercised jointly under the terms of the shareholders’ agreement.”

The regulator has also sought information on purchases of Idea stock by Pilani Investment.

The Aditya Birla Group investment company is said to have acquired 8.2 million Idea shares in the secondary market between November 18 and December 6 last year for Rs 58.59 crore at an average cost of Rs 71.70 apiece.

The Vodafone Group told the London Stock Exchange on January 30 this year that it was in discussions with the Aditya Birla Group about an all-share merger of Vodafone India and Idea.

Following this, the Idea stock surged 26% to Rs 97.75 from Rs 77.80. It is learnt that stock exchanges have submitted their report to Sebi in this regard.

The Aditya Birla Group was unavailable for comment. Vodafone offered no comment. An email sent to Sebi went unanswered.

“The company will have to give an explanation on both these issues to Sebi,” said a person familiar with the development.

Agrawal said Sebi’s insider trading regulations put the onus on a “connected separate company to provide its innocence and inability to access inside information from an acquirer or a target company. Surveillance alert system of Sebi as well as stock exchanges examines the stock prices and the trading volume in at least an immediate preceding quarter before a merger or acquisition announcement, to ascertain possible insider trading.”