SEBI clears Jet-Etihad deal
Securities Exchange Board of India (“SEBI”), by way of its order dated May 8, 2014 (“Order”) has given a green signal for the proposed investment by Etihad Airways PJSC (“Etihad”) in Jet Airways (India) Limited (“Jet”).1 With this, the proposed transaction seems to have cleared all regulatory hurdles finally.
In September 2012, foreign investment in aviation industry in India was liberalized. In January 2013, Jet was the first airline to make a public announcement when it informed the Bombay Stock Exchange of talks with Etihad of potential investment by Etihad in Jet. The transaction was to be carried out by way of preferential allotment of 27,263,372 shares of Jet to Etihad (“Transaction”). For the purpose of consummating the Transaction, the parties entered into (a) investment agreement dated April 24, 2013 (“IA”), (b) a shareholders’ agreement between the promoters of Jet, Jet and Etihad (“SHA”), (c) a commercial cooperation agreement dated April 24, 2013 (“CCA”) and (d) a corporate governance code pursuant to the SHA (“CGC”). The IA, SHA and the CCA were amended on September 19, 2013 on the basis of certain issues raised by regulators (the amended agreements and the CGC are collectively referred to as the “Transaction Documents” hereinafter). The proposed preferential allotment was approved by the board of directors and the shareholders of Jet on April 24, 2013 and May 24, 2014, respectively.
The Transaction required the approval of a number of regulators, including the Cabinet Committee on Economic Affairs (“CCEA”), Foreign Investment Promotion Board (“FIPB”), the Competition Commission of India (“CCI”) and SEBI.
The CCI Order5, in light of the surrounding facts, including (a) Jet and Etihad were in the business of providing air transport services, (b) the terms of the CCA which, inter alia, laid the framework for co-operation in operations, pricing, joint marketing, sales, and distribution, joint airport handling, (c) Etihad’s recommendation of candidates for Jet’s senior management and (d) utilization of Abu Dhabi as an executive hub, stated:
It is observed that the Parties have entered into a composite combination comprising inter alia the IA, SHA and the CCA, with the common/ultimate objective of enhancing their airline business through joint initiatives. The effect of these agreements including the governance structure envisaged in the CCA establishes Etihad’s joint control over Jet, more particularly over the assets and operations of Jet.
In light of the above observation of the CCI, SEBI served show cause notices dated February 11, 2014 (“SCN”) on the promoters of Jet, namely Naresh Goyal, Anita Goyal and Tail Winds Limited (“Promoters”) and Etihad (“Noticees”) alleging joint control over Jet by Etihad and the Promoters under the Takeover Code requiring an open offer under regulation 4 of the Takeover Code by Etihad.
Contentions of the Noticees
With respect to Tail Winds, it was contended that since it was no longer a shareholder of Jet, the question of joint control with it would not arise.
Naresh Goyal and Anita Goyal
The whole time member of SEBI held that the Transaction would not attract the provisions of the Takeover Code. In concluding the same, it relied on the following points.
SEBI’s verdict is a welcome move, since it has clarified that while interpreting the respective statutes, the intent and the objective of the statute needs to be looked into. While with this verdict, the Transaction has been cleared by all regulators, a public interest litigation is pending before the Supreme Court in India alleging, inter alia, lack of transparency in the entering of the bilateral agreement entered into by India with UAE for increase in passenger seat capacity. The Supreme Court has already clarified that the Transaction may be quashed if irregularities are discovered. This might result in complicating the Transaction further since the shares have already been allotted to Etihad on November 20, 2013 post approval from the CCI.10
At a macro level, our regulators and the government need to ensure that deal timelines do not get stretched on account of delay in decision making. Certainty in law, faster decision making by regulators and better coordination amongst regulators is quintessential for a robust M&A regime in India. With the election results around the corner, it would be important for the incoming government to give comfort to international investors on ease of doing deals in India. As far as the regulatory hurdles to the Jet-Etihad partnership is concerned, it seems the sky is clear for the time being. However, time will tell whether a smooth take off also results in smooth landing.
For a detailed analysis of the Transaction, please refer to our M&A Lab here.
1Order in the matter of acquisition of shares of Jet Airways (India) Limited (hereinafter referred as "Jet") by Etihad Airways PJSC (hereinafter referred as "Etihad") available online at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1399545948533.pdf
2 FIPB Approval would be required as under Paragraph 6.2.9. 3.1 (c) (i) of the FDI Policy, any investment by a foreign airline into an Indian company providing scheduled air transport services would be under the Government Route, i.e. with the prior approval of FIPB.
3 Under the FDI Policy any transaction involving more than INR 12,000 million requires CCEA approval.
4 For a detailed analysis of the approval from CCI, please refer to our hotline available here.
7 AIR 2010 SC 3089
8 Paragraph 220.127.116.11.1 (c) (iv) (c) of the FDI Policy 2014.
9 Para 2.2 of the Justice P.N. Bhagwati Committee Report on Takeovers states
“To be acting in concert with an acquirer, persons must fulfill certain "bright line" tests. They must have commonality of objectives and a community of interests which could be acquisition of shares or voting rights beyond the threshold limit, or gaining control over the company and their act of acquiring the shares or voting rights in a company must serve this common objective. Implicit in the concerted action of these persons must be an element of cooperation. And as has been observed, this cooperation could be extended in several ways, directly or indirectly, or through an agreement - formal or informal”
The report is available online at http://www.sebi.gov.in/commreport/bagawati-report.html