No open offer required in Jet deal: Sebi

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Regulator says carrier remains in control of Indian nationals

No open offer required in  Jet deal: Sebi
The Securities and Exchange Board of India (Sebi) on Thursday exempted Etihad Airways from making an open offer for shares in Jet Airways, as its purchase of 24 per cent stake in domestic carrier last April did not amount to any change in ownership.

The Sebi decision is the last and final nod for the first FDI by an overseas airline in India. The Foreign Investment Promotion Board (FIPB) and the Competition Commission of India (CCI) have already cleared the deal.

Sebi had issued a show-cause notice in February, asking the Abu Dhabi airline why it should not have to make a tender offer to Jet public shareholders as part of the takeover code. Sebi went on to examine whether the share sale agreement between the two airlines amounted to acquisition of joint control in the Indian airline.

“Etihad cannot be termed as a person acting in concert along with the existing Jet promoters under regulation 2(1)(q) of the Takeover Regulations, 2011, and it has not acquired control over Jet under regulation 2(1)(e) read with regulation 4 of the Takeover Regulations, 2011,” a 17-page Sebi order issued by whole-time member Rajeev Kumar Agarwal said.

“It was never the intention of Etihad to acquire control in any manner over Jet Airways. FIPB approved the deal/tran­saction on being satisfied that the effective control over Jet remained with Indian nationals even consequent to the transaction documents.

Further, the transaction documents do not confer any control to Etihad over Jet under the Takeover Regulations, 2011. If it is held that there was acquisition of control by Etihad, the permission granted by FIPB would be lost and the parties would lose bilateral rights as independent airlines,” Sebi said.

The FDI policy specifies that “a scheduled operator permit can be granted only to a company the substantial ownership and the effective control of which is vested in Indian nationals.”

Etihad signed an investment agreement with Jet and its existing promoters on April 24, 2013 to subscribe to 24 per cent equity shares in the Indian carrier for $379 million at Rs 754.74 a share.

FIPB approved the deal on October 10, 2013 and in pursuant to the said approval Jet issued 2,72,63,372 equity shares (24 per cent of paid-up capital) of the face value of Rs 10 each on a preferential basis to Etihad at Rs 754.74 per share on November 20, 2013. The Competition Commission of India approved the transaction on November 12, 2013, saying that the combination proposed in the deal was not likely to have “appreciable adverse effect” on competition in India.

As per the deal, Etihad can have only two directors out of the 12 on the Jet board as long as the Abu Dhabi carrier holds at least 15 per cent equity interest in Jet, whereas Jet promoters will nominate four directors. Further, the Jet promoters shall have the right to nominate one of the promoter board members as the chairman of the board and the chairman shall have a casting vote at all meetings. Etihad would recommend candidates for the senior management of Jet.

The transaction documents dated September 19, 2013 do not accord Etihad any affirmative, veto or blocking right, any quorum right at general meetings or any casting vote, pre-emptive or tag-along right. Further, the Jet promoters will have 51 per cent shareholding in the carrier.

The deal is in the form of a commercial cooperation agreement (CCA), whereby the two carriers agreed to frame cooperative procedure in relation to joint route and schedule coordination, pricing, marketing, distribution, sales representation and cooperation, joint/reciprocal airport representation and handling, technical handling and belly-hold cargo and dedicated freight capacity on services (into and out of Abu Dhabi and India and beyond).

“Etihad and Jet are relatively small players in the global aviation market and, therefore, there was a need to cooperate in certain commercial areas in order to enhance their networks and reduce their respective cost bases. The investment by Etihad provides it access to the Indian market, while allowing Jet access to Etihad’s more extensive international network. Jet, in financial difficulty, also needed a capital injunction,” the Sebi order noted.

The agreement says Jet will use Abu Dhabi as its exclusive hub for scheduled services to and from Africa, North and South America and the UAE, and would refrain from entering any code-sharing agreement with any other airline that has the effect of bypassing Abu Dhabi as the hub for traffic to and from the above said locations, or is detrimental to the cooperation contemplated by the CCA.

Sebi said the question whether the rights conferred on Etihad under the CCA would result in change in control or acquisition of joint control with existing promoters of Jet under regulation 2(1)(e) read with regulation 4 of the Takeover Regulations, 2011 was left open for determination on the basis of the decision taken by the government or other regulatory agencies regarding change in management/control.

Sebi had earlier conceded vide its communication dated September 25, 2013 to the ministry of finance that the acquisition of Jet shares by Etihad did not amount to change in ‘control’ within the meaning of Takeover Regulations, 2011.

As per the takeover code, control shall include the right to appoint a majority of directors or to control the management or policy decisions, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.

FIPB appears to have accorded its approval to the deal only after Sebi’s express opinion confirming that "there was no change in control" and that the provisions of the Takeover Regulations, 2011 were not attracted.

The competition commission, which is concerned with any adverse effect on competition vide order dated November 12, 2013, has concluded that "...the proposed combination is not likely to have appreciable adverse effect on competition in India and therefore, the commission hereby approves the same...”

The MoF also advised that the mandate of FIPB/CCEA is to ensure compliance with the FDI. It has been confirmed by MoF that FIPB and CCEA have found the Jet-Etihad deal in compliance with the FDI policy and approved the proposal.


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