Jet open offer relief for Etihad

Regulator says 'effective control' Jet continues to vest with Indian nationals

The Securities and Exchange Board of India (Sebi) said on Thursday Etihad Airways’ acquisition of 24 per cent stake in Jet Airways didn’t warrant an open offer, as “effective control” remained with Indian nationals and the Jet board.

This puts an end to the regulatory uncertainty surrounding the biggest merger and acquisition deal in India’s aviation sector.

In its 17-page order, Sebi said Jet and Etihad had made necessary changes to their commercial cooperation agreement (CCA) to ensure the deal didn’t result in change of control. “All of these voluntary changes (including deletion of Schedule I to the CCA, with regard to governance procedures) have been made to ensure there is absolute certainty ‘effective control’ of Jet is and continues to vest in Indian nationals and the board of Jet,” Rajeev Agarwal, whole-time member of Sebi, said in the order.

The market regulator had issued a showcause notice to Etihad for violation of the takeover code, based on the Competition Commission of India (CCI)’s observation that Jet and Etihad were gaining “joint control” through the deal.

In its submission to Sebi, Etihad had argued, “The concept of ‘control’ for the purposes of competition law is specific to its own statute and applies to a different context, as opposed to the definition of control for the purposes of takeover regulations.” It added it couldn’t be said to be acting in concert with Jet’s promoters, as it hadn’t violated takeover regulations.

Convinced with the argument, Agarwal said in the order, “I find Etihad and other noticees are not having joint control over Jet, in terms of regulation 2(1)(e) read with regulation 4 of the Takeover Regulations, 2011.” Regulation 2(1)(e) pertains to appointment of most of the directors and control of “the management or policy decisions”.

The Sebi order said Etihad didn’t have any affirmative, veto or blocking rights at board or general meetings of Jet. Also, it didn’t have any quorum rights in the board, casting vote rights and any pre-emptive or tag-along rights for the transfer of shares, Sebi added.

In its order in September 2013, Sebi had cleared the Jet-Etihad deal, saying prima facie, the deal didn’t result in change of control. However, the regulator later changed its view, based on the CCI’s observations.

In the latest order, Agarwal said the provisions of the takeover code and the competition law had to be examined independently, in light of the facts and circumstances of each case.

The order comes as relief for Etihad, which would have had to spend at least an additional Rs 2,000 crore on the open offer to Jet’s minority shareholders. Also, the open offer would have clashed with foreign direct investment regulations, which allow a foreign airline to hold up to 49 per cent in a domestic carrier.

On Thursday, the Jet stock closed at Rs 236 on BSE, up 1.75 per cent.