Sebi vets stake control in Zomato's IPO papers for China firm's role

Regulator scans startup's prospectus to check if Jack Ma's Ant group will be issued bonus shares/rights shares.

The Securities and Exchange Board of India (Sebi), which is reviewing the draft red herring prospectus (DRHP) filed by Zomato, is vetting how and where the “control” lies as it is backed by China’s Ant group. 

It is also seeing whether post listing, Jack Ma’s Ant group will be issued bonus shares/rights shares and whether that would require approval under the amended foreign direct investment (FDI) norms for China. “We are looking at certain aspects, including whether start-ups are controlled by Chinese investors and whether the foreign investor has any controlling interest under the Takeover Code. And, since it (Zomato) is backed by the China-based firm, clarity is needed whether it requires any prior approval or permission under press note 3 of the current regime,” said a regulatory source. Among key shareholders in Zomato are Info Edge, Internet Fund (Tiger Global) and Ant Financial. Two of the principal shareholders, that is, Info Edge, holds 18.55 per cent equity shares, and Alipay and Antfin (of Ant Group) together hold 16.53 per cent. 

Ant Financial has been an investor in Zomato since 2018. It is the second largest investor in Zomato and put in around Rs 3,243 crore in the company to date. It has been backing Zomato since it picked up a 14.7 per cent stake in 2018. It followed that up by raising its holding to 25 per cent until last year. However, the definition of “control” under Sebi’s Takeover Code provides broad contours and does not offer objective criteria for its deter­mination. It has three dimensions —right to appoint a majority of directors, right to control the management, and right to control policy decisions. These rights can broadly be exercised by a person holding shares or having contractual rights under a shareholders’ or voting agreement.

In several other legislations under the Companies Act, FDI follows the same definition with minor tweaking. 

When contacted, Zomato declined to comment on the issue. The concerns surfaced keeping in mind government curbs on FDI into Indian companies from neighbouring nations. This is to block opportunistic acquisition of local companies at beaten-down valuations because of the coronavirus pandemic. However, in the absence of a specific threshold, Chinese firms can still buy up to 10 per cent in Indian-listed companies. However, last year, a Press Note introduced prior vetting by the government on investments by seven countries, including China. While FDI is regulated by the commerce ministry, foreign portfolio investments are regulated by Sebi.

In January 2020, Zomato had raised $150 million from Ant, but change in the regime had led the Alibaba group to reevaluate its timing of the additional investment in the company. Last month, the food aggregator had filed a DRHP with Sebi to raise as much as Rs 8,250 crore ($1.1 billion).

The company plans to issue new shares to raise a maximum Rs 7,500 crore, while its major shareholder Info Edge India will offer 7.5 billion shares, according to documents filed with Sebi.