Sebi, Diageo and the hidden advantage

Sebi's amendment to Regulation 13 seemed tailored to suit Diageo-USL deal

On November 9, 2012, Smirnoff maker Diageo Plc signed a deal with the Vijay Mallya-led UB Group to acquire up to 53.4 per cent of United Spirits (USL).

The transaction was supposed to have three separate legs. In the first one, Diageo and persons acting in concert (PACs) would buy about 25 million shares (19.3 per cent stake) from UB Holdings and associated entities. This was done at a negotiated price of Rs 1,440 a share.

In the second leg, USL would do a preferential issue of about 14.5 million shares. Such issues require approval by a special resolution of shareholders. This process has its own timelines of public notice, etc. Together, these two legs would take the holding of Diageo to 27.4 per cent of the enlarged share capital.

By the Sebi takeover regulations of 2011 in force at the time, when an acquirer crossed the threshold of 25 per cent, he was supposed to make an open offer to buy a further 26 per cent from the public. In cases where the acquisition was through a combination of different methods, the open offer was triggered only at the point where the holding of the acquirer crossed 25 per cent, according to the then regulations.

In this case, the share price on December 14, 2012, when the special resolution clearing the preferential allotment was passed through postal ballot, would have become material. By then, the USL shares had rallied to over Rs 2,000 a share, closing at Rs 1,929 on December 14, 2012.

However, the share purchase agreement had clauses which meant any change in the offer price would derail the deal itself. If Sebi had insisted the open offer be made at the higher price, rightfully due to the minority shareholders, then the deal might not have gone through.

The open offer, initially scheduled to begin on January 7, 2013, was postponed. JM Financial, manager for the offer, said as “final observations from Sebi” are awaited, the schedule had been revised. In a board meeting on January 18, 2013, Sebi cleared an amendment to the takeover code, which was then less than two years old.

The new code had been adopted after detailed consultations by a committee headed by former Securities Appellate Tribunal presiding officer C Achuthan. The agenda papers of this meeting talk of concerns over certain recent cases, without naming any, and of the “disadvantageous position” the acquirer would be put in if he had to “recalculate the offer price, taking multiple dates as relevant dates”.

On January 31, 2013, Diageo received the Sebi observations on the draft letter of offer.

Sebi’s amendment to Regulation 13, wherein a new provision (2A) was inserted, seemed tailored to suit the Diageo-USL deal. It said when two or more methods are involved, an open offer “shall be made on the date of first such acquisition, provided the acquirer discloses in the public announcement the details of the proposed subsequent acquisition”.

The new regulation was gazetted on March 26, 2013. The open offer got going on April 10. Needless to say, the offer for some 38 million USL shares given by Diageo at the price of Rs 1,440 hardly found any takers. Though subsequently Sebi has forced other open offers at higher prices, the decisions of early 2013, overlooking objections from investors and governance advisory firms, saved Diageo several hundred crores by even conservative estimates.

On May 17 this year, The Indian Express reported that Diageo Scotland, a step-down subsidiary of the British giant, was one of the 20 companies that had received a summons under the Prevention of Money Laundering Act for alleged payments made to Advantage Strategic Consulting and Chess Management Services, two companies allegedly linked to Karti Chidambaram, son of the then finance minister.