Jet-Etihad issue: Will the stake sale go through?

The Jet Airways deal remains the hottest corporate business topic notwithstanding that it's been around since April 24, when Etihad agreed to buy a 24 per cent stake in Jet for about Rs 2,060 crore.

Given the fact that Jet Airways is a listed company having a dominant market share, the deal needed to be cleared by the Securities and Exchange Board of India (Sebi) for takeover regulations, by the Competition Commission of India for fair trade norms, by the Foreign Investment Promotion Board (FIPB) for foreign direct investment (FDI) approvals.

FIPB is currently scrutinising the commercial cooperation agreement between Jet Airways and Etihad Airways to ensure control under the Sebi Takeover Regulations has not been passed on to Etihad. There are certain provisions in the agreement which may amount to passing of 'control'.

The agreement envisages shifting of Jet's revenue management office to Abu Dhabi, which is a different geographical and legal jurisdiction. It further allows Etihad to play an active role in the Indian airline's aircraft acquisition. The agreement gives the foreign carrier voting rights and other powers in excess of their shareholdings as provided under Sebi (Substantial Acquisitions of Shares and Takeovers) (Amendment) Regulations, 2013, (The Takeover Regulations).

The issue of whether the deal amounts to transfer of control in the Indian carrier to foreign hands has arisen because the FDI policy lays down that permission would be given if the "substantial ownership and effective control is vested in Indian nationals". Naresh Goel is an Indian national. There are consultations underway among various government departments and regulatory agencies on what "control" would mean in the context of the Jet-Etihad deal. Sebi has a definition of "control" in the context of takeover regulations, while the Companies Bill also provides a definition. The Companies Bill, 2012, says: "Control shall include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders' agreements or voting agreements or in any other manner".

The Sebi Takeover Code adopts the same definition of control as that of the Companies Bill. Sebi is, therefore, scrutinising the deal and if it indicates a change of control, then Sebi would require Etihad to make an open offer.

Although such an offer would run counter to the FDI policy that stipulates full control must remain in Indian hands, this is again a position which needs to be scrutinised.

Sebi is reportedly looking into whether the deal will trigger the requirement for an open offer for public shareholders, under the takeover regulations. The Ministry of Company Affairs, the FIPB, and the Competition Commission have to clear the proposal. Jet Airways is a listed company, and there is a possibility in case it does not remain so, corporate governance norms would be breached. Sebi, therefore, has to determine whether control under the Sebi Act would pass to Etihad. FIPB has to consider clearing the proposal next week. The Department of Industrial Policy and Promotion DIPP has already voiced its concerns about effective control, but it has not been addressed in the revised Shareholder's Agreement.

According to Sebi rules, an acquirer buying 25 percent or more stake in a listed company is required to make a mandatory open offer for purchase of further 26 per cent from public investors. However, the takeover regulations for making an open offer would also apply to an entity buying a stake less than 25 per cent, if it is getting control of the entity being acquired. So, Sebi would be deciding on whether "control" would pass to Etihad or not according to the agreement between the two airlines.

The two airways are waiting for the regulatory approvals. FIPB deferred a decision last month and asked for more details on the effective control of Jet. It was due to lack of clarity on the level of control exercised by Etihad and the ownership structure of the company after the transaction, that the decision to grant approval by the FIPB was deferred. Once the deal is cleared by the capital markets regulator, it would still need a final approval from a Cabinet panel.

Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at kumkum.sen@bharucha.in