The income-tax (I-T) department has served a tax notice to RRPR Holding, a promoter group company of listed broadcaster New Delhi Television (NDTV), on two transactions dating back to 2009-10, totalling a sum of nearly Rs 500 crore.
According to the I-T notice, served earlier this year, the first of the two transactions was a Rs 403.85-crore "interest-free loan" granted by Vishvapradhan Commercial Pvt Ltd (VCPL) in July 2009. The second pertains to a set of transactions in NDTV shares between RRPR and its shareholders Prannoy Roy and Radhika Roy, where gains of about Rs 94 crore have been allegedly made.
The notice has alleged that the loan agreement with VCPL was a "colourable device, designed to evade tax" and the transactions between Roys and RRPR were "colourable transactions".
RRPR has also challenged the notice in Delhi High Court, arguing it came after a reopening of the assessment based on a "change of opinion", which was "bad in law." It had also contested other charges of the tax department. The department contended that the reopening was on the grounds that fresh material (copy of the loan agreement etc) became available.
In an order dated February 26, the Delhi High Court has posted the matter to be heard in August 2016 and said, "In the meanwhile, the assessment proceedings may go on but no final order be passed."
Separately, the Securities and Exchange Board of India (Sebi) has in an affidavit before the Delhi High Court in a case between Quantum Securities, a minority shareholder, and NDTV has said that it was examining complaints about transfer of controlling interest in NDTV to VCPL by virtue of conditions in the loan agreement. An e-mail sent to Sebi seeking details on the "examination" did not elicit any response.
Conditions in loan agreement
The I-T notice, served in January, reviewed by Business Standard, listed the various conditions of the loan agreement.
It required that RRPR held at least 26 per cent shares in NDTV. Convertible warrants equivalent of 99.99 per cent stake in RRPR were to be issued to VCPL. The option was unconditional and was exercisable even after repayment of the loan.
In addition, VCPL also acquired right to buy all shares of RRPR now held by the Roys. For the purpose of the transaction, NDTV was valued at Rs 1,346 crore. Another condition related to repatriation of an investment of $85 million in NDTV Studios, which at then dollar rates was roughly equal to the loan amount. These conditions led the assessing officer to conclude that "the agreement although titled as loan agreement is actually a sale agreement for transfer of controlling rights over NDTV by RRPR to VCPL for a sale consideration of Rs 403.85 crore."
The I-T notice added: "This transaction is thus, colourable device, designed to evade tax… Lifting the veil cast over this transaction, gives rise to income from capital gains, which is chargeable to tax."
This loan, first reported by media news portal Newslaundry in January 2015, had been raised by RRPR to repay a loan of Rs 375 crore from ICICI Bank, which carried an interest of 19 per cent per annum, in addition to personal guarantees and pledge of about 39.6 million NDTV shares, according to I-T department documents.
An e-mail sent to the official e-mail ID of VCPL did not elicit any response. VCPL had a paid-up capital of Rs 1 lakh, according to the ministry of corporate affairs filings for FY14. It has not filed its statutory documents for FY15 yet.
A transcript of an I-T department's investigation report showed that VCPL was specifically asked why no security was taken for loan or any interest was not being charged and such a practice was not in conformity with normal business practices. The investigation had been initiated in 2011, based on a complaint by Yashwant Sinha, Bharatiya Janata Party leader and then chairman of standing committee on finance.
VCPL told the director general-investigation that it has not taken any security, because "as per loan agreement, it has an option to convert the loan into such number of equity shares at par aggregating to 99.99 per cent of fully diluted equity of RRPR at any time."
Whether this amounts to transfer of control is what Sebi's ongoing examination has to conclude.
A takeover expert close to NDTV said, "It is settled law that convertibles do not result in change of voting rights or transfer of control. The control will change hands only if and when VCPL exercises the option." The expert added enforceability of options in privately-held companies was a grey area.
At Rs 650 crore, NDTV's market value today is about half of its valuation at the time of the loan. From VCPL's point of view, the exercise of option would not make sense unless NDTV shares double in value from here. On the second transaction, the notice said RRPR sold 3.47 million shares of NDTV to the Roys at Rs 4 per share on March 8, 2010. On that day, NDTV shares were being traded on the exchange in the range of Rs 129-135. "Further on the same day and at the same time, RRPR itself purchased shares of NDTV from these same two persons at Rs 140 per share. Thus, RRPR has passed on funds amounting to Rs 94.63 crore to its two shareholders through colourable transactions, which are prohibited," the notice said.
It added that this amounts to "relinquishment of income" by RRPR and was chargeable to tax in its hands.
When contacted, the NDTV spokesperson declined comment saying the matter related to the promoter group and forwarded the queries to Prannoy Roy.
THE STORY SO FAR
May 19, 2004: NDTV stock lists on bourses
June 2007: NDTV annual report talks about "great leap forward"
January 2008: Sensex hits all-time high and starts falling
September 2008: Collapse of US investment bank Lehman Brothers, the starting point of global financial crisis
October 2008: RRPR Holding raises Rs 375 crore loan from ICICI Bank at 19% per annum
July 2009: VCPL lends Rs 403.85 crore interest-free loan with convertible warrants and other conditions; ICICI loan repaid in August
2011: DG (I-T) probe begins into transaction based on complaint by Yashwant Sinha, chairman, standing committee on finance
2015: Newslaundry reports about loan agreement
Jan 2016: I-T notice to RRPR; Sebi tells court "examining" complaints of takeover code violations
- February 2016: High court order to continue assessment, but not pass final order
'Baseless, false and vexatious'
In an e-mailed response, Rahul Kapoor, a representative of RRPR, said, "The said allegations are entirely baseless, false and vexatious in nature. The transactions carried out by RRPR, both with VCPL and its shareholders, are valid and legal transactions, entered into within the four corners of law. Further, the promoters of NDTV continue to exercise control over the affairs of NDTV, which they have been exercising independently and without interference by any third party, in the best interests of all the stakeholders of NDTV."
On the matter of examination by Sebi, Kapoor said, "I would also like to clarify that RRPR has adequately responded to the queries raised by SEBI, pursuant to which no further queries were raised by the regulator."
The RRPR representative added that in the past similar allegations were raised by one Sanjay Dutt and his company, Quantum Securities Ltd (QSL) and NDTV had approached the Bombay High Court for action against them. "While the proceedings are still pending before the Hon'ble Court, the Hon'ble Bombay High Court has, on more than one occasion, found prima facie merit in the case of NDTV. The Hon'ble Court has accordingly, on more than one occasion, granted ad-interim injunction in favour of NDTV restraining the said entities/individuals from making such allegations."
In the October 2014, Bombay High Court passed an interim order prohibiting any publication of any nature whatsoever in connection with and/or pertaining to and/or relating to the petitioner (NDTV), its senior officials and promoters, the RRPR representative said.
'Fighting for transparency'
Sanjay Dutt of QSL in an e-mail response said they are fighting for transparency and good corporate governance. He added, "I must inform you that the interim order is still in operation and QSL and all its directors are bound to obey the orders till it is vacated. However, without prejudice to the fact that an interim order is in operation, QSL reiterates that even if there were no interim order then also neither QSL nor any of its directors, including me will ever defame NDTV (as it is our company, being long-term shareholders)."