BackSebi exempts Etihad from open offer to hold stake in Jet
The market regulator exempts the airline from making an open offer, clearing the last bottleneck for the first FDI by an overseas airline in India
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Mumbai: India’s capital market regulator on Thursday exempted Etihad Airways PJSC from having to make an open offer to public shareholders of Jet Airways (India) Ltd, removing the only regulatory obstacle standing in the way of the first investment by a foreign airline in an Indian carrier.
The Securities and Exchange Board of India (Sebi) cleared Abu Dhabi-based Etihad’s purchase of a 24% stake in Jet Airways, India’s second largest airline by market share, noting that the deal terms had been modified to comply with Sebi rules to avoid an open offer. Control of the Indian airline remains with Jet’s management, it said.
“It never was Etihad’s intention to acquire control in any manner over Jet," Sebi’s order, signed by whole-time member Rajeev Kumar Agarwal, read. “In fact, the shareholders agreement and the other transaction documents were amended accordingly and the concerned Regulatory Authorities were satisfied that ‘effective control’ was vested in Indian nationals before approving the FDI (foreign direct investment) in Jet by Etihad."
Mint reported on 9 April that Sebi may exempt Etihad from an open offer.
Sebi issued a notice to Etihad Airways earlier this year, asking it to explain why it shouldn’t make an open offer to Jet’s public shareholders under the rules. An open offer is required to be made if an acquirer buys at least 25% stake in a target company or if a significant change in management control accompanies a stake purchase below the threshold.
The Competition Commission of India (CCI) approved the stake purchase by Etihad in November. It, however, observed that it had resulted in Etihad gaining “joint control over Jet, more particularly over the assets and operations of Jet", Reuters reported.
In October, Sebi had approved Etihad’s purchase of the stake in Jet Airways, observing that the deal would not trigger a mandatory open offer to public shareholders and Etihad would not be considered a promoter entity in Jet Airways. Public shareholders own 25% of Jet Airways.
But CCI’s observation prompted Sebi to take another look at the deal, the first investment by an overseas airline in an Indian carrier since the government in September 2012 allowed such investments.
The fact that the existing promoters of Jet hold 51% shares and voting rights in the airline support Sebi’s stance that Etihad cannot be termed a person acting in concert along with the existing promoters of Jet and that it had not acquired control of Jet, said the order.
Sebi noted that Etihad does not have any affirmative veto or blocking rights at board or general meetings or any quorum rights at board or general meetings or any casting vote rights or any pre-emptive tag-along rights on the transfer of shares.
In its order, Sebi referred to a letter from Etihad to the market regulator, in which the national airline of the United Arab Emirates mentioned that all the voluntary changes in the share purchase agreement had been made to ensure that there is absolute certainty that “effective control" of Jet is vesting and continues to vest in Indian nationals and the board of Jet.
Etihad Airways and Jet Airways spokespersons declined to comment immediately on the development.
Etihad’s letter to Sebi, cited in the regulatory order, said: “These further changes/amendments (to the share purchase agreement) reflect the commercial understanding between the parties, who will independently engage with one another in a spirit of transparency and reciprocity."
Sebi’s approval was critical for both Jet Airways and Etihad Airways because key personnel appointments have been delayed after Sebi’s decision to look again into the deal, which has been cleared by the Union cabinet besides CCI. Jet has seen an exodus of executives since the $379 million deal with Etihad was signed in April 2013. Last month, acting chief executive officer (CEO) Ravishankar Gopalakrishnan resigned in the latest departure by a senior executive.
Jet Airways is likely to name former Air Seychelles chief executive Cramer Ball its next CEO and fill other senior management roles, according a person close to the development, who said the airline had been waiting for the Sebi order to make the announcement.
The Jet-Etihad deal still faces a hurdle in the courts—Bharatiya Janata Party politician Subramanian Swamy has challenged the transaction in the Supreme Court, which said in December that it would quash the agreement if any irregularities are found.
All the man-hours spent by government agencies and regulators on evaluating a subjective concept called “control" in a corporate entity could have been put to better use, said Amber Dubey, partner and India head of the aerospace and defence practice at consulting firm KPMG.
“I welcome the decision by Sebi. This allows Jet Airways to bring in much needed funds and leverage the synergy benefits of the Etihad network. The new government should consider raising the FDI limit in airlines from 49% to 100% as per the Mayaram Committee report," Dubey said.
A panel led by economic affairs secretary Arvind Mayaram called for the increase, in a report submitted last year.
Along with the 24% equity in Jet, Etihad Airways bought a 50.1% stake in Jet Privilege Pvt. Ltd (JPPL), a frequent flyer programme of Jet Airways.
In February, CCI cleared this transaction, saying it would not have an adverse impact on competition and that the two airlines were already partners in their respective frequent flyer programmes.
A 14 March report by the proxy advisory firm Stakeholders Empowerment Services (SES) said Jet Airways had not disclosed whether an independent fairness opinion had been obtained on the valuation of the business being sold, nor had it disclosed how it arrived at the valuation.
“SES is raising this issue as the extant guidelines of Government of India limits foreign participation to 49% and in JPPL, Etihad will have direct equity of 50.1% and indirect equity of 11.98% (24% of 49.9%) taking the total equity of Etihad at 62.08%," the report said.
Jet Airways shares rose 1.75% to ₹ 236.05 on the BSE on Thursday as the benchmark Sensex ended barely changed, edging up 0.09% to 22,344.04 points. The Sebi announcement came after market hours.
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