New Delhi/ Mumbai: Nasdaq-listed Rediff.com India Ltd has received the approval of its board to buy Vubites India Pvt. Ltd, a television advertising company owned by the Internet firm’s founder and chairman Ajit Balakrishnan.
Rediff will pay Rs 13.1 million for Vubites, a localised television advertising company owned by the Internet firm’s founder and chairman Ajit Balakrishnan. It will also extend Rs 136.8 million as an interest-free loan to enable the company “to repay the loan advanced by Mr Ajit Balakrishnan to Vubites”, Rediff said in filing to the US capital market regulator Securities and Exchange Commission (SEC) on 28 October.
The loan amount includes Rs1.28 crore towards stock options granted to Vubites’ employees. Technology portal Medianama reported the development, and raised the issue of a possible conflict of interest, first on 8 November.
Balakrishnan, who was in the US on Tuesday, could not be reached for comment.
Analysts are divided over the deal, with some questioning the ethics of a company buying a firm owned by its promoter, and others saying there is no problem if the transaction is transparent.
“We’ve followed all procedures, which is why we don’t think that there are any ethical issues that come up in such a deal,” said Jayesh Sanghrajka, vice-president, finance, at Rediff.
The company will ask shareholders for their approval on 26 November, he said. The financial due diligence on Vubites was conducted by one of the big four accounting firms, and Rediff has also obtained a valuation report from one of the big four accounting firms and a “fairness opinion” from Bansi S. Mehta and Co. Mumbai, an accounting firm, he added.
Sanghrajka said Rediff has had ambitions for the TV space for some time now. “There are not too many competing companies feeding ads on digital cable networks space, which is why this acquisition is important to us,” he said.
Diwan Arun Nanda, a director on Rediff’s board as well as chairman and managing director of advertising agency Rediffusion Y&R, said the deal was unanimously passed by the board “after all due-diligence was done and a strict arm’s length view on valuation was taken”.
Balakrishnan was a founder of Rediffusion Y&R as well.
Asked if other companies were considered, Nanda replied in the negative. “There are no other companies in this field; Vubites’ value proposition is very unique,” he said.
Vubites offers a platform for companies to put localized advertising on national TV channels via digital cable networks.
An investment committee comprising independent members of Rediff’s board was formed to oversee the process, in which Balakrishnan did not take part. “He also did not vote on the resolution passed at the meeting of the board held on 26 October,” Rediff said in its SEC filing.
Independent members on Rediff’s board include Sunil N. Phatarphekar, founder of Mumbai law firm SNP Legal (Advocates); Sridar A. Iyengar, former chairman and chief executive officer of KPMG India; and Rashesh C. Shah, founder and chairman of the Edelweiss group. While Shah declined to comment, Iyengar was in the US and could not be reached immediately.
“There is a problem with such transactions where promoter-owned firms are involved, as prima-facie they are suspect of wrongdoing. However, eventually they might turn out to be (a) fair deal,” said Prashant Bhusan, a senior Supreme Court lawyer.
Rediff’s promoters have “used the opportunity to transfer the liability of losses and loan in a loss-making venture, apart from pocketing the acquisition money”, said Arun Agarwal, a Bangalore-based lawyer who specializes in economic offences. “It’s surprising that promoters can get away with such things even under the American laws, which are far more stringent than those in India.”
Rediff, which faces stiff competition from the likes of Yahoo Inc. and Google Inc., had $42.8 million of cash as on 30 September.
Mahesh Murthy, founder and chief executive of Pinstorm.com, a digital marketing firm, said he is not bullish on Vubites’ model of ad insertions on digital cable networks.
“A lot of national channels have a problem with such a model as local ads play in place of the national ads, which have already been struck by the national broadcasters,” he said. “It’s a model that’s not seen much success and has some way to go. There are very few companies operating in this space.”
Avinash Gupta, leader, financial advisory, at Deloitte Touche Tohmatsu India Pvt. Ltd, said there would be no issues with Rediff’s acquisition of Vubites “as long as he (Balakrishnan) has given the relevant disclosures.”
Deepti Chaudhry in Bangalore contributed to this story.