Mumbai: In a move that could alter the structure of the transcontinental merger deal between Bharti Airtel Ltd and South Africa’s MTN Group Ltd, capital markets regulator Securities and Exchange Board of India, or Sebi, said on Tuesday that it would be changing a key component of its takeover norms.

MTN is to invest in Bharti through a complex equity-cum-cash deal that will help create a $23 billion (Rs1.1 trillion) telecom behemoth with at least 200 million customers in 23 countries.

In May, Bharti Airtel announced its intention to acquire a 49% stake in MTN for $2.9 billion. In turn, MTN is to receive a 36% ownership stake in Bharti: 25% through offshore GDRs and 11% through cash. News agency Bloomberg later reported on 9 September that Bharti had sweetened its bid to buy 49% in MTN by increasing the cash portion of its $14 billion offer.

“In GDR or ADR issues, an open offer will be compulsory if the company acquires GDRs or ADRs with voting rights," said Sebi chairman C.B. Bhave following a board meeting on Tuesday.

Earlier in July this year, Sebi had said that MTN need not make an open offer to Bharti Airtel shareholders in India as its shareholding in the Sunil Mittal promoted firm would be through GDRs.

Also See New Takeover Rules (PDF)

Though it was widely known that Sebi was reworking its takeover norms, observers were taken by surprise that some of these changes came so soon.

Changing rules: Chairman C.B. Bhave (centre) with board members M.S. Sahoo and Prashant Saran at a Sebi meeting in Mumbai on Tuesday. PTI

A spokesperson from Bharti said in an emailed press statement that the structure of the deal with MTN will comply with the laws of both India and South Africa. “We can confirm that the structure, under discussion with MTN, will be fully compliant with the laws in both countries. All relevant approvals, including exemption from open offer from Sebi (if required), would be sought at the appropriate time," he said.

Experts were divided over what the changes in the takeover norms would mean for the Bharti-MTN deal.

According to most, the amendment could impact the composition of global transactions. “It becomes a bit tougher for companies to structure cross border deals. Earlier, there was a blanket exemption under the takeover code for ADRs or GDRs, irrespective of whether they had voting arrangements or not. This change would take away such blanket exemption. The Bharti-MTN deal could be impacted to the extent that they are trying to structure it through ADR/GDRs, unless such issuance is without any kind of voting arrangement," said Vyapak Desai, head, capital markets practice, Nishith Desai Associates.

Nitin Potdar, a merger and acquisitions lawyer and partner of Mumbai-based law firm J. Sagar Associates observed that with the new amendments it is not as if all ADR or GDR holders will automatically have to make an open offer.

Jayant Thakur, of Mumbai-based Jayant Thakur and Company, a chartered accountancy firm that specializes in securities law, seconded Potdar. Under the current “Sebi takeover code, takeover regulations are attracted only after the conversion of GDR and ADR shares into Indian shares. The new amendment proposes that the takeover code will be triggered at the time of acquisition of GDR or ADR shares if they carry voting rights."

Bhave refused to comment on any specific deal and said that if the voting is at the instance of the ADR or GDR holder then it needs to be treated the same way as with anybody acquiring shares in India. “As far as what will be applicable to what deal will depend on what the circumstances of the deal, and therefore I cannot comment on any specific issue," Bhave added.

A lot thus depends on whether the Bharti GDRs that MTN plans to buy will have voting rights or merely “economic interest" that gives the South African company certain rights on the Indian telecom company’s cash flows.

“One of the key elements of the Bharti-MTN deal is the economic interest of MTN’s 25% shareholding. In general, an economic interest means the right to receive dividends and other financial benefits from the company without voting rights," said Rajiv Sharma, an analyst at HSBC Securities and Capital Markets (India) Pvt. Ltd, and his colleagues Harve Drowat and Tucker Grinnan from the Hong Kong and Shanghai Banking Corporation Ltd in a 19 June report on the proposed Bharti-MTN deal titled “Legal and regulatory issues."

Other lawyers raised wider issues that go beyond the immediate implications for the Bharti-MTN merger. Akil Hirani, managing partner of international corporate law firm Majmudar and Co. said, “They are creating a new fiction by creating a new class of GDR, ADR investor."

“Indian companies doing GDR listings with voting rights of 15% or more will trigger the code. This may be a dissuasive factor for them. Otherwise, impact of the changes on the code are not major and will not hinder M&A activity. Additionally, the takeover code is already being overhauled, so all of this may change. If one does an all cash or part shares and bulk cash deal, then although the cost of acquisition may go up, the takeover code can be avoided," Hirani added in a subsequent email.

“I am not sure how Sebi is planning to administer this. Every shareholder of an Indian company is entitled to exercise voting rights. The way GDRs are structured, it is very difficult to identify the acquirer of GDRs and usually the depository administers the voting rights of the underlying shares. How will Sebi identify which are the holders which are cumulatively triggering the threshold limits under the takeover code?" asked Madhurima Mukherjee, a partner of law firm Luthra and Luthra.

Meanwhile, Bharti chairman Mittal on Tuesday met Prime Minister Manmohan Singh and is understood to have discussed contentious issues such as dual listing and an exemption for MTN from the open offer. The South African company will have to pay around 32,000 crore ($6.6 billion) at Tuesday’s closing prices if it has to buy an additional 20% stake in Bharti in case it has to make an open offer to domestic shareholders.

Bhave chose not to comment on various news reports that Bharti and MTN could opt for a dual listing in the two countries in case a clean merger is not possible. “There has been a lot of discussion in the media about dual listing. I don’t yet know what exactly is dual listing and what are the requirements there, so it will be premature to comment on it," Bhave said.

A group of officials from the National Treasury and the South African Reserve Bank (Sarb) will be visiting India to meet with officials from the Indian Ministry of Finance, regulatory authorities and officials of the central bank to discuss regulatory matters related to the deal. Besides the changes in the takeover norms, the Sebi board has made it mandatory for listed firms to submit an auditors certificate to the stock exchange while undertaking corporate restructuring.

Sebi has also decided to introduce the concept of anchor investors for Indian Depository Receipt (IDR) issues. Like other public issues, Sebi has mandated IDR issuances also to reserve at least 30% of the issue size for retail investors.

N. Sundaresha Subramanian, Manish Ranjan, Bloomberg and PTI contributed to this story.