DISCLOSURE OF PROMOTER AGREEMENTS: SEBI’S NDTV ORDER

SEBI recently passed an
order against some promoters of New Delhi Television Limited (NDTV). Under the
order dated 14th June, 2019, it debarred certain promoters from dealing in and
accessing the securities markets, acting as directors in listed companies, etc.
The order concerns itself with certain loan and related agreements the terms of
which were not disclosed to the public. SEBI held that such non-disclosure is
fraudulent and harmful to the interests of the public / shareholders. The order
raises wider concerns since this is a common issue. The question would be
whether there is adequate disclosure of terms of shareholders’ agreements and
similar agreements by major shareholders / promoters of listed companies. On
appeal, the Securities Appellate Tribunal on 18th June, 2019 stayed the SEBI
order for the time being.

The bone of contention was
the loans taken by a promoter company under certain terms from two successive
lenders. These terms fell into broadly two categories: One is the grant of
convertible warrants to the second lender such that they could effectively
become almost 100% owners of the promoter company. The second relates to
certain clauses whereby the promoters were obliged to take prior written
permission of the lender before carrying out specified acts in NDTV. This,
according to SEBI, amounted to giving powers to the lender to take decisions in
NDTV. However, these agreements were not disclosed to NDTV or the public in
general. According to SEBI, this amounted to non-disclosure of price-sensitive
information and also fraud, and thus passed the adverse directions against
three promoters.

As stated earlier, some of
the terms are commonly a part of agreements entered into by promoters /
companies. This order ought to be of wide concern since it may lead to charges
of non-disclosure or incomplete disclosure and thus result in serious adverse
consequences.

BACKGROUND AND FACTS

The relevant promoters of
NDTV were RRPR Holdings Pvt. Ltd. (RRPR) and Dr. Prannoy Roy / Ms Radhika Roy
(together the Roys). The Roys owned RRPR. They held in the aggregate during the
relevant time about 61 to 63% of the equity shares of NDTV. It appears that
RRPR had taken some loans from ICICI Bank Limited. To repay those loans, it
took certain loans from Vishwapradhan Commercial Private Limited (VCPL). The
terms of the loans from ICICI Bank and VCPL and the transactions related to the
loans were the areas of concern.

After carrying out certain
internal sale / purchase transactions, RRPR ended up holding 30% shares in
NDTV. As a part of the loan transaction terms with VCPL, share warrants were
issued to VCPL whereby, if such share warrants were fully exercised, VCPL would
hold 99.99% shares in RRPR. Effectively, it would thus become 100% owner in
RRPR. Certain connected agreements also gave an option to associate companies
of VCPL to acquire in aggregate 26% of NDTV from RRPR.

Further, the loan agreements
between RRPR / the Roys and ICICI / VCPL provided for certain terms relating to
the management of NDTV. Several specified important decisions could not be
taken in NDTV without the prior written approval of VCPL. RRPR and the Roys
were required to exercise their shareholding in NDTV to ensure that decisions
in NDTV are not taken in violation of these terms.

THE ALLEGATIONS

SEBI stated that the
promoters did not make the required disclosures of these transactions and
terms. The information was price-sensitive and would have affected the
decisions of the investors / public. SEBI alleged that this non-disclosure was
fraudulent in nature.

The terms of the agreement
whereby share warrants were issued to VCPL amounted for all practical purposes
to transfer of the shares in NDTV by the promoters. Further, agreeing to terms
whereby certain important decisions in NDTV would require prior approval of
ICICI / VCPL also amounted to information that shareholders / public ought to
know. Effectively, decision-making power was transferred / shared with certain
persons of which the public did not have knowledge. They would be looking at
the Roys as the persons in charge.

Thus, multiple provisions
of the SEBI Act and the SEBI PFUTP Regulations were alleged to have been violated
by entering into such transactions without due disclosures.

THE DEFENCE OFFERED BY THE PROMOTERS

The promoters denied the
allegations. They claimed that the loan agreement was a private one and had
nothing to do with NDTV. NDTV was not bound by the terms of the agreement.
Hence, the terms agreed upon did not affect NDTV and thus the public /
shareholders.

Further, it was contended
that these were standard terms in loan agreements.

Importantly, a distinction
was made between their role as shareholders and as directors. It was stated
that they were free to do what they wanted as shareholders in respect of their
shares. They stated that their acts as private shareholders did not conflict
with their role as directors. In any case, they were in the minority on the
board as there were so many other directors.

SEBI’S CONCLUSIONS AND ORDER

SEBI did not agree with
the defence offered by the promoters. It held the agreements were not bona
fide loan agreements, and indeed were a sham to that extent. Such long-term
loans without interest and without any terms of repayment are not entered into
in the ordinary course of business. The loan agreement was, SEBI concluded, a
sale agreement.

The right of ICICI / VCPL
under the agreement to participate in certain important decisions was vital
information that the promoters should have disclosed to NDTV and the public.
SEBI also rejected the distinction made by the promoters between their role as
shareholders and as directors.

SEBI also rejected the
contention that as just two directors on the Board of NDTV, they could not have
influenced the decisions of NDTV. SEBI noted, ‘This contention is not tenable
in view of the fact that Noticee No. 2 is not only the Director of NDTV but is
the Chairman of the Board of the Company. Secondly, Noticee No. 2 and 3 were
not only the Chairman and Managing Director, respectively, but along with
Noticee No. 1, which is a private limited company of Noticee No. 2 and 3, were
also the promoters and majority shareholders, holding majority voting rights in
NDTV. Therefore, it is inconceivable that Noticee No. 2 and 3 were incapable of
ensuring compliance with the conditions to which they had agreed under the loan
agreements with respect to the affairs of NDTV.’

Further, SEBI pointed to
the code of conduct of NDTV to which the Roys were subject. As per this code,
they were not supposed to put themselves in a position of conflict with the
company. Yet, by entering into such a loan agreement, they had placed
themselves in such a position.

SEBI noted that the Roys
had entered into off-market transactions in the shares of NDTV. Thus, they
dealt in shares of NDTV without disclosing relevant information to the public
who dealt in shares without having such information. SEBI observed, ‘In the
absence of availability of material information relating to VCPL Loan
Agreements 1 and 2 in the public domain, investors were not in a position to
take any informed decision while dealing in the scrip of NDTV. Hence, by
concealing such material information from the public shareholders during the
relevant period when the promoters themselves were dealing in shares of the
company, Noticees have allegedly committed fraud on the minority public
shareholders of the company.’

The terms of the loan
agreement, SEBI noted, apart from being very liberal, were strange. The share
warrants could be converted even after the repayment of the loan. Thus, the
lender could become effectively the owner of RRPR and hence the 30% shares in
NDTV even after repayment of the loan. Thus, it noted, ‘It is not a loan
transaction simpliciter. It appears an outright transfer of 30% stake and
voting rights in NDTV by the Noticees masquerading as a loan agreement which
did not even possess the basic attributes of a normal secured loan transaction.
In my view, the VCPL Loan Agreements 1 and 2 are sham loan transactions
executed by the Noticees only with a motive to sell their substantial stake in
NDTV.’

Accordingly, SEBI ordered
as follows: RRPR and the Roys were debarred from accessing the securities
markets, buying / selling securities or being associated with the securities
markets for two years. Their existing securities, including mutual fund units,
were frozen during this period. The Roys were also debarred from occupying
positions as Director or Key Managerial Personnel in NDTV for two years and in
any other listed company for one year.

APPEAL TO SAT AND STAY

The promoters immediately
appealed to SAT, which has stayed the order for the time being pending final
disposal. SAT held that the conclusions drawn by SEBI need to be examined in
more detail and a company such as NDTV cannot be kept headless in the meantime.
This would be harmful to NDTV and also its shareholders.

IMPLICATIONS AND CONCLUSIONS

It is very common for
parties to enter into shareholders’ and similar or related agreements with
investors / lenders. Certain rights are given to them that include taking their
approval for specified major matters. The SEBI LODR Regulations now do have a
requirement of making disclosures of such agreements. However, this order would
be an eye-opener for parties who would have to ensure that due disclosures are
made. The present case related to events in and around 2008-2010. There may
thus be concerns that even agreements entered into in the distant past may be
covered and SEBI may take action if these have not been disclosed.