The Securities and Exchange Board of India (Sebi) has moved the Supreme Court (SC) challenging an appeals court verdict in British alcoholic beverage maker Diageo Plc’s 2012 acquisition of United Spirits Ltd (USL), a case that may determine the stock market regulator’s power to intervene in a takeover after the open offer has concluded.
The apex court website showed that Sebi filed the petition in October, and a bench will be allotted soon. A verdict will decide whether shareholders who exited USL through an open offer in late 2012 and early 2013, when Diageo took over the company, deserved a better price.
“Sebi had approved the transaction in 2013; however, they went on to initiate proceedings against the company nearly three years later, in 2016,” said a lawyer privy to the development. “In a way, the intervention was retrospective in nature. If the Sebi order is upheld by the apex court, it would have an impact on the whole takeover code.”
An email sent to Sebi remained unanswered at the time of going to press.
At the crux of the matter is a special provision of the takeover code that says if an acquirer buys additional shares of the target company within 26 weeks from the conclusion of an open offer at a higher price, then the acquirer needs to pay the higher price even to the open offer investors. This July, the Securities Appellate Tribunal (SAT) quashed a Sebi order asking Diageo to pay more to shareholders, saying in the current scenario, the special provision of the takeover code doesn’t apply.
The ‘scenario’ is slightly complicated, and this is how the sequence of events unfolded. In 2007, much before Diageo made its move on USL, the beleaguered promoter of USL, Vijay Mallya, had availed a $135 million loan from ICICI Bank, UK. In 2012, Diageo made its first move to take over USL after it acquired 25% of the shares of the company from its promoter entities, triggering an open offer. The offer opened in November 2012 and closed in May 2013.
During the takeover, ICICI Bank asked Diageo to pay up the $140 million loan of 2007. After negotiations, it was decided in August 2013 that Standard Chartered Bank would refinance the loan. In return, Diageo would provide a backstop guarantee of $140 million. Additionally, Standard Chartered also secured the loan through a pledge of 7.9% stake of Mallya-related entities in United Breweries (Holdings) Ltd (UBHL), an associate company of USL.
In May 2015, Mallya defaulted on repayment of the loan, which led to a debt recovery case in the UK. In 2016, a commercial division of the UK High Court asked Mallya to pay up the loan, which he did in 2016 itself. Once the loan was repaid, the $140 million backstop guarantee given by Diageo was released.
“Sebi has taken a view that the additional $140 million ought to have been factored into the open offer price,” said another lawyer privy to the development. “However, the whole transaction did not involve any shares of USL; only UBL shares changed hands. However, since UBHL back then was an associate company, action could be initiated by Sebi even in such cases.”