In what raises serious questions on the government?s ability to monitor and enforce the cap on foreign direct investment (FDI) in print media, it appears there have been some instances of violations of the spirit of the norm by minority overseas investors in certain newspaper firms. Blame the lapse on the ?special rights? given to these investors by some print media managements and the use of these rights by the former to exert control on key financial decisions of the firm in question.
A clear case of FDI policy violation by global private equity (PE) investor DE Shaw through the ?special rights? route was alleged by the management of Hindi daily Amar Ujala in a recent complaint to the information & broadcasting (I&B) ministry. In its defence to the Foreign Investment Promotion Board, DE Shaw termed these special rights as nothing ?unusual? or ?special?, adding several other leading print media firms like Jagran, Bhaskar and HT Media too have provided such rights to foreign investors before listing on Indian stock exchanges. FE could not independently verify the veracity of the PE major?s statement.
DE Shaw even told FIPB that the I&B ministry gave it a ?no-objection? in May 2007 after going through its investment and exit right agreements.
The principle behind capping the extent of overseas investment in the print media at 26% is to keep financial and management control with the majority Indian shareholders and the board.
According to experts, any norm or practice does not automatically become law. ?Such special rights and privileges granted in favour of the foreign investor under investment agreement are beyond sectoral cap of 26% in print media,” says Pravin Nigam, head of Amplus Consulting, a leading tax and financial consultancy firm.
It may be noted here that DE Shaw’s 2007 acquisition of 18% stake in Amar Ujala is now under scrutiny for alleged violations of rules on foreign exchange management and external commercial borrowings, among others.
In its response to a set to queries raised by FIPB on the complaint from Amar Ujala Publications, DE Shaw said “affirmative voting rights” and “exit rights” have been commonly provided to private equity funds and financial investors, adding that in the past, both the I&B ministry and the FIPB have cleared several FDI proposals in which the foreign investor was entitled to various protective rights including affirmative voting rights.
Sources said DE Shaw wants to exit Amar Ujala under the terms of “exit rights” as the company failed to list within four years from the date of execution of its investment agreement. However, it wants a 25% return on its investments, something which has been contested by Amar Ujala. Also, under the “exit rights”, DE Shaw says it is entitled to a “drag right” or right which requires the controlling shareholders to sell their shares to the same party the foreign investor wants to sell. This is also contested by Amar Ujala stating how a minority shareholder can force the majority to sell their stake on its terms.
In 2007, DE Shaw had bought 18% stake in Amar Ujala for Rs 117 crore, valuing the company at around Rs 650 crore. The board had approved the FDI in the Maheshwari family-owned media company with the rider that DE Shaw and Amar Ujala would inform the government about any structural change in investment. Subsequently, in December 2008, DE Shaw got into ?amended agreements? with Amar Ujala, wherein it was assured a minimum fixed return of 25% on its investment. This structural change in the investment agreement between the two parties was never intimated to RBI or the FIPB, sources said.