What is the difference between ADRs and GDRs with voting rights and without voting rights?
When ADRs and GDRs as an investment option were first introduced in India, these were used mainly as methods to obtain additional financing for companies. Voting rights per se were not important for investors. Investors were more concerned about the ?economic rights? or dividends arising from their investment. These were reflected in the agreements they signed that stated holders of ADRs and GDRs would always have their vote exercised in a manner to ensure that they vote along with the majority decision of the company or with majority shareholder. However, with shareholder rights evolving, institutions that hold ADRs and GDRs have voting rights along with their shares. Hence ADRs and GDRs have more or less started functioning as shares proper, that is, with ?economic rights? as well as ?voting rights?.
Earlier when Sebi had granted exemption for the proposed Bharti-MTN deal from an open offer, was that exemption for transaction in GDR without voting rights or was it an exemption even for transaction involving GDR with voting rights?
The earlier exemption was under the pre-existing regulation 3(2) and 14(2) of the takeover regulations and hence was even for a transaction involving GDRs with voting rights. However, the exemption was to cease the day the GDRs got converted into ordinary equity shares.
In the light of new GDR norms, what are the options available to Bharti and MTN to go ahead with the deal without having to go for an open offer?
It may be possible for the transaction to go through in its present form without any changes. Bharti can still approach Sebi for an exemption under the following clauses, where Sebi can apply its discretion and grant it the exemption:
(i) Media statements from Bharti and MTN have so far mentioned that there would be 36% ?economic interest? that the African telecom firm, MTN, and its shareholders are supposed to acquire in Bharti. If this is so then GDRs that Bharti proposes to issue to MTN may still be without voting rights and not fall victim to the new clause.
(ii) Bharti-MTN may also change the deal mechanics and take exemption under Regulation 3(1)(j). This is relevant for a scheme of arrangement or reconstruction including amalgamation or merger or demerger under any law or regulation, Indian or foreign. This means that Bharti would have to convince Sebi that interests of shareholders are taken care of, and if Sebi is convinced it can grant it the exemption from open offer. There have been instances when exemptions have been given under this clause.
(iii) Bharti could try to seek a specific exemption under Regulation 3(1)(l) of the takeover code, which allows exemptions to be taken from the Takeover Panel. One reasoning for such exemption may be that Bharti had acted as per the earlier informal guidance received by it from Sebi and was in the process of issuing their GDRs. As the new amendments are stated not to be of retrospective effect, it can be argued that they should not apply to Bharti, since it was already in the process of issuing GDRs. This, however ultimately will be a question of proof. If Bharti adopts this stance, it would be an extremely aggressive one.
Is there any possibility of Bharti-MTN going for an open offer?
This is totally ruled out. One, open offer would require MTN to shell out an additional Rs 32,000 cr, which would totally alter the financial dynamics of the deal. Two, the FDI guidelines would come in the way. Bharti already has around 33% FDI and MTN would acquire 36% in it. An additional 20% through open offer would breach the 74% FDI cap for the telecom sector.
Will the two companies be able to seal the deal by September 30?
Looks unlikely as they do not have time to complete regulatory procedures that have emerged from the latest Sebi regulation by the designated date. In such an eventuality the option between the two is either to extend the deadline as has been done by them twice in the past or enter into some form of MoU stating their resolve to move ahead as and when they sort out the regulatory hurdles. This way the two sides can signal to the markets that the deal has not been called off.
