Vahanvati clears air on 3-yr lock-in clause in M&A deals

Written by Jayati Ghose | New Delhi | Updated: Jan 30 2014, 09:21am hrs
Attorney General GE Vahanvati has opined that in a merger & acquisition (M&A) deal, a three-year lock-in period over sale of equity will apply only on the shares of the new entity. However, outright sale of equity by any operator that participates in the forthcoming auction, and is thus subject to a lock-in condition, will not be allowed before the three-year period is over.

This effectively means that if for instance, Telenor buys new spectrum in the February auctions, coming under the lock-in condition, but then wants to merge with another operator say Airtel, then the new entity formed will not be able to make an outright sale of its shares before the 3-year period is over. However, since Telenor's shares technically seize to exist due to the merger, it will not breach the lock-in condition. M&A involving sale of equity, which triggers the mandated three-year lock-in clause, has been one of the contentious issues that industry wanted clarity on.

Effective way to encourage auction (optimise participation) and at the same time maintain the purpose underlying the lock-in period would be to clarify the M&A policy to provide that if a licencee participates in an auction and is consequently subject to a lock-in condition, then if such a licencee proposes to merge into another licencee, the lock-in would apply...on the new shares...issues to the resultant company, said the AG's note to the EGoM on telecom.

The attorney general justified that such a move would encourage consolidation in the fragmented telecom sector, which has around 12 players, many of them with limited operations but saddled with high debt.

Earlier, the telecom commission had recommended that in case a merger or an acquisition is proposed before the three-year lock-in period has expired, the resultant entity should pay a fee based on the valuation of the transaction.

The lock-in clause had been inserted to prevent excessive profiteering through speculative activities such as buying a licence and then selling it at a higher price.

The EGoM had, in December, approved the broad contours of the new M&A policy, according to which a telco buying another company will have to pay market price for any spectrum holding above 4.4 MHz GSM and 2.5MHz of CDMA. However, if the acquired spectrum is liberalized (bought through government auction), then there is no need to make any payment for the same. The ministers had also agreed to increase the earlier-proposed 35% cap on market share (in revenue, as well as user base) for merged entities in a circle to 50%.