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Corporate Jul 24, 2013

Jet-Etihad deal: Govt, regulators to decide on management control

By Siddharth Zarabi and Kritika Saxena

New Delhi/Mumbai: The Securities Exchange Board Of India has made it clear that it is up to the government and other regulatory agencies to conclude if there would be a change in management or control of Jet Airways on account of the Etihad's investment in the company. Responding to a query from the Department of Economic Affairs (DEA), the market watchdog has said that it would take a call on whether the deal was compliant with the takeover code post the government making up its mind on permitting the transaction in its present shape. Sebi's 18 July missive also states that if Etihad is seen as acting in concert with Naresh Goyal, then the transaction was not compliant with the takeover code and no preferential allotment would be possible.

On the question of whether the pre and post-issue shareholding of Jet complies with minimum listing norms, Sebi has told the DEA that the combined Jet-Etihad shareholding would cross the 75 percent limit, but if Jet's argument that the Etihad will be a "public shareholder" is accepted, only then would it be in compliance with relevant norms. Hence, this matter too will have to be decided finally by the Foreign Investment Promotion Board (FIPB), which is slated to take up the matter on 29 July.

An Etihad Airways aircraft. AFP

An Etihad Airways aircraft. AFP

On the third question opposed by the DEA, this one on whether Etihad's investment complies with substantial ownership and effective control as per the FDI policy, the market watchdog has pointed out that the rights proposed to be acquired by Eithad need to be modified. It has warned that unless modified, the rights would attract the provisions of the takeover code with respect to change in control. For instance, the clause on Independent Directors would lead to joint control and Etihad would have significant rights over their appointment and removal. This clause, the Sebi says, is also not in line with company laws.

Arguing for the need to ensure that effective control of Jet remain with the Indian promoters, Sebi has criticised several clauses in the shareholders agreement as well as the separate commercial cooperation agreement (CCA) which cedes a significant amount of management control and discretion to Etihad. In fact, Sebi has underlined five clauses in the CCA that give an upper hand to Etihad in the operations. Striking down this pact, the market regulator has warned that such an agreement cannot be allowed at this juncture. Were such a pact to be struck post the deal, a separate view would have to be taken on its legal validity.

Besides this, Sebi has also said that the proposed relocation of the Jet network to Abu Dhabi needs to be re-examined, the slot changes need approval of the competent authorities and that six new proposed destinations for Etihad are not in line with Jet bilateral rights.

Meanwhile, sources claim that Jet and Eithad are drafting a revised agreement and would submit it to the regulatory authorities later this week. Etihad is not willing to make an open offer for Jet Airways and the investment in Jet would remain a minor one for the company. However, sources say Etihad is willing to forego rights to appoint 'investor directors' and is also open to Jet retaining majority seats in the nomination committee. In addition, the revised agreement will restore the voting and nomination rights of Jet Airways chairman Naresh Goyal and Etihad would abide by definition of 'effective control', which the Union Cabinet is expected to finalise soon.

The sources added that Etihad chairman Sheikh Hamed bin Zayed Al Nahyan is directly overseeing the progress of the deal and the proposed changes. By the looks of it, if the deal is delayed beyond a time limit, Etihad may even consider a complete overhaul of the pact.


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