2025 (6) TMI 1887 - Board - SEBI

Acquisition of equity shares by the Government of India ( GOI ) in Vodafone Idea Limited (VIL) - sole intent of protecting the larger public interest - conversion of outstanding spectrum auction dues into equity shares - seeking exemption from the applicability of Regulation 3(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 ( Takeover Regulations 2011 ) - HELD THAT - The proposed acquisition by the GOI in the instant case is intended to provide relief in public interest by easing liquidity and cash flow to the TSP. GOI has permitted TSPs to pay the due instalments by way of equity before/after expiry of the moratorium/deferment period consequent to a review of the prevailing situation at the option of the GOI as communicated by the DoT vide its Letter No. 1002/05/2024-LFP dated March 28 2025. In terms of Regulation 10(1)(i) of the Takeover Regulations 2011 acquisition of shares by lenders pursuant to conversion of their debt as part of a debt restructuring scheme implemented in accordance with the guidelines of Reserve Bank of India is exempt from the obligation to make an open offer. In my view it shall be appropriate to treat the conversion of VIL s Outstanding Spectrum Auction Dues (including deferred dues) repayable after the expiry of the moratorium period into equity shares to be issued to GOI at par with a debt restructuring scheme as envisaged under Regulation 10(1)(i) of Takeover Regulations 2011. In view of the special circumstances of this matter public policy and public interest involved in the entire transaction and taking into cognizance various steps taken by GOI to ease liquidity and cash flow to the TSPs as well as to help various banks having substantial exposure to the Telecom sector I note that the proposed acquisition of shares by GOI merits consideration. Considering the fact that a substantial sum of money is due to be paid to the GOI by VIL which may place a potential burden on the financials of VIL and also that an open offer obligation on the part of GOI involves huge sums of cash outflow (from GOI) I find that it would be appropriate to grant exemption to the Acquirer from open offer requirements as laid down in Regulation 3(1) of the Takeover Regulations 2011. Thus hereby grant exemption to the Acquirer i.e. the Government of India from complying with the requirements of Regulation 3(1) of the Takeover Regulations 2011 with respect to the proposed direct acquisition of equity shares in the Target Company viz. Vodafone Idea Limited by way of the proposed transaction as mentioned in the Application. The exemption so granted is subject to the following conditions; The exemption granted above is limited to the requirements of making open offer under the Takeover Regulations 2011 and shall not be construed as exemption from the disclosure requirements under Chapter V of the aforesaid Regulations; compliance with the SEBI (Prohibition of Insider Trading) Regulations 2015 Listing Agreement / SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 or any other applicable Acts Rules and Regulations. The Application read with other submissions filed by the Applicant is accordingly disposed of.

Summary

1. ISSUES PRESENTED and CONSIDERED

(a) Whether the proposed acquisition of equity shares by the Government of India (GOI) in the Target Company, Vodafone Idea Limited (VIL), through conversion of outstanding spectrum auction dues into equity shares, triggers the obligation to make a public open offer under Regulation 3(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations, 2011).

(b) Whether exemption from the open offer requirement under Regulation 3(1) can be granted to the GOI under Regulation 10(1)(i) of the Takeover Regulations, 2011, which exempts acquisition pursuant to conversion of debt as part of a debt restructuring plan implemented in accordance with Reserve Bank of India (RBI) guidelines.

(c) Whether the acquisition of shares by the GOI pursuant to conversion of dues would amount to acquisition of control in VIL, thereby affecting the intent and regulatory requirements applicable to such acquisition.

(d) Whether the public interest considerations and the financial distress faced by the Target Company justify exemption from the open offer obligation.

(e) What conditions, if any, should be imposed on the exemption granted to ensure compliance with applicable laws and protection of investor interests.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Applicability of Open Offer Obligation under Regulation 3(1) of Takeover Regulations, 2011

The relevant legal framework is Regulation 3(1) of the Takeover Regulations, 2011, which mandates that an acquirer who, together with persons acting in concert, acquires shares or voting rights entitling them to exercise 25% or more of the voting rights in a target company must make a public announcement of an open offer for acquiring shares of the target company.

The Court noted that the GOI's proposed acquisition of shares through conversion of spectrum auction dues would increase its shareholding from 22.60% pre-acquisition to approximately 48.99% post-acquisition, thereby crossing the 25% threshold and triggering the open offer obligation under Regulation 3(1).

The Court's reasoning highlighted that the acquisition is a direct acquisition of shares on a preferential basis under Section 62(4) of the Companies Act, 2013, and thus prima facie falls within the scope of Regulation 3(1).

Key evidence included the detailed shareholding structure before and after the proposed acquisition, showing the increase in GOI's shareholding and the nature of the transaction involving conversion of dues into equity shares.

The Court applied the law strictly to the facts, acknowledging the trigger of the open offer obligation due to the shareholding increase.

Issue (b): Exemption under Regulation 10(1)(i) for Debt Restructuring Conversions

Regulation 10(1)(i) of the Takeover Regulations, 2011, provides exemption from the open offer obligation for acquisition of shares by lenders pursuant to conversion of their debt as part of a debt restructuring plan implemented in accordance with RBI guidelines.

The Court interpreted the conversion of the Target Company's outstanding spectrum auction dues (including deferred dues) into equity shares by the GOI as akin to conversion of debt into equity between a debtor and a creditor. Although the dues are payable to the GOI, the Court treated the transaction as a debt restructuring measure.

The Court reasoned that the GOI, being a creditor, is converting dues into equity in line with the intent of Regulation 10(1)(i), which aims to facilitate debt restructuring without triggering open offer obligations that could hinder financial rehabilitation of companies.

The Court considered the absence of explicit RBI guidelines for this specific conversion but took a purposive approach, recognizing the public policy objective behind the Telecom Relief Package and the financial distress of the Target Company.

Competing arguments that the transaction is a preferential allotment and not a debt restructuring were considered but rejected based on the broader public interest and the nature of the dues as government receivables.

The conclusion was that the exemption under Regulation 10(1)(i) is applicable to the present transaction.

Issue (c): Intent and Impact on Control of the Target Company

The GOI submitted that it has no intent to participate in the management or board of the Target Company and that there would be no change in control post-acquisition. Further, the GOI's shareholding would be classified as public shareholding.

The Court accepted these submissions, noting that the acquisition is solely to provide financial relief and support the telecom sector in public interest, not to acquire control over the Target Company.

The Court emphasized that the absence of change in control and management participation is a relevant factor in considering exemption from open offer requirements.

This reasoning aligns with the regulatory objective to prevent hostile or control acquisitions without due process, while allowing government intervention for sectoral support.

Issue (d): Public Interest and Financial Distress Justifying Exemption

The Court acknowledged the significant financial challenges faced by the Target Company and the telecom sector at large, including liquidity constraints and deferred payments of spectrum auction dues and Adjusted Gross Revenue (AGR) dues.

The Telecom Relief Package, 2021, announced by the Government of India, aims to protect employment, promote competition, protect consumer interests, infuse liquidity, encourage investment, and reduce regulatory burden on telecom service providers.

The Court recognized that the conversion of outstanding dues into equity shares by the GOI is intended to safeguard the interests of investors and the securities market by stabilizing the financial health of the Target Company.

The Court also referenced a prior SEBI order dated May 25, 2022, granting a similar exemption to the GOI in respect of acquisition of shares pursuant to the Telecom Relief Package, reinforcing the consistency of the regulatory approach.

These public policy considerations weighed heavily in the Court's decision to grant exemption from the open offer obligation.

Issue (e): Conditions on the Exemption

The Court imposed conditions on the exemption to ensure compliance with applicable laws and investor protection:

• The acquisition must comply with relevant provisions of the Companies Act, 2013, and other applicable laws.
• The GOI must file a report with SEBI within 21 days of completion of the acquisition, as per the Takeover Regulations.
• The statements and facts presented by the GOI in the application must be true and correct.
• The exemption is limited to the open offer requirement and does not exempt the GOI from disclosure obligations under Chapter V of the Takeover Regulations, SEBI (Prohibition of Insider Trading) Regulations, Listing Agreement, or other applicable laws.

The Court's imposition of these conditions reflects a balanced approach to granting relief while maintaining regulatory oversight and transparency.

3. SIGNIFICANT HOLDINGS

"In terms of Regulation 10(1)(i) of the Takeover Regulations, 2011, acquisition of shares by lenders pursuant to conversion of their debt as part of a debt restructuring scheme implemented in accordance with the guidelines of Reserve Bank of India is exempt from the obligation to make an open offer. In my view, it shall be appropriate to treat the conversion of VIL's Outstanding Spectrum Auction Dues (including deferred dues) repayable after the expiry of the moratorium period, into equity shares to be issued to GOI, at par with a debt restructuring scheme as envisaged under Regulation 10(1)(i) of Takeover Regulations, 2011."

"Considering the fact that a substantial sum of money is due to be paid to the GOI by VIL, which may place a potential burden on the financials of VIL, and also that an open offer obligation on the part of GOI involves huge sums of cash outflow (from GOI), I find that it would be appropriate to grant exemption to the Acquirer from open offer requirements as laid down in Regulation 3(1) of the Takeover Regulations, 2011."

"The acquisition of shareholding by GOI in VIL is proposed with the sole intent of protecting the larger public interest. Moreover, at present, GOI has no intent to participate in the management or the Board of VIL and there shall be no change in control of VIL. Further, such holding of GOI shall be classified as Public Shareholding."

Core principles established include the recognition that conversion of government dues into equity shares by the GOI can be treated as debt restructuring for the purpose of exemption under Regulation 10(1)(i), that public interest and sectoral support are valid considerations for granting exemption from open offer obligations, and that absence of change in control or management participation is a material factor in such decisions.

Final determinations are that the GOI is exempted from the obligation to make an open offer under Regulation 3(1) of the Takeover Regulations, 2011, subject to specified conditions, in respect of the proposed acquisition of shares in Vodafone Idea Limited through conversion of outstanding dues into equity shares.