The Adani Group’s potential hostile takeover bid of NDTV brings home the dangers of over-borrowing, the growing clout of large corporates in the media business and the need for media companies to focus on subscription revenues.
While the Adani Group’s move seems to have blindsided the management of NDTV, it should not have come as a total surprise either. Convertible warrants issued by a promoter company of NDTV have been hanging over it as a Damocles sword for at least a decade now.
In 2009, RRPR Holdings, owned by the founders of NDTV, Prannoy Roy and Radhika Roy, issued convertible warrants to a firm called Vishwapradhan Commercial Pvt. Ltd. (VCPL) against a loan taken from the latter. Upon conversion, these warrants are convertible to equity shares equal to 99.99% of RRPR, which had a 29% stake in NDTV. The warrants could be exercised at any point in time during the loan tenure, or thereafter, the agreement between RRPR and VCPL said.
The Roys seem to have agreed to issue such a warrant since they had to refinance loans taken from the ICICI Bank which was charging an annual interest of 19%. The loan itself was first owed to Indiabulls Finance, which helped fund an open offer by NDTV in 2007.
While VCPL, a Reliance group-backed entity, had entered as a sort of white knight to help RRPR and extended an interest free loan, there is no such thing as a free lunch.
Hence, the agreements between RRPR and VCPL included convertible warrants, call options on NDTV shares issued to VCPL’s associates and protective rights such as the right to appoint a director to RRPR, getting prior written approval from VCPL for RRPR and NDTV to raise funds, buyback shares, set up a subsidiary, sell or pledge RRPR’s shares in NDTV and so on.
Now, VCPL has passed through the hands of Reliance and its associates and has been bought by AMG Media Networks Limited, an Adani Group company, which wasted no time in exercising the option to convert the warrants into shares in RRPR. This also triggered an open offer under the Takeover Code.
What happens next?
AMG had given RRPR almost 48 hours to convert the warrants and transfer the shares. That deadline ended on Thursday. NDTV said that since Radhika Roy and Prannoy Roy are not permitted by the Securities and Exchange Board of India (SEBI) to conduct any securities transactions till the end of November this year, this prohibition also applies to all the firms that these two promoters possess. It said that SEBI approval is needed.
Proxy advisor and founder of InGovern Shriram Subramanian said that this defence used by the Roys is thin because the loan agreement predates the SEBI ban. It is a tactic to buy time till November. Be that as it may, what’s curious is that Adani’s open offer under SEBI rules to buy a further 26% in NDTV at ₹294 a share is far below the current market price of ₹424 a share.
To be sure, NDTV’s market price has jumped by around 186% in the last six months on speculations of sale and the fair value might be much lower.
However, if Adani Group is intent on gaining control, why is its open offer price at such a steep discount to the market price? One conclusion is that perhaps it doesn’t want to gain control. But then, what will it achieve with a 29% stake in NDTV?
Tycoons typically buy media companies because it gets them influence or it is some sort of philanthropic effort. If it were the second, an easier way would be to just inject funds into a media company through say, preference shares or such instruments and give it the resources to pursue independent journalism. A messy takeover battle is not how one does philanthropy.
With a 29% stake, however, Adani Group — or any investor for that matter — can be a thorn in the side of a company’s management. That’s because they can block a certain category of shareholder resolutions called special resolutions. These resolutions need 75% of shareholder votes to pass.
Buyback of shares, loans and investments by a company and appointment of certain directors, etc, requires a special resolution. A shareholder with 29% stake can block this and be an irritant even if they don’t have a say in the day-to-day affairs of the company.
Now that the Roys appeared to have dug in their heels, Adani could well take the matter to court. In a statement on Friday, Adani conveyed that it didn't buy into NDTV's argument and expressed surprise at the latter's stand.
On its part, NDTV will also invoke another clause in the loan agreement which bars VCPL and its associates from purchasing shares of the television company, which will increase their holding to more than 26% in NDTV without the consent of the promoters.
According to company law expert Jayant Thakur, this clause can be tricky to apply. It bars VCPL or the affiliates from directly purchasing shares of NDTV as it would increase their holding to more than 26%. But, he says, the question is whether this would bar conversion of warrants in RRPR whereby VCPL effectively becomes the 99.99% owner of capital and thereby control more than 26% of NDTV.
VCPL may say that it is just converting holding in RRPR and hence, not purchasing shares of NDTV.
This will be a key point of the litigation.
Effect on Indian media
The Adani Group’s entry into the media business (it already has a 49% stake in BQ Prime) is yet another example of the growing dominance of corporations in this sector. Companies, often like governments, want to control the narrative. And that narrative will not necessarily serve the interest of the public at large.
Moreover, when large and diverse conglomerates own media units, there is a significant conflict of interest which could crimp editorial independence. Some of these other large businesses are in regulated sectors such as energy or telecom, where the government has a say, and corporations would displease the government, whether at the Centre or the States. This can happen even if the corporate owner tries to maintain an arm’s length relationship with their media entity.
Media companies can maintain editorial integrity by cutting down their dependence on sources of revenues which have an embedded element of conflict of interest.
Media consumers (readers and viewers) should be at the forefront and subscription revenues the way forward.
Khushboo Narayan is Dean of the ACJ-Bloomberg Programme at Asian College of Journalism, Chennai.