Vodafone-Idea deal faces Sebi questions

Regulator seeks details of how acquisition share price was determined

The Securities and Exchange Board of India (Sebi) has sought an explanation from the Aditya Birla Group-promoted Idea Cellular over its proposed merger with Vodafone Plc’s Indian arm.

According to sources familiar with the development, the regulator has asked Idea to share details of the methodology through which the share price for acquisition was arrived at and whether such price discovery was in line with the listing regulations.

The regulator has also asked how Idea Cellular arrived at the pricing of shares for the merger with Vodafone. The move is aimed to ensure small investors have an opportunity to take an informed decision about their stake in the company.

“The regulator wants to be sure that all the compliance requirements are properly met, as the decision involves the fate of thousands of investors who have purchased Idea shares. Companies should maintain utmost transparency while going for such deals,” said a Sebi source.

The regulator has asked the Aditya Birla Group to submit promoters’ share transaction agreement, by which the promoter will acquire from Vodafone a 4.94 per cent stake after the merger and 9.88 per cent in the next four years. It has also questioned why this arrangement was made part of the merger scheme.

Sebi has also inquired if the proposed merger is compliant with the Department of Telecommunications (DoT) regulations.

These queries were raised by Sebi earlier this week after Idea Cellular approached the regulator for the merger approval.

The company has been given time until May 22 to respond to the queries raised. Aditya Birla Group companies declined to comment on the matter.

In March, Idea Cellular and Vodafone India announced their merger, which would make it the largest telecom operator in the country. In the first step, Idea Cellular and Vodafone India would merge their operations at a swap ratio of 1:1. Then, Birla’s holding companies would buy a 4.9 per cent stake from Vodafone at ~110 per share, investing close to ~3,900 crore.

This would increase Idea’s stake to 26 per cent and bring down Vodafone Plc’s stake to 45.1 per cent. The Birlas would have the right to acquire another 9.5-9.88 per cent stake from Vodafone in the next four years, so that both partners eventually hold an equal stake in the company (about 35.6 per cent each).

On the pricing issue, Sebi’s Issue of Capital and Disclosure Requirements (ICDR) regulation says that the company would have to disclose all the materially important facts and ensure that all disclosures are true, fair and adequate.

“The disclosure should be in line with Sebi’s new provisions on scheme of arrangements. According to it, even if an unlisted company is merging with a listed company, the provisions of ICDR need to be followed. The regulations clearly state that all the materially important facts need to be informed to the investors,” said J N Gupta, cofounder and managing director, Stakeholder Empowerment Services (SES), a proxy firm.

Another expert said the investor has the right to know more than just the swap ratio. At present, the company has only disclosed the swap ratio, and has not explained how the ratio was arrived at and what factors were considered in the process.

The approval process for merger involves multiple steps. After getting a nod from the board of director of companies, the company needs to submit details of the scheme of arrangement to the stock exchanges. The exchanges forward that scheme to Sebi along with their comments.

Sebi should give a ‘no objection’ on the scheme of amalgamation and then it finally goes for National Company Law Tribunal (NCLT) for its approval.