SEBI’s intended review and likely ban of non-compete fee allowance in merger schemes, following the HDFC Life-Max Life deal uproar, is tantamount to safeguarding the interest that’s already protected.
It all began with the furore over the non-compete fee of Rs. 850 crore paid to promoters of Max Life in the HDFC Life-Max Life merger. With some of the advisory firms holding it against the interest of minority shareholders, SEBI now reportedly intends to review the exemption even in court-approved merger schemes, supposedly to ensure uniformity in the rules for takeover schemes where such fees is denied.
Whilst some advisory firms dubbed the non-compete fees to Max Life as ‘uncalled for’ or ‘unclear’, some firms questioned if Analjit Singh and his family could claim the sole credit for the growth of Max Life Insurance. In any event, post-merger, the promoters of MFSL would continue to hold a 6.5% stake in the merged entity, which by itself is large enough to act as a deterrent for MFSL’s promoters from starting a competing business.
On a serious note, some of the advisory firms even suggested that most minority shareholders in MAX’s case are institutions which wish to maintain their long-term relationships with the merged entity, and hence, are siding with it on the non-compete fee issue. Some commentators have questioned the non-compete fees on merit in the given case. The plain fact is that current SEBI provisions adequately protect minority interest in both Merger and Takeover schemes, albeit through different mechanisms.
Let’s have a closer look at the non-compete fee issue. In case of a takeover offer under SEBI Takeover Regulations, non-compete fees is totally banned. However, any M&A transaction carried out under section 391 is outside the purview of SEBI Takeover Regulations. Hence, in a given case, it is possible to pay non-compete fees under a scheme of merger, depending upon the commercial reality of businesses. HDFC-Max seems to have has clearly sought refuge in this gap available under the applicable law. However, it is critical to appreciate that SEBI M&A guidelines for listed companies state that any arrangement between promoter and the company under any scheme of M&A has to be approved by the minority shareholders who are uninterested. So if the minority shareholders themselves have allowed such payments, where does the question of adversely affecting minority interest arise? In the same breath, where does the question of a ban on non-compete fee arise?
In the Max deal, the minority shareholders of Max Financial Services Ltd had cleared the proposal. So there’s no question of any oppression of minority. The minority shareholders would have certainly refused to support the non-compete fees to the promoters, had they reasons to believe that they were not adequately paid their value. So it boils down to getting the right commercial value for each constituent which is purely a business decision and I am afraid whether SEBI can regulate the same in any manner.
Earlier, the Supreme Court in the case of I.P. Holding Asia Singapore P. Ltd. vs SEBI (decided on April 20, 2014) had observed that although SEBI is mandated to protect the interest of all investors and may question the payment of a non-compete fee but the commercial decisions of the parties should be respected and that SEBI cannot go beyond its jurisdiction to determine certain aspects of takeover.
Admittedly, SEBI’s provisions for M&A in case of listed companies have been subjected to multiple filters and adequate scrutiny in terms of getting fair valuation and minority protection. So, the larger question is to what extent SEBI should control such schemes in the name of minority protection? The payment of non-compete fee is purely a commercial matter and the truth of the matter is that the real threat of anyone competing would never be from any minority shareholder. If at all there’s a threat, it would be from a promoter who is capable of rebuilding the business and challenging the acquirer or destroying the value paid. This is precisely why, in any partnership, the outgoing partner can legally receive a non-compete fee under the Indian Partnership Act. Similarly, Section 27 of the Contract Act contemplates a non-compete fee when goodwill of any business is sold. A scheme of M&A is merely a process or tool to facilitate such commercial arrangements which are hard commercial business decisions, and certainly are beyond the comprehension of any bureaucratic mindset.
In trying to protect the already protected, we would only make a mockery of Section 391 scrutiny which in any case is comprehensive (read cumbersome for listed companies because of SEBI’s M&A guidelines). In the name of minority protection, we cannot overlook the commercial reality of a globalised economy. More importantly, scrupulous regulation does not mean we should unduly prohibit promoters on every pretext.
The author is M&A Partner of law firm J. Sagar Associates.
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