D E Shaw runs afoul with RBI- again! This time on Amar Ujala deal

Posted on July 18, 2011

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D E Shaw, one of the world’s largest hedge funds, which holds 18% in Amar Ujala is getting regulatory attention from the RBI and ED with its investments in India coming under a scanner a second time.

People tracking D E Shaw’s investments in India will remember the issue they faced with trying to exit from their investment into DLF Assets- according to a Money Control report (linked here) dated June 30, 2009, D E Shaw attempted to explore ‘creative’ avenues for exit valuation which ran foul with the Indian Regulators.

To quote Nayantara Rai, ” Let’s go back to early 2007. The RBI was very concerned about the large debt inflows into the country and had banned debt instruments. So, Optionally Convertible Preference Shares, Partially Convertible Preference Shares were banned in early 2007. The RBI had made it very clear that only Compulsory Convertible Preference Shares (CCPS) and Compulsory Convertible Debentures (CCD) would be allowed. These are equity instruments. When you give you an equity instrument you cannot promise an investor that this is the price at which you will exit. It is equity; you have to exit at the current valuation.

We understand from sources that there are a lot of cases where a lot of private equity investors in which they gave debt and it was disguised as equity. The RBI will have no problem if DE Shaw were to exit at today’s valuations because that is supposed to be equity and not debt. You can give a notional amount of how much the return should be and that is how usually these private equity deals are supposed to be structured.”

History seems to be repeating itself, with D E Shaw’s legal wrangling the Indian promoters of Amar Ujala on its failure to provide it an exit route through an IPO as agreed upon between the two parties at the time of entering the agreement.

DE Shaw in 2007 ( note the year) had picked 18% stake in Amar Ujala Publications through a preferential allotment for a cash consideration of Rs 58.5 crore. In addition, it also picked 18% stake in A&M Publications, the printing unit of the media house for a similar consideration of Rs 58.5 crore. This Rs117 crores transaction at that time valued the two entities at about Rs 650 crore cumulatively. A&M Publications has subsequently got merged in Amar Ujala Publications some time back.

DE Shaw is pushing the company to buy back its entire equity holding of 18% in the company at an assured rate of return of 25% compounded annually, which would amount to Rs325 crores at present ( which RBI forbids under its 2007 guidelines). The failure of which will lead DE Shaw to “Drag” its own holding along with majority shareholders holding in Amar Ujala to any proposed buyer that it might be interested in selling the stake.

The fund has now filed a case with Delhi High Court seeking an injunction to restrain the promoters with majority shareholding from selling or transferring their shares.

It alleges that since Amar Ujala has not been able to come out with an IPO by September 2010 as agreed upon (while seeking the investment) therefore it is invoking its right to restrain the majority shareholders from selling or transferring such shares.

The fund in 2007 while making the investment had entered into an “Investment Agreement” and “Exit Rights Agreement” with Amar Ujala.  FIPB had approved the investment by DE Shaw in Amar Ujala based upon these  agreements(both “Investment Agreement” and “Exit Right Agreement”) entered into by the two parties. The FIPB permission specifically mentions that any change in the said agreement has to be first intimated to it, I&B Ministry and RBI (who monitor FDI in the country) and permission/approval is required to be taken from such authorities.

It is believed that there have been materials changes in the agreements between the two parties post the FIPB permission which have not been duly intimated and permission obtained both from FIPB and the I&B Ministry.

It is under the changed agreements signed between the two parties in 2008 that allows for the exit route to DE Shaw through an IPO by the company by September 2010. While the “Exit Rights Agreement” under it provides the fund with the rights to require the “Controlling Shareholders” to buy its share at pre agreed formula failing which the fund can enforce the “Drag Rights” (right to require the Controlling Shareholders to sell their shares to the same party) on the promoters/controlling shareholders.

The absence of permission post these changes would make this action on DE Shaw questionable.