Non-compete Fee: SAT Rejects Sebi Directive

Securities Appellate Tribunal (SAT) has upheld E-Land Fashion’s appeal against a directive from the Securities and Exchange Board of India (Sebi) to include non-compete fee in its open offer for Mudra Lifestyle. 

“Promoters have the capability of building a strong business from scratch as a result of their understanding of the market and ability to compete with the business of target company (Mudra). If they were to do that, it would not be in the interest of its shareholders,” the ruling said. The South Korean textile company had acquired 25% stake in the Indian firm. It made an open offer to buy 20% at Rs 60 per share, while paying . 75 a share to promoters for a controlling stake. The capital market regulator had asked ELand to include the non-compete fee of 25% in the open offer, which means that even non-promoters will have to be paid at par with promoters. “The payment (non-compete fee) is not an attempt on part of the appellant to reduce the cost of acquisition to discriminate against public shareholders,” SAT said. 

Non-compete fee is paid to the selling promoters so that they do not re-enter the business and pose threat to the acquired company. An acquirer can pay non-compete fee of up to 25% of the price offered to shareholders in an open offer. Anything more than 25% has to be included in the open offer price. 

Non-compete fee is increasingly becoming a contentious issue with Sebi vetting several such cases and SAT upholding such payments to promoters. A committee on takeovers constituted by Sebi and headed by C Achuthan, former presiding officer of SAT, had suggested that either the non-compete fee be scrapped or shared with public shareholders. 

In case of E-Land, Sebi had advised adding the non-compete fee in the open offer as the promoter still holds about 19% post offer shareholding. The capital market regulator said that even after stake sale to E-Land the promoter will have joint control of Mudra, with rights to appoint board members and right of first refusal, and is not likely to compete. However, appealing to SAT against the market regulator’s directive, E-Land said that in past promoters of Mudra, who were earlier Bombay Rayon promoters, broke away from the company and built a strong competitor in Mudra. 

There have been similar such tussle over payment of non-compete fees in the past. In 2006, Heidelberg bought stake in Mysore Cements, where Sebi said payment of non-compete fee to promoters was not justified, which was later turned down by SAT. Similarly, Idea Cellular had to defer its open offer following a delay in approval from the markets regulator, when it offered non-compete fee of 25%. Tata Tea’s acquisition of shares in Mount Everest also ran into trouble after Sebi told the company to include the noncompete fee to share-holders. However, in the acquisition of Gujarat Ambuja Cement, Indo Rama Textile, Micro Inks and Cairn India, Sebi has allowed payment of non-compete fee. 


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