Sweet Deals Are Made Of This

In February 2015, SpiceJet’s new promoter Ajay Singh was having a pep talk with the top management and pilots of the beleaguered airline he had just bought. Actually, make that bought back. The 51-year-old Singh had founded SpiceJet in 2005 after restarting the erstwhile Royal Airways (and this initially was S.K. Modi’s ModiLuft), and had subsequently sold his stake in 2008. Eventually, media baron Kalanidhi Maran of Sun TV bought into the airline in 2010.

According to a recording of the interaction—which Outlook has heard—Singh told the SpiceJet top team that Maran had approached him first in December 2014, saying he was interested in shutting down the airline. “The government approached me as well and said, look we would like you to explore whether it is possible to revive SpiceJet,” he added. Singh currently owns a little over 60 per cent of SpiceJet’s equity, with financial institutions and the public controlling the remaining stake.

Over the 33-minute conversation, Singh reiterated this point, besides stres­sing that he had secured funds to run the airline. “There are strategic imperatives for a lot of people, including the government. Nobody wants to see an airline go down. With the government and the people of India behind us, I think there’s a pretty bright future ahead. You must see the tremendous amount of support the government’s extended this airline.”

The Maran brothers Political pressures took a toll on the Kalanidhi-owned airline

This conversation matters because uncomfortable questions are now being asked about the SpiceJet deal. These doubts, being raised across aviation and political circles, focus on knowing more about the deal that enabled Singh to fly away (forgive the pun) with an airline with a diminished marketshare but enormous assets, flight slots, a ready fleet and network. Fuelling this talk is the absence of clear answers by multiple regulatory bodies and the government.

It is indeed unusual that nothing about the deal has been made public. No one knows the final deal price. There has been no open offer to other shareholders, a mandatory requirement given that SpiceJet is a listed company. Unlike similar transactions, there has been no investigation by the authorities about Singh’s source of funds. There has been a matching silence on the part of the Union corporate affairs and aviation ministries and market regulator SEBI. Outlook’s repeated queries to these government departments went unanswered. Dubai-based aviation consultant Mark D. Martin has a probable explanation: “The subliminal message to everyone is that this is (Narendra) Modi’s airline and hence no questions will be asked.”

Actually, Mr Modi’s office has been receiving some uncomfortable questions about the deal. On May 6, BJP member Dr Subramanian Swamy wrote a letter to the prime minister alleging large-scale irregularities in the sale of SpiceJet. In his letter, written on a BJP letterhead and acknowledged by the PM, he alleged that there was corruption under the provisions of the Preven­tion of Corruption Act, the SEBI Act, the Companies Act, the Indian Penal Code and Prevention of Money Laundering Act arising out of the “illegalities” from the change of ownership in SpiceJet. This was Swamy’s third letter to the PM on the issue and each time it has been acknowledged promptly by the PMO. Outlook has copies of the letters (see Subramanian Swamy’s Missive Attack).

Some context is useful here. Kala­nidhi’s brother is former Union minister and DMK leader Dayanidhi Maran. Daya­nidhi, once high-profile and ext­remely powerful, is now being investigated in the Aircel Maxis case filed by the CBI as part of the 2G scam. Dayanidhi is also facing charges of running a 300-line private exchange from his residence when he was the telecom minister in the UPA government.

Hearings for the Aircel Maxis case and the illegal exchange are currently going on—Dayanidhi is yet to be prosecuted. Recently, Union finance minister Arun Jaitley took on the Union home ministry where the latter was not giving security clearance to the Marans’ 50 FM radio channels under the brand name Suryan FM in Tamil Nadu and Red FM elsewhere in India. According to reports, however, the home ministry is unlikely to accede to the finance minister’s requests.

In the early part of 2014, SpiceJet was flying high in the Indian aviation market. Then came the turbulence—moun­ting losses, the inability to pay creditors and fuel bills. It lost pilots and aircraft, and in December 2014, it grounded all flights and shut down operations. While there were many business reasons for this decline, most experts agree that the poli­tical pressure on the Maran brothers had also taken its toll. While Kalanidhi has run Sun TV with great profitability, he chose not to cross-subsidise the aviation business. In short: SpiceJet was starving for funds in a cash-intensive business and no one was willing to fund it.

In came the politically connected Ajay Singh, a serial entrepreneur said to be associated with about 40 companies, some of which are allegedly defaulters. One of the companies he co-promoted was Allianz Infratech which had obtained two telecom licences at the height of the telecom controversy. These licences were later merged with Etislat-Swan Telecom.

Singh is also believed to have been close to former telecom minister, the late Pra­mod Mahajan. Since Maha­jan’s death, Singh is said to be close to the BJP top brass, particularly in Delhi. That Singh is well-woven into the BJP fabric is evident from the fact that he was an instrumental figure in the BJP’s election campaign last year. Singh was part of a special cell that also had Amit Shah, Piyush Goel and Arun Jaitley and is rumoured to be beh­ind the Modi punchline: Abki baar Modi sarkar. He was also in charge of all outdoor and electronic publicity for the BJP during the elections.

Earlier, in 1996, sources point out that the then BJP government in Delhi appointed Singh as director of DTC and he had a hand in the purchase of new buses for the corporation. Despite repeated attempts, Singh was unavailable for comment for this story. In an interview with Outlook after his repurchase of SpiceJet, he had said things were better for the airline: “We have paid off a significant amount of our creditors. With confidence returning, forward cash flows have returned and fund requirements have reduced.”

Multiple experts agree that the airline required at least Rs 1,500 crore to jumpstart a revival, and the company’s stock, at around Rs 15-19, would not have fetched much value in case equity sale was considered as an option for raising money. SpiceJet’s market capitalisation, according to the June 3, 2015, price of Rs 18.10, is Rs 1,085 crore. But even so, it makes a sweet deal for Singh: with little over Rs 1,500 crore, he has acquired SpiceJet with a standing reputation, planes, parking and hangar rights and approved domestic and international routes. This would have taken months and money in case one was setting up a new airline.

A long-lasting BJP tie Ajay Singh with Pramod Mahajan, circa 2004. (Photograph by India Today)

According to Mark Martin, while the Marans were looking at a price of around Rs 72 per share for the airline, the final deal was made at around Rs 48-50 per share by lowering the value of the airline. Experts say that for airlines like SpiceJet, valuation is based on the business model, its sustainability, the network, inventory sale capability, distribution, airline operations, engineering capability and its core assets—the staff and crew. With most of these things in place, SpiceJet could command a good valuation in the market despite the fact that its aircraft were leased.

Subramanian Swamy also points out in his letters to the PM that the publicly listed airline has fixed assets of around Rs 20,000 crore and a little over 40 per cent of its shares are held by the public and public sector financial institutions. Aviation industry experts concur. “The entire fleet of SpiceJet is leased, with the exception of the Bombardier fleet. SpiceJet, if correctly valued in the market, should be at least $500 million or Rs 3,000 crore based on some of its contracts and market access rights it has,” says Martin.

Other questions have been raised about this ‘bailout’ or sale. Says Prof R. Vaidya­nathan, professor of finance at IIM Bangalore: “SpiceJet is owned by the public and begs an important question—can a public listed company be acquired without disclosing the acquisition scheme or the purchase price?” According to him, three issues of public importance were “kept secret”—scheme details were not disclosed, acquisition price was not disclosed and open offer was exempted without valid reason. “It is extraordinary that the exemptions from open offer as well as non-disclosure of prices are...making one feel about the emergence of a scam of massive magnitude which will haunt this government,” insists Vaidyanathan, who was on the government’s black money committee.

Moreover, he says, in the ‘Form B and D filings’, both Maran and Singh have put the face value of shares and not the actual transaction price. Says former Air India executive director Jitender Bhargava, who authored The Descent of Air India, “At what rate Maran sold the airline to Ajay Singh needs to be put in the public domain. It has to be in a transparent manner. Whatever the rate they sold it at, the other shareholders should also be given the benefit. Was this done at all?”

Vaidyanathan says that in the filing made by Ajay Singh under 10(6) of the SEBI (Substantial Acquisition Of Shares And Takeovers) Regulations, 2011 (‘SAST Regulations’), he did not disclose the price at which the shares are proposed to be acquired. Singh wrote that in terms of the share sale and purchase agreement the consideration paid by the acquirer for the acquisition of these shares is “confidential”. “Confiden­tiality is being claimed for a mandatory public disclosure and it is atrocious to say the least. Both in letter and spirit it is not tenable. Let us be clear that this is a private transaction in a public company. It is not some private deal,” says Vaidyanathan.

While these raise several questions, one of the most prominent issues being highlighted in the case is the exception given to SpiceJet’s new promoters to come out with an Open Offer considering that SpiceJet is a listed entity and under SEBI rules for any sale of above 25 per cent stake making an open offer is mandatory. In this case, the Marans’ stake of a bit above 58 per cent was taken over by Singh. Yet an open offer was not insisted upon by SEBI here. This is unusual. “They cannot escape making an open offer under SEBI laws. It’s not clear why SEBI is not insisting on it. SEBI typically doesn’t pay heed to any request for no open offer unless the company is bankrupt which is not the case here,” says Deepak Shenoy of stockmarket analytics firm CapitalMind India.

Regulation 3(1) of the SAST Regulations provides for any acquirer of more than 25 per cent in a company to go for an open offer. In fact, says corporate lawyer Hemant Batra, “the regulations even go to the extent of stating that irrespective of acquisition or holding of shares or voting rights in a target company, no acquirer shall acquire, directly or indirectly, control over such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations.”

Adds Chennai-based chartered accou­ntant M.R. Venkatesh, who is known to be close to Jayalalitha, “This kind of a waiver by SEBI is unprecedented. SEBI has suspiciously acted with great alacrity in this particular case.” He agrees that had it been any other company, SEBI would likely have come down heavily upon them but was extraordinarily lenient on SpiceJet’s promoters.

To be sure, certain exemptions could have been provided under Regulation 10/11 of the SAST Regulations. SEBI has the power to exempt the acquirer from making an open offer under Regulation 10/11. Such discretionary power may be exercised by SEBI upon an application made by the acquirer. However, such power is to be exercised in the “interest” of the securities market.

Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG, explains. “The cash-stra­pped airline was grounded on December 17, 2014, during the peak winter season, due to non-payment of dues to oil companies. Had the airline been shut down, its share certificates would have been rendered worthless. So from a layman’s perspective, the interest of minority shareholders has already been protected with the revival of the near-defunct airline. Media reports suggest that SEBI may consider granting an exemption from open offer to SpiceJet under sections 10 and 11 of SAST Regulations.”

Adds corporate lawyer Gaurang Kanth, “It appears from secondary sources that a ‘Scheme of reconstruction and revival for the takeover of ownership, management and control of SpiceJet Limited’ was filed before the competent authority, the (Union) ministry of civil aviation, and that such a scheme has since received the ministry’s approval.” This apparently takes decision-making from sebi’s hands. “This interpretation, however, may have a potential of misuse,” adds Kanth.

That may well be so, but in the absence of clear statements explaining their stances from the regulatory bodies, tongues will continue to wag. This applies in particular to a government that has recently stressed—via finance minister Arun Jaitley—that there was no scam in the first year of Modi sarkar. “The corridors are empty, and the sile­nce cheery,” wrote Jaitley in a Facebook post recently, pointing to “the difference between UPA’s crony capitalism and institutional destruction and nda’s liberalisation and anti-corruption”. The onus is on the government to come clean on the SpiceJet deal.

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Flying Around In Circles

Many questions around the government-assisted SpiceJet deal between Ajay Singh and the Marans

The Airline

• Marketshare 9.2%

• Daily flights 245 to 41 destinations

• Aircraft strength 20 Boeings, 15 Bombardier Q400s

• Assets Rs 20,000crore

• Market capitalisation Rs 1,085crore

• Accumulated losses in Dec 2014 Rs 3,000crore

The Deal

• The airline was grounded in December 2014. The owner, Kalanidhi Maran, approached Ajay Singh to buy the airline

• Singh is known to be close to BJP and was an integral part of prime minister Narendra Modi’s campaign machinery

• Singh took over 58.46% of the Kalanidhi and Kal Airways stake at an undisclosed sum; he currently holds 60.31%; 39.69% is publicly held

• Singh is bringing in Rs 1,500 crore in three tranches to revive the airline

The Questions

• Why was the deal value not disclosed when it is mandatory according to SEBI rules?

• Why was an open offer not made to other shareholders, as per SEBI rules?

• Why was Ajay Singh’s source of funds not examined closely?

• Why have SEBI and various govt departments maintained a sphinx-like silence on the deal?

• Why did the government approach Ajay Singh, as he says, to take over SpiceJet if it did no such thing for Kingfisher?