SpiceJet vs Kalanithi Maran: An ugly battle

Kalanithi Maran, the former promoter of Spicejet, has moved the Delhi High Court against the airline.

Like most divorces, the one between SpiceJet and Kalanithi Maran has clearly turned ugly.

Maran, the former promoter of the low-cost airline, has moved the Delhi High Court alleging that though the company had paid Rs 679 crore, the current management was not issuing his two entities 189 million convertible warrants.

Interestingly, these warrants would give Maran a 20 per cent stake in the airline from which he had walked away for a consideration of a paltry Rs 2 a year ago.

There are two pieces to the Rs 680-crore (Rs 6.8 billion) that Maran claims to have paid SpiceJet.

Of this, Rs 370 crore (Rs 3.7 billion) has come to the airline in the form of non-convertible preference shares on which the airline will pay a coupon of six per cent a year.

The repayment of interest and principal is due only at the end of eight years in one bullet payment.

The other bone of contention is the issuance of convertible warrants to Maran.

The genesis of these lies in a loan given by Maran to the airlines back in 2014.

While Maran had management control then, shareholders' approval was sought for the issuance of 189 million warrants (in two tranches) to Maran at an annual general meeting in September 2014.

However, these were not issued till the company changed hands in 2015.

Maran possibly wanted to retain an upside from the transaction, which is why the issuance of the warrants was included in the share purchase agreement with Ajay Singh, say market analysts.

The turnaround has happened faster than either party expected, as oil prices have fallen sharply giving a boost to profits. And, if the current management dilutes stake in favour of a foreign airline, valuations will further move up.

However, experts believe opaqueness of the deal is one of the reasons for the current outcome.

Experts also say that Singh's acquisition of controlling stake in the airline was not followed by an open offer.

The share purchase agreement of January 8, 2015, between Singh and Maran refers to this on page 24.

The agreement, viewed by Business Standard, says: "The Parties agree and acknowledge that the shareholders of the company at their general meeting held on September 24, 2014, had approved the issuance of 81,680,629 and 107,410,749 warrants, which can be converted into equity shares in FY16 and FY17 respectively. The warrants will be converted at a conversion price of Rs 16.30 a share."

For this, Maran was required to pay Rs 308.21 crore (Rs 3.08 billion).

Sources close to the dispute said a part of this payment was a loan given by Maran to the company prior to the firm changing hands in 2015.

This is also mentioned in an annexure in the agreement: "The amount of loan Rs 178.59 crore (Rs 1.78 billion) provided by Kalanithi Maran shall be adjusted towards total consideration payable for issue of Tranche 1 and Tranche 2 warrants."

The new management of SpiceJet under Singh was in February 2015 to receive another Rs 75 crore (Rs 750 million).

However, it is not clear if this payment has been made or not.

The share purchase agreement states the issuance will happen only if regulatory approvals are obtained.

The current management has claimed an application for the same was turned down last year and a fresh appeal was filed in July 2015.

However, given that the share price has moved up significantly, the issuance of warrants at Rs 16.30 a share might raise some questions.

The SpiceJet stock closed on Friday at Rs 61.75 a share on the BSE.

If Maran were to convert the warrants at Friday's closing price, the outgo would be Rs 1,167 crore, which would be Rs 859 crore higher than what it would have been at the Rs 16.30 per share conversion price.

People close to the deal say SpiceJet would be willing to repay Maran's debt with interest.

Amit Tandon, managing director of Institutional Investor Advisory Services, says, "We do not approve issuance of warrants to promoters, unless there is a CDR (corporate debt restructuring) or a BIFR (Board for Industrial and Financial Reconstruction) case. The right thing for promoters to do is to bring in money and take equity upfront. Delaying conversion by 18 months leads to issues like what we see in SpiceJet. What we favour is money gets converted immediately into shares in place of warrants."

THE FLIGHT PATH

2014

SpiceJet flies into trouble as loss touches Rs 1,000 crore (Rs 10 billion) in 2013-14

Starts scouting for investors in August 2014

As losses mount, airline cancels around 40 flights a day from September

Marans loan Rs 179 crore to SpiceJet

Shareholders approved issuance of 189 million convertible warrants to promoters at Rs 16.30 a share in Sep

Convertible warrants were not issued in 2014, despite shareholders’ nod

Company firms up deal with Ajay Singh in Dec

FEBRUARY 2015

Maran exits SpiceJet after deal with Singh

He commits Rs 679 crore to the airline

Issued preference shares worth Rs 370 crore at the coupon rate of 6%

Rs 370-crore principal and interest to be paid at the end of eight years

189 mn warrants not allotted as SpiceJet claimed it was unable to get regulatory approval

MARCH 2016

Maran goes to Delhi High Court claiming breach of contract