Mumbai: The recent purchase of a minority stake in Hyderabad-based roads-to-township builder IVRCL by two Essel Group companies promoted by media baron Subhash Chandra might be a test case for how the new takeover code will pan out in case of companies where promoter holdings are low.
Chandra’s two companies — Asian Satellite Broadcast and Jay Properties — purchased a 10.19% stake in IVRCL through market operations recently. This has made the two Chandra companies’ combined stake in IVRCL only a trifle less than the 11.18% held by its promoters, the Reddy family. Under the new takeover code, Chandra can raise his stake in IVRCL to 24.9% and become the single largest shareholder without triggering an open offer.
As per the new code announced by the Securities and Exchange Board of India (Sebi) in July last, acquirers can buy up to 25% in a firm before they are required to make a mandatory open offer to minority shareholders. So if Chandra raises his stake further as he had stated, Sebi will have to give a ruling on who controls IVRCL, and this could be a precedent for such cases, analysts said. “This is a test case for the new takeover code to define control.” said Jayant Thakur, a chartered accountant specialising in securities law.
“For companies with such low promoter holdings, in case of a hostile takeover, the situation has changed with the new takeover code.” he added.
Three key factors attract corporate raiders. Low promoter ownership, low market cap and an attractive price. IVRCL fits in. Promoters own 11%, which represents a market value of R1,768 crore at a share price of R66.25. Some companies like India’s largest engineering company Larsen & Toubro, with no identified promoters, have survived takeover attempts and now have ring-fenced themselves after offering shares to employees. L&T Employees Trust owns 17% of the company now.
“Control is a contentious issue,” said the managing director of a foreign investment bank. “It is the situation that defines control and not theory.” A 24.9% stake for Chandra might not make any difference in terms of board seats, he added.
“A final call will have to be made by shareholders for board seats,” the MD said.
There is, of course, some precedent on defining control. In late 2000, under the previous takeover code guidelines, Sebi favoured Gujarat Ambuja Cements after it purchased 14.9% in rival Associated Cement Companies despite GACL having only two board seats. Sebi ruled there was no violation of takeover code and exempted GACL from making an open offer.
Chandra can raise his stake to 24.9% and ask the management to continue like in the case of GACL and ACC. But there could be a tussle unless Chandra strikes a negotiated deal with the Reddys.
Essel Group has made its intentions clear and IVRCL is hoping to fight back. “In line with its philosophy to grow its infrastructure business to match and benefit from the rising proportion of infrastructure investment by India, the Essel Group has acquired a 10.19% stake in IVRCL and is keen to increase it and is in the process of increasing it,” the group had said in a statement.
But IVRCL is confident of support from financial institutions and lenders. “I have received messages from other infrastructure companies willing to extend support and personally chairmen of some banks also said they will help, if required,” IVRCL chief financial officer Balram Reddy told a news agency. “Our chairman is having talks with other FIIs and (we are) fully backed up. We are ready to resist the move to any extent.”
For the Reddys, investors are crucial for any move by rival to takeover company. Foreign institutional investors own 37.11% and domestic institutional investors 5.4%, and the rest is with the public, according to shareholding pattern with the BSE until December 31.
A change in management will also trigger many clauses in many job contracts with both government and private companies and joint ventures partners. There are many contractual obligations IVRCL had entered into and many of these will have to be renegotiated if there is a change in management.
“We have asked our lawyers to examine the possibilities of a change in management in IVRCL,” said a senior official of a company that had invested in one of IVRCL’s ventures. “IVRCL will have to compensate for any change in management when the project is in works.”