Promoters, better watch out, big investors are regrouping

Corporate managements are on high alert. They have reasons to be so. From now onwards, institutional or individual investors who are not promoters can acquire 24.99 percent without going for an open offer. This effectively means private equity (PE) investors holding a sizeable stake in Indian companies are going to assert themselves. The Securities and Exchange Board of India (Sebi), the capital market regulator, has accepted recommendations of a committee that suggested reforms in the existing takeover code by setting the takeover code trigger at 25 percent. The committee had submitted recommendations a year ago.

Under the existing norms, if an investor acquires more than 15 percent of a listed company’s shares, the takeover code rule meant that an open offer should be made to all shareholders to acquire a minimum 20 percent in the company.

With the acceptance of this proposal, investors could now easily acquire up to 24.99 percent without the worry of a takeover code getting triggered. Once the holding crosses 25 percent, the investor has to make an open offer for a minimum of 26 percent from the public. The committee had made a recommendation for an offer to acquire 100 percent holding in the company like in the US and the UK. However, Sebi has opted for the 26 percent minimum offer limit.

These changes could have significant implications for the existing promoters who have a holding of l ess than 25 percent. It’s the PE investors who stand to gain from this move. The companies where the largest single shareholder does not happen to be the promoter include mid-tier IT services companies like Infotech Enterprises, Firstsource Solutions and media company Moser Baer.

General Atlantic Partners owns a sizeable stake in Infotech Enterprises and Warburg Pincus owns over 30 percent in Moser Boer. Similarly, Singapore’s Temasek owns a significant chunk of Firstsource Solutions.

While there may not be any sudden change of guard at any of these companies, one would expect private equity investors to strengthen their position on their boards. If these investors can ensure better corporate governance, it could benefit other minority shareholders of the companies, too.

The very fact that PE investors have a chance to hike their holding in the business to a higher level would be good enough for promoters to stay alert, said one investment banker. Promoter holding in some companies was below 25 percent last July when the Achuthan Committee report was released. Since then, some of them have managed to shore up their stake.

Praj Industries promoter holding now stands at 25.2 percent, up from 22.8 percent in June 2010. Similarly, Nagarjuna Constructions or NCC promoter holding stands at 38.2 percent, from 20.2 percent a year ago. Indiabulls Real Estate promoter holding is now at 27.9 percent, which was 18.3 percent last year.

With interest rates on the upswing, it may not be easy for promoters to raise cash to invest into their own companies.

Watch as Koushik Chatterjee, Tata Steel says, that he is happy that the recommendations of TRAC have seen the light of the day.