The Union government’s proposed acquisition of institutional lender IFCI Ltd is unlikely to be smooth, as the unprecedented move might require multiple regulatory approvals.
“There are not too many precedents (of a private company going into government hands. There are only precedents of companies being nationalised through parliamentary statutes,” Atul Rai, chairman, IFCI, told Business Standard. “Since IFCI is a listed company, one would imagine that approval of Sebi (the Securities and Exchange Board of India) may be required.”
The government has decided to convert Rs 923 crore worth of optionally convertible debentures (OCDs) it holds in the company into equity shares at par. “Post exercise of conversion option of Rs 923 crore OCDs into equity at par, (our) holding will become 55.57 per cent and by including the holding of banks/financial institutions, it will be 68.31 per cent, making it a government company,” the government said last month.
Since the deal was announced on August 24, the stock has crashed 28 per cent. Today, it ended in the green, gaining 0.6 per cent to close at Rs 25.20. The company’s board of directors is scheduled to meet tomorrow on the matter.
Interestingly, the government does not hold certificates for part of its debenture holding. A person associated with IFCI said getting Sebi approval might not be easy, as the proposed move might falter at the test of the Companies Act. As a first step, the government has filed a petition to the Registrar of Companies, asking it to direct the company to issue OCD certificates. Though the government claims it holds debentures worth Rs 923 crore, it has certificates supporting only Rs 400 crore.
Further, experts said such a conversion would trigger an obligation on the government to make an open offer to minority shareholders. Under the Sebi takeover rules, any entity acquiring 25 per cent or more in a listed company is required to provide an exit to minority investors by making an open offer to acquire a further 26 per cent.
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“The acquisition will trigger an open offer. But the government can apply for an exemption,” said Manoj Kumar, assistant vice president, Corporate Professionals. He said there have been instances where the government has infused a substantial amount of capital and Sebi had waived the open offer requirement. Last year, the government had subscribed to shares in several public sector banks, duly getting exemptions from the market regulator.
“Perhaps in the case of IFCI, there could be a new model of corporate governance, a new model of management or perhaps we may also have to contend with the challenges of repositioning our business,” Rai of IFCI said.
The erstwhile Industrial Finance Corporation of India (IFCI) was converted into a company incorporated under the Companies Act, 1956 in March 1993. It was then decided that the holding of government-controlled institutions in IFCI should be maintained above 51 per cent.
In 2001, the government had infused Rs 400 crore as Tier-l capital in the form of 20-year, 9.75 per cent, unsecured convertible debentures. Then, in December 2002, the government approved financial assistance of Rs 5,220 crore to IFCI, to be released between 2003-04 to 2011-12. Of the package, financial assistance of Rs 2,932 crore (Rs 523 crore as loan in the form of OCDs and Rs 2,409 crore as grants-in-aid) was released. In 2006-07 the company started making profits and it was decided to stop release of further assistance.