IFCI suitors worried about stake stability

Potential buyers of a 26 per cent stake in the government-owned Industrial Finance Corporation of India's (IFCI), the country's oldest financial institution, have raised concerns over the stability of their shareholding and board representation.

Interested parties are concerned about the possibility of 24 domestic banks and six financial institutions converting to equity Rs 1,480 crore worth of zero-coupon debentures to which they subscribed in 2002-03.

They are also worried at IFCI's inability to accommodate more than three or four representatives from the prospective strategic investor on its 15-member board.

The IFCI board is expected to meet on Monday to discuss these issues.

Representatives of two potential buyers told Business Standard that once the debentures are converted, the strategic investor's equity and, therefore, control will be reduced. 
 

IFCI's 'DEBT TRAP'
Scene I
Cause	The conversion of bonds takes place after the successful bidder buys 26%
Effect	The bidder will end up having 10% stake
Scene II
Cause	Conversion takes place after the bidder scales up stake to 46%
Effect	The bidder's stake will come down to 17%

Sources at IFCI, however, said no time frame has been decided for the conversion. "The conversion has to follow certain legal procedures, including approval from the IFCI board. Nothing will be done which could impact strategic investors' interests," they added.

On the issue of board representation, one suitor said: "Four seats on the board will not be in tune with the strategic investor's equity holding of 26 per cent."

In addition, the suitors said, the idea of buying 26 per cent was aimed at an eventual control of the company. Under the law, any acquisition of more than a 15 per cent stake requires a mandatory 20 per cent open offer for retail shareholders.

The successful bidder will eventually emerge as the largest shareholder in IFCI with nearly 46 per cent after an open offer.

"But the present structure of the IFCI board is averse to offering the majority of the board seats to the successful bidder. This will defeat the purpose of acquiring a majority stake," he added.

The IFCI stock today closed at Rs 83.80 on the Bombay Stock Exchange, 3.29 per cent lower than yesterday's close. At this rate, the company's valuation of the company stands at Rs 5,352 crore. So an acquisition of 26 per cent is estimated at Rs 1,392 crore.

Sources close to IFCI said the effort to strike a balance between the interest of the bidder as well as other stakeholders is on. "We are hopeful of finding a solution," they said.