A number of promoters, who hold more than 20 per cent stake in their companies but are short of the new trigger of 25 per cent announced by the Securities and Exchange Board of India (Sebi ) last week, are looking to increase their shareholding.
Cash-rich promoters are looking to raise stakes at the prevailing cheap share prices by taking advantage of the window before the new rules get notified, say bankers advising these promoters. Getting to 25 per cent is a crucial safeguard against hostile takeovers and a key enabler for further consolidation.
According to data provided by Takeovercode.com, a website that specialises in the takeover law and its application, at least 210 companies had promoter holding above 20 per cent and below 25 per cent as of June 30.
Some of the prominent names in the category are Mahindra & Mahindra Ltd, in which more than 50 promoter group entities including trusts hold 24.86 per cent, HDFC Bank (23.28 per cent), 3i Infotech (20.33 per cent), Koutons Retail (21.74 per cent) and Edserv (23.75 per cent).
Promoters of these companies still have a window of a week to 10 days before the notification is issued, according to a takeover law expert. “The new code is expected to be notified in 8-10 days. During this period, when the old law is in force, the promoters can use the creeping acquisition provisions to raise their stakes,” he added. The Takeover Code, 1997, in force at present, allows promoters who have 15 per cent or more stake to increase their holdings by 5 per cent every financial year without making any open offer, under the creeping acquisition route.
Under the new norms, creeping acquisition will be open to promoters only if they hold 25 per cent or more, the new trigger limit. Creeping acquisition is an important weapon for promoters to consolidate holdings without the burden of open offers. The new code also provides for a voluntary open offer by promoters to consolidate their holdings. Even this offer, which can be for a minimum of 10 per cent stake, can be made by promoters only if they have a holding of at least 25 per cent.
The takeover panel had said in its recommendations the new code would have prospective effect. However, whether the effective date will be the date of notification or the date of the board meeting (July 28) is still not clear. Sebi officials declined to comment.
“I think people will do that (buy shares to reach 25 per cent), provided they have the money. The Trac (Takeover regulations advisory committee) had recommended the regulations take effect prospectively. So, if someone is below 25 per cent on the day the new code takes effect, he will not be in a very comfortable position,” said a senior investment banker, who was part of the 12-member Trac headed by C Achuthan.
Promoters of at least 170 companies who hold between 15 and 20 per cent will be in an uncomfortable position. Though they would hold over 15 per cent and be eligible for the creeping buy, they will not be able to cross the 25 per cent line even if they exhaust their entire 5 per cent creeping limit.
This list includes Infosys Ltd, in which founders Narayana Murthy, Nandan Nilekani, S Gopalkrishnan, K Dinesh and Shibulal hold a little over 16 per cent along with their family members. Nirlon (16.05 per cent), Moser Baer (16.3 per cent), Essar Oil (15.96 per cent) and Firstsource Solutions (19.86 per cent) are some of the other prominent names in this category.
“The Trac recommendations were out almost a year ago. These companies had sufficient time to shore up their holdings. Now, that they have not done it for any reasons, they are exposed to the new reality. If they want to raise their stake to 25 per cent, they cannot do it without making the mandatory open offer for 26 per cent to minority shareholders,” said the Trac member quoted earlier.
