Hike stake in your co, the cheaper way

NEW DELHI: Promoters’ holding in their companies is going up through an indirect route. They are either going for share buybacks or merging group companies with the listed entity, which results in higher promoter holding. The list of companies for which either of the two has been announced include names both big and small like Gujarat Ambuja, SRF, MphasiS, Mahindra Gesco, Spentex, Ansal Properties & Infrastructure, ICI India, Abbott India and Natco Pharma, among others.

As against the direct route where promoters pick shares from the open market under the creeping acquisition route or through open offers and also options like convertible warrants, the indirect route does not involve paying cash for greater control.

Share buybacks, which have recently been announced include that of SRF, ICI India, Abbott India and Natco Pharma. While the basic purpose of buybacks is to distribute surplus cash with the company to its shareholders, at times it is also used to lift share price if the management feels it is undervalued.

Says Ashish Bharat Ram, president and executive director at SRF, which has just closed its buyback offer: “We had funds available with us as a result of carbon credits, so we went ahead with the buyback.”SRF’s buyback was made at a significant premium to its existing price early this year, but with stock markets bouncing back, its share price soon moved up catching up with the offer price and the company has closed the offer garnering an insignificant proportion of the targeted shares.

The merger route, however, is more debatable. Usually companies say it is being done to integrate operations. But shareholder activists argue that in some cases, this represents backdoor listing to circumvent open offers to minority
shareholders illegally.

Says corporate lawyer Diljeet Titus of Titus & Co, “It is almost impossible to determine whether the merger of a privately-held company with the public company is being done for increasing stake or for business integration. As long as the merger has been approved by the court, it is legal.”

Many promoters have announced merger of their unlisted entity with the public company over the last few months. Among the big names include cement giant Holcim which is merging Ambuja Cement Eastern with Gujarat Ambuja.

As a result, Holcim’s stake in Gujarat Ambuja will move up to the level of 23% from 14.8% as of June, ‘06. This, at a time when Holcim failed to increase its holding in Gujarat Ambuja through its open offer to the shareholders.

Among others, US-based software service major EDS is merging EDS India with MphasIs. As a result, its holding in MphasiS would move up from 51.4% to 61.8%. Others who are following this route include Ansal Properties & Infrastructure, Mahindra Gesco and Spentex.