Private Equity Investors come under the scanner
Private equity investors (PEIs), which have emerged as formidable players in the Indian corporate landscape, are being questioned on the extent of ‘control’ they exercise on companies.
By Sugata Ghosh, TNN |
MUMBAI: Private equity investors (PEIs), which have emerged as formidable players in the Indian corporate landscape, are being questioned on the extent of ���control��� they exercise on companies.
It is perceived that even as minority stakeholders, these investors exercise an amazing control by virtue of an agreement that PEIs enter into with the promoters of companies they invest in. The pact, based on which PEIs put money in a company, gives them veto rights on several key decisions.
Under such an agreement, the company has to take the consent of the PEI on moves like acquisition, divestment and raising capital. The pact also ensures that the majority shareholder will vote in support of such an agreement at shareholders��� meetings. If the company is a listed entity, this assumes special significance ��� due to such agreements, the PEI could be construed as a party ���acting in concert��� with the promoter.
According to private equity circles, the Securities & Exchange Board of India (Sebi) has raised the issue of ���control��� in a few cases. Some of the institutional investors have consulted their legal advisors on the subject.
The interpretation has significant implications in the context of the takeover code. The code requires an investor to make an open offer if its shareholding touches 15% of a company���s equity. However, PEIs even with stakes well below 15% enjoy veto rights, and thereby control, on companies. The point, then, is: should a PEI be asked to make an open offer even if its stake is below 15%?
It is perceived that even as minority stakeholders, these investors exercise an amazing control by virtue of an agreement that PEIs enter into with the promoters of companies they invest in. The pact, based on which PEIs put money in a company, gives them veto rights on several key decisions.
Under such an agreement, the company has to take the consent of the PEI on moves like acquisition, divestment and raising capital. The pact also ensures that the majority shareholder will vote in support of such an agreement at shareholders��� meetings. If the company is a listed entity, this assumes special significance ��� due to such agreements, the PEI could be construed as a party ���acting in concert��� with the promoter.
According to private equity circles, the Securities & Exchange Board of India (Sebi) has raised the issue of ���control��� in a few cases. Some of the institutional investors have consulted their legal advisors on the subject.
The interpretation has significant implications in the context of the takeover code. The code requires an investor to make an open offer if its shareholding touches 15% of a company���s equity. However, PEIs even with stakes well below 15% enjoy veto rights, and thereby control, on companies. The point, then, is: should a PEI be asked to make an open offer even if its stake is below 15%?
Secondly, if the PEI and promoter are felt to be acting in concert, then their combined shareholding should not exceed 55%. Under new Sebi regulations, the promoter shareholding can go up to 55% through creeping acquisition, and touch a maximum of 75% through an open offer. According to PEI circles, the agreement is largely to protect one party against the other, rather than the two acting in concert.
If Sebi sticks to its view, then such issues relating to control have to be factored into the takeover code. PEIs think that an open offer trigger at various stages would not only make investments costly, but also lower the liquidity.
The contentious issue is the agreement between the PEI and promoter. In the absence of such an agreement, the regulator is unlikely to raise the issue of control. ���The agreement is to protect minority shareholder interest and is practised in other markets. But if the regulator thinks otherwise, we have to abide by whatever it says,��� said a PEI.
Between January and June ���05, the total PEI investment in India has been over $850m. It was close to $1.8bn in calendar year ���04. While Corporate India has roped in PEIs through preferential allotment of equity in supporting capital expansions, the stringent conditions that these investors insist on have often not gone down well among Indian promoters. Given the interest that PEIs have shown in Indian companies, chances are that they may have to dilute some of their rights in the days to come.
Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
