Sebi norms make promoters with small holding nervous

Now an acquirer can buy up to 24.99 per cent in a company without triggering an open offer, which effectively means that private equity (PE) investors holding a sizeable stake in listed companies can play an assertive role — in the sense they can make things difficult for the existing management.

Legal advisors familiar with M&A activity even visualise a scenario where these segment of investors armed with 24.99 per cent equity in a company — without raising their stake to 51 per cent through an open offer — can forge an unwritten arrangement with the existing promoters and get what they want. Simply put, they can influence management and control the company informally, as 24.99 per cent stake is big enough to muscle their way.

At the same time, another (positive) view is that now PE investors have a chance to hike their holding in the business to a higher level would be good enough for promoters to stay alert.

Not that every investor who shores up equity of 24.99 per cent is keen on taking over the company, said an investment banker.  Though minority shareholders stand to gain more in case of hostile takeover attempts, the sucess rate of such an act in India is very low simply because the regulatory and business environment don't view it kindly. Classic example is that the mighty Ambanis with their huge clout in the right places did not succeed in the takeover of Larsen & Toubro in the nineties.

So much so, even when financial institutions in 90s threatened to sell their holdings in Modi Rubber to any interested buyer due to non-repayment of term loans, promoters averted the hostile takeover by repaying the loans and buying out FIs equity at a premium to market price.

Recently, a year back Arun Bajoria of Kolkata made a hostile bid for the takeover of Bombay Dyeing belonging  to Nusli Wadia but did not succeed.

The companies where the largest single shareholder does not happen to be the promoter include IT major Infosys, Essar Oil, Moser Baer to mention a few whose promoters hold shares of over 16 per cent.

As of now there may not be any sudden change of guard at any of these companies, one would expect private equity investors to strengthen their position on their boards. If these investors can ensure better corporate governance, it could benefit other minority shareholders of the companies, too.