Mindtree defers buyback in wake of L&T roadblock

The Bengaluru-based mid-tier IT services company Mindtree has deferred its decision on the buy-back of the shares, in view of the roadblocks caused by the engineering behemoth Larsen & Toubro's open offer.

"The Board considered the proposed buyback of equity shares of the Company at its meeting held on March 20, 2019. Following detailed discussions, the meeting has been adjourned to a future date," the company said in a filing to the stock exchanges.

It also informed the exchanges that no decision has been taken in relation to the proposed buyback of equity shares.

According to the experts, the company's buy-back proposal would have been impossible to get a nod, in wake of the open offer by L&T, aimed at a hostile take over.

“Now it’s a closed door for them. Even if they announce the buyback, they will have to go back to the shareholders to get approval. So, it seems like a waste of an exercise,” Shriram Subramanian, MD at InGovern Research Services, a proxy advisory services firm told DH.

Section 26 (2) of Substantial Acquisition of Shares & Takeover (SAST) Regulations of the Securities and Exchange Board of India (Sebi), rules that upon the public announcement of an open offer, the board of the target company shall not implement any buyback of shares or affect any other change to the capital structure unless the approval of 75% of shareholders by a special resolution by postal ballot is obtained.

In ordinary situations, the buybacks which constitute more than 10% of the company's share capital will have to be approved by the shareholders.

As of date, L&T has entered an agreement to buy 20.15% of the company’s stake from Café Coffee Day owner VG Siddhartha. It has also launched an open offer to take over around 46% of the MindTree’s stake at Rs 980 per share.

As of now, the company’s management has claimed support of just 23.93% of the remaining 79.85% of the shareholders – which includes promoter group owning 13.32% stake and Singapore-based Nalanda Capital, which owns 10.61% stake in the company.

According to market sources, the company has not been able to garner the support from the majority of its shareholders, which includes institutional investors, to make sure that buy-back proposal goes through. "Right now the investors are divided into two camps. Plus you have to realise that AM Naik of L&T is far more astute in convincing people in what is good for the company. So that is why Mindtree held back," a market insider told DH.

The experts believe that the move is aimed to increase the cost of acquisition for the L&T. “I don’t think that it can prevent the hostile takeover. It can increase the cost of acquisition for the bidder. And that is the route they seem to take,” said Amit Tandon, CEO and Founder of Institutional Investor Advisory Service (IiAS).

As corporate action like a buyback usually pushes up the share price, many analysts have seen it as an attempt by the management to make it costlier for any acquirer to take control of the company, apart from rewarding existing shareholders.

Tandon also lashed out the Mindtree management for what he said they were “using company’s money to hold on to their positions in the management.”