How companies become a sitting duck for a corporate raider with cash
Mindtree Limited
Mindtree Ltd got listed on stock exchanges on December 12, 2006. As on March 31,2007, the shareholding pattern of the promoters was 35.32% whereas the public held the rest 64.68%.
During the year 2011, Mr. Ashok Soota, one of the founding members of Mindtree who held around 11% of the shares sold his entire shareholding. Pursuant to this, as on March 31, 2012, the shareholding pattern of the promoters was 20.19% whereas the public held the rest 79.81%.
Let us jump straight to the years where the fall of the first domino triggered the entire set to fall. The series of events took place in the FY 2019-20. So lets begin understanding the picture from the closure of FY 2017-18.
The shareholding pattern of the company as on March 31, 2018
As on 31 March, 2018 the promoter holding in Mindtree Ltd was 13.37% whereas the public holding was 86.63%. Such a low promoter holding would anyways invite corporate raiders.
List of Top Ten Shareholders of the Company as on March 31, 2018
- Coffee Day Enterprises Limited
- Coffee Day Trading Limited
- V G Siddhartha
The following three herein referred to as VG Siddhartha and Group, owned around 20.45 % of Mindtree Ltd shares.
Subsequently on 18 March,2019, the consent of the Board of Directors was accorded to sell the shares at an agreed price of INR 980 per share along with such other terms and conditions, as per the draft share-purchase agreement to be entered between the Group and Larsen & Toubro Limited (L&T Ltd).
Hence, on 18 March,2019, a share purchase agreement was entered among the Group and L&T Ltd for sale of the shares subject to approval of the regulator and certain other routine terms and conditions.
On 30 April, 2019, L&T Ltd pursuant to the approval from Competition Commission of India, acquired 3,27,60,229 shares constituting 20% of Mindtree Ltd share capital from Mr. V.G. Siddhartha and his group of companies.
We need to understand few regulations of Securities and Exchange Board of India (Substantial Acquisition of Shares And Takeovers) Regulations, 2011 herein referred to as takeover regulations.
According to Regulation 4 of the takeover regulations,
an acquirer shall acquire control over the target company after he makes a public announcement of an open offer for acquiring shares of such target company.
According to Regulation 6 of the takeover regulations,
An acquirer who collectively hold 25% or more but less than the maximum permissible non-public shareholding in a target company, can voluntarily make a public announcement of an open offer.
If the acquirer, has acquired shares of the target company in the preceding fifty-two weeks without triggering the obligation to make a public announcement of an open offer, they are not eligible to voluntarily make a public announcement of an open offer under this regulation.
During the offer period, the acquirer is not entitled to acquire any shares other than those under the open offer.
According to screener, as on March 31, 2020 L&T Ltd had cash equivalents of INR 15,118 Crores i.e. even after cash outflow of INR 10,053 Crores, L&T Ltd had INR 15,118 Crores in its bank account !
L&T Ltd will definitely be a raider with cash for many more sitting ducks in the near future.
India cements Ltd was founded in the year 1946. From a two plant company having a capacity of just 1.3 million tonnes in 1989, India Cements has robustly grown in the last two decades to a total capacity of 15.5 million tonnes per annum. While retaining cement over the years as its mainstay, India Cements has ventured into related fields like shipping, captive power and coal mining that have purposeful synergy to the core business.
Shareholders acting in concert hold about 22.77% of the shareholding in India Cements Limited. What is even more interesting is the name of the shareholder – Mr. Radhakishan S Damani. (herein referred to as RK Damani)
Any guess as to who is this RK Damani ?
RK Damani is none other than the promoter of Avenue Supermarts Ltd – Dmart. RK Damni is also a stock market investor holding a wide portfolio of companies.
RK Damni and other related parties own around 22.77%. India Cements Limited can in no time become a sitting duck in the hands of RK Damani because the promoter holding is only around 28.41%, a little higher compared to Mindtree Ltd but not sufficient enough to wade off the threat. Mr. N Srinivasn, may be a man with significant powers in the corridors of BCCI and politics but Mr. RK Damani is a man with significant powers in the Dalal Street. RK Damani being a stock market trader and investor has enough financial resources to acquire majority control of India Cements Ltd through an open offer. If RK Damani makes up his mind to take control, even before N Srinivasn rings his brokers in Mumbai, the shares would be acquired.
According to Regulation 6 of the takeover regulations,
An acquirer who collectively hold 25% or more but less than the maximum permissible non-public shareholding in a target company, can voluntarily make a public announcement of an open offer.
If the acquirer, has acquired shares of the target company in the preceding fifty-two weeks without triggering the obligation to make a public announcement of an open offer, they are not eligible to voluntarily make a public announcement of an open offer under this regulation.
During the offer period, the acquirer is not entitled to acquire any shares other than those under the open offer.
L&T Ltd desirous of acquiring control over Mindtree Ltd started to acquire shares in the open market. From May 03, 2019 till June 14, 2019, L&T Ltd acquired 1,46,93,579 shares from open market which constituted to an increase by 9% in the shareholding. L&T Ltd now owned 29% shareholding in Mindtree Ltd.
L&T Ltd was eligible to make a public announcement of an open offer to acquire shares of Mindtree Ltd as it held more than 25% shareholding. Hence, an open offer to acquire 5,13,25,371 shares of Mindtree Ltd constituting 31% of the share capital at consideration of INR 980 per share was announced by L&T Ltd. On successful completion of the open offer on July 02,2019, L&T Ltd held around 60.15% shareholding in Mindtree Ltd.
Subsequently, 17,48,555 shares of Mindtree Ltd were acquired in the open market thereby taking the shareholding of L&T Ltd to 61.08% as on March 31, 2020.
Even if L&T Ltd has paid INR 1,000 per share, the total consideration for acquiring nearly 60% is around INR 10,053 Crores.
L&T Ltd was eligible to make a public announcement of an open offer to acquire shares of Mindtree Ltd as it held more than 25% shareholding. Hence, an open offer to acquire 5,13,25,371 shares of Mindtree Ltd constituting 31% of the share capital at consideration of INR 980 per share was announced by L&T Ltd. On successful completion of the open offer on July 02,2019, L&T Ltd held around 60.15% shareholding in Mindtree Ltd.
Subsequently, 17,48,555 shares of Mindtree Ltd were acquired in the open market thereby taking the shareholding of L&T Ltd to 61.08% as on March 31, 2020.
L&T Ltd had acquired 10,05,27,734 shares of Mindtree Ltd as on March 31,2020.
Even if L&T Ltd has paid INR 1,000 per share, the total consideration for acquiring nearly 60% is around INR 10,053 Crores.
According to screener, as on March 31, 2020 L&T Ltd had cash equivalents of INR 15,118 Crores i.e. even after cash outflow of INR 10,053 Crores, L&T Ltd had INR 15,118 Crores in its bank account !
L&T Ltd will definitely be a raider with cash for many more sitting ducks in the near future.
Question - Is there another sitting duck for a raider with cash.
Answer – Yes !
The India Cements Limited
Shareholding pattern of the company as on March 31, 2023
Shareholding of promoters in the company as on March 31, 2023
List of shareholders holding more than 5% of the equity share capital as on March 31, 2023
Any guess as to who is this RK Damani ?
RK Damani is none other than the promoter of Avenue Supermarts Ltd – Dmart. RK Damni is also a stock market investor holding a wide portfolio of companies.
RK Damni and other related parties own around 22.77%. India Cements Limited can in no time become a sitting duck in the hands of RK Damani because the promoter holding is only around 28.41%, a little higher compared to Mindtree Ltd but not sufficient enough to wade off the threat. Mr. N Srinivasn, may be a man with significant powers in the corridors of BCCI and politics but Mr. RK Damani is a man with significant powers in the Dalal Street. RK Damani being a stock market trader and investor has enough financial resources to acquire majority control of India Cements Ltd through an open offer. If RK Damani makes up his mind to take control, even before N Srinivasn rings his brokers in Mumbai, the shares would be acquired.
In the latest block deals of VST Industries Ltd, RK Damani acquired 2,22,935 shares and 2,33,766 shares on January 02, 2024 and April 15, 2024 respectively. If RK Damani needs to obtain control of VST Industries Ltd then he has to announce an open offer to acquire the shares from the existing shareholders.
The idiom - "once bitten, twice shy" which means a person who has failed or been hurt when trying to do something is careful or fearful about doing it again. RK Damani has been badly hurt once trying to acquire control of VST Industries Ltd by announcing an open offer, so this time he is planning it out very carefully by cornering as much shares available in the open market and avoid any possibility of throwing spanner in his works.
Only time can tell whether RK Damani will acquire control of India Cements Ltd and VST Industries Ltd.
Conclusion
Along with managing the business of the company the promoters have to ensure that they own controlling equity interest in their entity. On failing to do so, the enterprise becomes target for hostile takeovers.Steps such as buyback of shares, having a strategic investor who is aligned with the long-term vision of the company and has a healthy track record of finance allows you to retain control of the enterprise.
Buyback allows you to reduce the number of shares issued, even if the number of shares owned by the promoters remain the same. When the denominator decreases and the numerator remains constant, the fraction increases thereby % of promoter shareholding increases because the number of shares outstanding decreases. The promoters did plan for buyback of shares but it was at a time when the situation was already out of control and they did not have sufficient cash reserves to undertake such a quantum of buyback which would ensure them to retain control of Mindtree Ltd.
Buyback allows you to reduce the number of shares issued, even if the number of shares owned by the promoters remain the same. When the denominator decreases and the numerator remains constant, the fraction increases thereby % of promoter shareholding increases because the number of shares outstanding decreases. The promoters did plan for buyback of shares but it was at a time when the situation was already out of control and they did not have sufficient cash reserves to undertake such a quantum of buyback which would ensure them to retain control of Mindtree Ltd.
Paying dividend to shareholders benefits the promoters as well as the public shareholders but accumulating and utilizing the same resources to buy back shares will generate wealth to public shareholders in the form of capital appreciation and allow promoters to raise their shareholding % due to decrease in the number of shares outstanding.
One of the reason why V.G. Siddhartha and Group had entered into a transaction with L&T is because they had a cash crunch in their business and this was a path available to them to raise finance. Instead of blaming V.G. Siddhartha and Group for triggering the takeover bid, promoters of Mindtree Ltd could have approached existing investors aligned with long term vision of the company to buy the stake.
Mindtree Ltd has always been a successful business case study, a group of people left their well paying jobs to step into the shoes of entrepreneur and just like Walter B Pitkin's book titled "Life begins at 40", these founders life began when they laid the stepping stone of an IT Company. Nevertheless, Mindtree Ltd is now a subsidiary of L&T Limited and has set an example to be one of the hostile takeover bids in India.
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