Even as IFCI Ltd evaluates bids received for the sale of a 26% strategic stake, the development financial institution has expanded its equity base, thereby raising the cost of acquisition for the winning bidder, and increasing the stake public sector banks and insurance companies hold in it to more than 26%.
This holding will give them the power to have a say in important strategic decisions the winning bidder may wish to take at a future date.
RAISING THE BAR (Graphic)
The winning bidder will, apart from acquiring a 26% stake in the company, make an open offer—in keeping with Indian laws—for a further 20% stake in the firm.
IFCI expanded its equity by issuing fresh shares to government-owned banks and insurance firms, thereby pushing up the cost of acqusition for bidders because they will now have to acquire 26% of an expanded equity base.
IFCI communicated its decision to expand the equity base to the Bombay Stock Exchange on Tuesday.
If the new capital structure gives the banks and financial institutions a combined stake in excess of 26%, they can block moves by the strategic investor to unlock value in the company by unbundling and selling some of its expensive real estate assets or to enter new businesses.
Indian laws mandate that this can be done only through a special resolution which needs the support of shareholders controlling more than 74% of a company’s equity.
Meanwhile, a meeting of IFCI’s board of directors, which started on Monday evening, was yet to take a decision on the bids till late Tuesday evening.
IFCI will issue 123.7 million shares to public sector banks and insurance companies at Rs107 a share. On the basis of data available with the stock exchanges, the fresh issue of shares will leave them with a combined equity holding of about 28.8% after the strategic investor takes a stake in IFCI.
Prior to the fresh issue of shares, banks and insurance firms held about 25% in IFCI.
IFCI had earlier said the fresh issue of equity was to help the banks and insurance companies benefit from the upside in the company’s stock price—a sort of quid pro quo for their help in bailing out the institution when it was in financial trouble in 2002. The banks and insurers allowed IFCI to roll over its obligations to them in 2002.
Assuming Rs107 as a floor price for the strategic bid, the new issue of equity will increase the cost of the bid by about Rs343 crore to Rs2,120 crore. After this investment, the successful strategic bidder would have to make an open offer of up to 20% of the company’s equity to shareholders, pushing up the cost of acquisition further.
In early December, IFCI issued a media statement saying four of the eight shortlisted bidders had carried out due diligence on the company. The four are a consortium of Sterlite Industries and Morgan Stanley, a consortium of WL Ross, GS Capital Partner VI Fund, Standard Chartered Bank and Housing Development Finance Corp. Ltd, a consortium of Cargill Financial Services Corp. and Texas Pacific Group and a consortium of Shinsei Bank, Punjab National Bank and JC Flowers and Co.
A senior executive of IFCI had said soon after the stake sale process had begun that the board and management were not keen that a strategic investor hive off IFCI’s real estate assets for immediate gains. Instead, the management would prefer the strategic investor to buy into the company’s vision of being engaged in long-term infrastructure financing, the executive, who did not wish to be identified had said.
On Monday evening, PTI quoted an unnamed IFCI executive as saying that the Sterlite-Morgan Stanley consortium had emerged the highest bidder for the 26% stake.