Warburg Pincus in lead to acquire controlling stake in Sharekhan

Warburg Pincus has submitted a binding bid to buy a controlling stake, in a deal valued at as much as Rs2,400 crore

Mumbai: Global private equity (PE) firm Warburg Pincus has submitted a binding bid to buy a controlling stake in brokerage Sharekhan Ltd in a deal valued at as much as 2,400 crore, according to two people familiar with the negotiations.

“All the private equity funds are selling their stake and the management is also in the process of selling some stake," said one of the two people cited above, adding that negotiations are now at the final stages and a final agreement could be signed within weeks. The person declined to be named.

Existing investors in Sharekhan have been seeking to sell their stakes in the company since late last year. The Economic Times reported in December that Rohatyn Group, which holds the largest stake in Sharekhan, is seeking buyers.

IndusInd Bank Ltd, which had also expressed an interest in the brokerage house, has pulled out from the deal.

“The bank (IndusInd) is definitely not in the picture now. Sharekhan is all set to be taken over by a private equity company. The deal’s valuations could be anything between 2,000-2,400 crore, not more than that," said the second person cited above.

As India’s economic growth accelerates, retail investors have flocked to buy stocks, particularly those of small- and mid-cap companies, boosting the fortunes of brokerages such as Sharekhan. Brokerages have seen a pick-up in their business over the past year as equity indices surged to new highs. That is likely to continue, with some investors saying that Indian stocks are set for a multi-year bull run because of low commodity prices and economic reforms that are being effected by the business-friendly Narendra Modi government.

“Stock broking has already gone through disruption from innovative, technology-based providers and has got commoditized.

Yet, in a growth economy, capital markets are bound to grow and retail investors will move to direct, discount trading," said Shinjini Kumar, executive director and leader, banking and capital markets, at consulting firm PricewaterhouseCoopers. Kumar was not commenting specifically on the deal.

To be sure, PE interest in the financial services sector has remained strong even before the recent pick-up in the markets. The banking and financial services sector saw PE deals worth $1.35 billion (43 deals) in 2014, after seeing $1.1 billion (43 deals) in deals in the previous year, according to Grant Thornton’s Dealtracker report for 2014.

Most recently, in February, US-based PE firm Carlyle bought a 49% stake in Destimoney Enterprises Pvt. Ltd from New Silk Route for 1,236.78 crore.

Sharekhan was set up in 2000 by Mumbai-based entrepreneur Shripal Morakhia. The brokerage house is now majority owned by PE funds.

Tarun Shah, chief executive officer of Sharekhan, said he cannot comment on the transaction as he is travelling abroad. He did not respond to an email seeking comment. A spokesperson for Warburg Pincus also declined to comment, citing company policy.

According to a 2013 Icra report, a majority (46%) stake in Sharekhan was held by Citi Venture Capital International (CVCI).

This stake was later sold to Rohatyn Group, which completed an acquisition of CVCI’s global portfolio in December 2013. Samara Capital and IDFC hold 33% and 9%, respectively, in the brokerage, said the ICRA report.

Each of these funds are now set to exit, said the people cited above.

Samara Capital declined to comment on media reports, while Rohatyn Group did not immediately respond to an email on Thursday seeking comment.

Financials filed with the registrar of companies showed that Sharekhan reported 355.5 crore in revenue from operations in fiscal 2014, while net profit for the year was at 83.8 crore.

In fiscal 2013, the brokerage had reported revenue of 348.8 crore and a net profit of 90.8 crore. Financials for the just concluded fiscal year have not been filed.

Actis Capital Llp had also expressed interest in buying a stake in Sharekhan, according to a 4 March report in Business Standard. Mint could not confirm if they are still interested.

“It is not our policy to comment on market speculation," said J.M. Trivedi, partner and head, Actis South Asia.