Battle hots up for CDSL takeover

Battle hots up for CDSL takeover

Mumbai: The takeover battle for Central Depository Services (India) Ltd (CDSL) has taken a dramatic twist, with the Bombay Stock Exchange Ltd (BSE), the largest shareholder in the depository, planning to stop it from buying office space in Mumbai for Rs65 crore, when the latter’s board meets on Friday, according a person with direct knowledge of the matter.

CDSL is now headquartered in BSE-owned Phiroze Jeejeebhoy Towers in Mumbai.

According to BSE management, buying a new office is an unnecessary expenditure, the person said.

BSE, whose board has approved its plan to acquire CDSL, is keen to buy the depository to boost its balance sheet and profits. Its chief executive Madhu Kannan is also trying to wrest back market share from the exchange’s larger and younger rival, National Stock Exchange of India Ltd (NSE). As part of this effort, BSE, in recent months, has extended market timings, reduced transaction fees, changed the delivery dates of its derivative products and started focusing on technology.

To this end, Asia’s oldest bourse has acquired a technology company Marketplace Technologies Pvt. Ltd. Now BSE wants to acquire CDSL and use a portion of the Rs1,700 crore reserves that the bourse has to push the depository into new businesses such as insurance and pension funds. But CDSL wants to remain independent.

BSE spokesperson Kalyan S. Bose declined comment.

The story began in early February when BSE, which already owns 36.6% in the depository, approached CDSL with an informal request for preference shares to increase its stake to 51%. The proposal was rejected.

Incidentally, NSE increased its stake in rival National Securities Depository Ltd (NSDL) from around 16% to 25%.

A CDSL board member, who wanted to remain anonymous because of the forthcoming board meeting, said the depository needed to be “an autonomous, independent organization for the proper functioning of the capital markets".

“If we become a BSE subsidiary, then NSE members, who are depository participants, may hesitate to do business with us," a CDSL official added. He too declined to be identified.

As part of its defence, CDSL has enlisted the support of its first managing director and former CEO of ICICI Bank LtdP.V.Maiya, who has written to other shareholders seeking support for the cause of an independent capital markets entity.

State Bank of India, Bank of Baroda and Bank of India own nearly 10% each in CDSL and have a member on the board, while HDFC Bank Ltd has a 14.5% stake but no board seat.

In his letter, Maiya, who was part of the CDSL founding team, wrote that “all through our interactions, it was clear that Sebi (Securities and Exchange Board of India) wanted CDSL to be an independent and professionally run entity in the capital market".

BSE too is wooing these banks to buy their stakes and has recently appointed merchant bankers for the deal. A director at one of the banks, who asked that neither he nor his bank be identified, confirmed that BSE’s management had indeed sought an appointment with him to discuss the stake sale. He wouldn’t say whether his bank wanted to sell.

A director at another bank, who too did not want to be identified, said the matter to sell its stake in CDSL hasn’t come up before its board.

On the face of it, “there is no conflict", if a bourse owns a depository, said Sandeep Parekh, a former director at Sebi.

Sebi has appointed a committee under former Reserve Bank of India governor Bimal Jalan to study the governance and holding structure of market infrastructure institutions such as bourses and depositories.

Globally, some bourses such as Deutsche Boerse AG (a shareholder in BSE) have depositories as subsidiaries. But in the US, Depository Trust and Clearing Corp. is independent of the New York Stock Exchange.

BSE has offered to acquire CDSL shares at around Rs50 apiece valuing it at Rs500 crore. According to its website, CDSL has demat custody of shares worth Rs8.4 trillion, or about one-fifth that of rival NSDL.

In the week ended 13 March, CDSL made settlements worth Rs8,142 crore, slightly more than one-fourth of what NSDL did in the same period.

The battle for the depository turned bitter last week after BSE found that CDSL has plans to acquire office premises—43,500 sq. ft spanning four floors—for Rs65 crore. For the fiscal year ended March 2009, CDSL had cash reserves of Rs93.5 crore.

“We have problems with the current premises at the BSE building. How can two organizations of national importance remain within the same building, which faces security hazards?" the CDSL official, quoted earlier, asked pointing to steel-plated doors at CDSL office entrance.

After it got to know about the purchase, BSE wrote a letter to CDSL on 12 March, with a copy to other shareholders, asking it to explain who had authorized the purchase.

“Our finances are improving and we can afford this place. Six board members approved it," said the CDSL board member.

In general, “unless the articles of a company impose specific conditions, purchase of property for the purposes of the business is a decision that the board can make", said Sujjain Talwar, partner at law firm Economic Laws Practice. “The collective wisdom of the board cannot usually be set aside by a shareholder...unless he can demonstrate that the board is making such purchase with mala fide intentions. If the shareholders lose faith in the board, they can always remove the board by passing an ordinary resolution."

The plans to buy the building were approved by a sub-committee of the CDSL board, which included its chairman and independent director S.S. Thakur, managing director V.V, Raut, independent director M.R. Mayya, Bank of India’s nominee director A. Kuppuswamy and BSE nominee Prakash R. Kacholia.

BSE has also opened the battle on another front seeking to nominate Ashish Chauhan, its deputy CEO, to the CDSL board. If it succeeds, it will have four directors, proportional to its shareholding in CDSL. Currently, Kacholia and Kannan apart, BSE’s chief financial officer L.P. Aggarwal is also part of the CDSL board.

Manish Ranjan in New Delhi contributed to this story.