If the dividend proposal receives approval from shareholders, Mindtree will pay a total dividend of  ₹384.30 crore to the public shareholders (Mint)
If the dividend proposal receives approval from shareholders, Mindtree will pay a total dividend of 384.30 crore to the public shareholders (Mint)

In Mindtree’s record dividend, some see a tactic to ward off L&T takeover

  • Mindtree says the special dividend is a way to celebrate $1 billion in annual revenue and mark the 20th anniversary of the company
  • CEO Rostow Ravanan denies the special dividend is a poison pill manoeuvre, a way to make the takeover costlier for L&T

Mumbai: Mindtree Ltd’s latest proposal to offer a fat special dividend to shareholders may well be another tactic to ward off the looming hostile takeover bid by Larsen and Toubro Ltd (L&T).

On Wednesday, following a board meeting, Mindtree announced a special dividend of 20 per share. It will also pay an interim dividend of 3 per share and a final dividend of 4 per share for fiscal 2019. In total, the company will pay a dividend of 27 per share, subject to approval by shareholders at the annual general meeting (AGM) in July. This is the highest ever dividend announced by Mindtree since its inception two decades ago.

“Given the fact that it’s an important milestone for the company and that it aligns with the policy of being shareholder-friendly and returning cash back to the shareholders, it is in line with our policy," said Rostow Ravanan, chief executive and managing director of Mindtree.

Ravanan denied that the board’s decision to pay a one-time dividend to shareholders was a poison pill manoeuvre, a way to make an asset less valuable to a hostile buyer.

If the dividend proposal receives approval from shareholders, Mindtree will pay a total dividend of 384.30 crore to the public shareholders, with the special dividend of 284.67 crore. The promoters will get 59.07 crore.

That compares with the 256.2 crore the company has in cash and cash equivalents and 3,141.9 crore in reserves and surplus.

The Bengaluru-based IT firm said that the special dividend was a way to “celebrate (Mindtree’s) twin achievements of exceeding $1 billion annual revenue milestone and 20th anniversary of the company".

According to Institutional Investor Advisory Services (IIAS), the special dividend does not move the needle much for investors. “Those who want will still tender," said IIAS, referring to L&T’s open offer proposal. “Should L&T have an acquisition in mind, it may prefer to have the cash remain in the company, else they should be indifferent. As L&T will get to vote on the final and special dividend, they can decide whether they want the money as dividend or not."

Abhimanyu Bhattacharya, partner at law firm Khaitan and Co., said: “Declaring a dividend is in the ordinary course of business. However, the dividend this time is unusual as compared to their previous payouts. So, it can be seen as a way to appeal to the shareholders in the realm of law."

Shriram Subramanian, founder and CEO of InGovern Research Services Pvt. Ltd, a proxy advisory firm, said that the Mindtree board had acted in an amateurish way to thwart L&T’s open offer.

“The special dividend is abnormally high," Subramanian said. “Right now, it just looks like a sweetener for the shareholders so that they favour the board’s resistance to L&T’s takeover and avoid tendering shares in the open offer; however, it is unlikely to impact the open offer process."

On 18 March, L&T announced its plan to launch an open offer to buy an additional 31% in Mindtree after agreeing to purchase Café Coffee Day founder V.G. Siddhartha’s 20.32% stake in the firm for 3,269 crore. L&T also said it would buy 15% stake in Mindtree separately from the open market.

The transaction, if completed, will see L&T buy up to 66.32% in Mindtree at 980 per share, making the three-part deal the first hostile takeover in the Indian IT industry.

L&T’s open offer for Mindtree will begin on 14 May and close on 27 May.

The Securities and Exchange Board of India’s takeover norms state that upon public announcement of an open offer, the business of the target company (in this case Mindtree) during the open offer period has to be conducted in the ordinary course and be consistent with the past practice. Also, without shareholders’ approval, the company’s board cannot alienate any material assets whether by way of sale, lease, encumbrance or otherwise, or enter into any agreement therefore outside the ordinary course of business.

A fat special dividend could affect the company’s valuation. “At this stage, altering the company’s capital structure so significantly may not be welcomed by the regulator," said a Mumbai-based corporate lawyer.

Ravanan, however, said: “This is in no way done with an expectation to change the price. The AGM is in July—and will take place after the open offer begins—so (it) shouldn’t have an impact. We haven’t done anything with an intention of influencing the price or anything like that. Moreover, dividend payment will only be done post the AGM in July (after approval), which will be after another quarter—and more cash flow would have come into the system.

An L&T spokesperson declined to comment.

According to Sandeep Parekh, founder and CEO of Finsec Law Advisors, prima facie, the special dividend offer may not be illegitimate because it anyway treats all classes of shareholders equitably and the company’s money will only enrich shareholders.

Varsha Bansal in Bengaluru contributed to this story.

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