The promoters of software firm Mindtree Ltd are in a race to retain control of the company as potential buyers eye the big chunk of shares put on the block by its largest shareholder V.G. Siddhartha, even as the tax department’s Friday action blocking the sale of some of Siddhartha’s shares adds uncertainty to their plans.
The promoters, who together own around 13%, have a two-pronged action plan: One, pledge their shares in exchange for money; two, raise money from a wealthy family office, according to two people familiar with the matter. In both cases, the ultimate objective is the same: purchase Mindtree shares from Siddhartha to prevent a hostile takeover by an outsider.
The promoters are in talks with family office trusts of Tata Sons, Reliance Industries Ltd and Wipro-founder Azim Premji, i.e. Azim Premji Trust, said the first person on condition of anonymity, adding Larsen & Toubro Ltd is in advanced talks to buy out Siddhartha’s stake. “The share pledge of the promoters’ 13% stake will fetch around ₹800 crore and the rest ₹3000-3,200 crore will come from the family office," this person added.
On Saturday, the Income Tax Department provisionally attached 5.2% of shares in Mindtree owned by Siddhartha and his firm Coffee Day Enterprises Ltd. Siddhartha and two of his companies together own 20.4% stake in Mindtree. The tax department, which says Siddhartha and his two companies owe ₹650 crore in tax dues, said the move is prudential and meant to “safeguard the interest of the revenue in respect of possible future tax and penalty obligations in respect of open assessments".
Any large purchase of Mindtree shares by promoters to fend off a hostile takeover will trigger the takeover code, forcing them to spend more money—which they don’t have—to buy shares from public shareholders. According to the second person, this is how promoters hope the whole thing will work out: Get a credible family office to help them with money; this will make it easier for Mindtree to attract private equity players or large institutional investors to help the company promoters manage an open offer.
Mindtree’s promoters include its chairman Krishnakumar Natarajan (3.72%), co-founder Subroto Bagchi (3.1%), N.S. Parthasarathy (1.43%) and CEO Rostow Ravanan (0.71%) and relatives of the promoters.
As of December-end, Siddhartha held 5.47 million shares (3.3%) in Mindtree, of which the tax department has imposed a sale-restriction on 5.27 million shares for six months. Coffee Day Enterprises Ltd had at least 17.4 million shares (10.63%), out of which 2.22 million shares have been restricted for sale. Another entity, Coffee Day Trading Ltd, holds over 10.5 million shares (6.45%) but there is no restriction on these shares.
The promoters’ primary objective is to retain control and prevent a hostile takeover, said the second person.
The move assumes significance in the backdrop of KKR & Co. and engineering conglomerate Larsen & Toubro, considering buying Siddhartha and CCD firms’ stake in Mindtree, to be followed by an open offer to acquire control of the Bengaluru-based IT consulting and services firm, which commands a market value of around ₹16,000 crore on BSE.
“Even if CCD or Siddhartha is asked to pay additional tax in any future tax assessment year, other types of collateral or properties, instead of equity shares, could be used or attached. It will depend on the final assessment of the tax authorities. There are several ways to pay the dues. And whatever is the market value of the property attached, the shares will be released and a part of the amount will first go to the tax department and then come back to CCD or Siddhartha," said a third person, who is close to Siddhartha.
On 21 September 2017, the tax department raided offices and the residence of Siddhartha in Bengaluru, Chikmagalur, Hassan and Mysuru in Karnataka.
Offices of Amalgamated Bean Coffee Trading Co., which runs CCD’s retail outlets, were also searched by tax authorities, after which the income tax department said it found around ₹650 crore worth of undisclosed income from the documents seized.
Saturday’s tax notice follows these raids. In fact, according to Friday’s closing price of Mindtree, the value of the shares attached by the tax department is nearly ₹659 crore, close to the alleged undisclosed income found by tax authorities.
CCD ranks among the top 10 coffee shop chain owners in the world.
Soon after the tax department action, Coffee Day informed exchanges that the promoter (Siddhartha) and the company have filed the required revised returns. “Further, there is no tax liability payable by the company and its subsidiaries as per the revised returns filled. The promoter has discharged all the tax liability along with the revised returns. The required action will be taken to release these shares in the next few days," read the filing.
How the tax department action on 5.2% shares in MindTree affects the share sale plans by Siddhartha and his two firms remains to be seen. “Even with 15.2% shares, Siddhartha, together with his firms, continue to the largest shareholder and the buyer can purchase these shares. For taking over Mindtree, the buyer has to just buy close to 10% from the public additionally. In fact, with lower amount of stake, the buyer has more control on the offer price on the Mindtree stock and may get it cheaper from Siddhartha and his firms. Bulkier is the stake, better is the premium," said an investment banker at a large global advisory firm.
“As a matter of policy, Mindtree does not comment on speculations," a company spokesperson said.
The head of research at a large domestic brokerage house said: “Even if a strategic investor were to take over the company, it might provide stability to minority shareholders and employees." “Apart from Microsoft, which is a $100-million plus client for Mindtree, the company does not have any big client. The difference between Microsoft and the next big client of Mindtree is much as $60 million. This makes growth unsustainable for Mindtree in the medium to long-term," said the second person.