The open offer was scheduled to start on 14 May and close on 27 May.
These questions sent by the Securities and Exchange Board of India (Sebi) on 25 April, some of which required L&T to seek answers from Mindtree, have delayed the regulator’s approval to L&T’s draft letter of offer to Mindtree shareholders. This forces L&T, which controls over 26% of Mindtree, to postpone its open offer to acquire control of the Bengaluru-based information technology (IT) services firm.
Two people directly aware of the development confirmed this.
L&T is trying to acquire control of Mindtree by buying as much as 66.32% in the IT services firm for about ₹10,700 crore. The deal, if completed, will mark the country’s first hostile takeover in the IT services industry.
According to the plan submitted in a draft letter of offer to Sebi and exchanges on 2 April, L&T, after buying the 20.32% stake jointly held by Café Coffee Day (CCD) founder V.G. Siddhartha and two of CCD’s associate firms, intended to buy an additional 15% from the open market and 31% through an open offer at a price of ₹980 per share.
Accordingly, the independent directors of Mindtree were supposed to provide their recommendation to its shareholders on the open offer price latest by 10 May. However, as Sebi sought a number of clarifications from L&T and had not cleared the draft letter of offer (DLoF), the engineering firm has been forced to postpone the open offer.
In the absence of Sebi’s approval, Mindtree’s independent directors also could not send their recommendation to shareholders. Under Sebi’s takeover code, a target company’s independent directors are obliged to provide shareholders their opinion on whether to accept the acquirer’s offer. This must be done two days before the launch of the open offer. With the open offer now postponed, Mindtree’s independent directors have also held back their opinion for the moment.
“L&T has sent its responses to Sebi on 10 May. If Sebi does not raise further queries and approves the draft letter of offer by 17 May, L&T will initiate the open offer process and file its final letter of offer," the first person said. “Once the draft letter of offer is approved, Mindtree’s independent directors have to be given at least two working days to provide recommendation to the shareholders. At least two days after that, the open offer can be launched. The entire process will take at least two weeks. So, the open offer may actually be launched either at the end of this month or early June."
An L&T spokesperson declined to comment. Emails sent to Sebi and Mindtree’s independent directors’ panel were unanswered. Sebi had asked L&T to clarify on several aspects regarding the proposed open offer; a few of the questions asked L&T to justify some of Mindtree’s policies and even furnish them.
For example, Sebi had asked L&T to provide a copy of Mindtree’s dividend policy and clarify whether the dividend declared by it is in line with its dividend policy. Sebi had also made it incumbent on L&T to seek a confirmation from Mindtree that the IT services firm would be complying with all the obligations under takeover norms during the open offer. Mint has reviewed a copy of the Sebi queries.
There were some other procedural queries. For example, Sebi had asked L&T to furnish details of the Mindtree non-convertible debentures (NCDs) and shares pledged by V.G. Siddhartha and the two CCD firms with Standard Chartered Bank.
L&T, in the draft letter of offer, says that an escrow account for the share purchase agreement (SPA) has been executed on 18 March, under which L&T, Mindtree and Standard Chartered Bank are the escrow agents and IDBI Trusteeship Services Ltd is the trustee. SPA shares refer to the 33.36 million shares (20.32% stake equivalent to 20.15% voting rights) of Mindtree held by Siddhartha and the two CCD affiliate firms that have been bought by L&T.
Siddhartha and the two CCD firms had pledged all of their Mindtree shares with Standard Chartered Bank. Separately, the two CCD firms had issued some NCDs in the past to raise money. According to the SPA escrow agreement, IDBI has the right to revoke the pledge on the 20.32% shares (so that they could be transferred to L&T) only after Siddhartha and the two CCD firms clear the payments of the NCD holders first.
Sebi asked L&T for details of the shares pledged, names of the entities to which the shares have been pledged and details of the issuer of NCDs.
Sebi had also asked L&T to clarify on the voting share capital of Mindtree. The draft letter of offer says the voting share capital of the target firm has been computed on a “fully diluted" basis and that the number has been taken from publicly available information. Sebi asked L&T to provide the source of this information and seek a confirmation from Mindtree on the voting share.
The clarification is necessary because, apart from other convertible instruments, Mindtree also has an employee stock option programme. The draft offer letter states: “We understand based on publicly available information that 1,351,673 convertible instruments of the target company (which include the aforementioned outstanding units under the Mindtree Employee Restricted Stock Purchase Plan 2012) are capable of being allotted during the (open) offer and have therefore considered the same for determining the voting share capital…"
Further, Sebi sought L&T to confirm that none of its directors is a wilful defaulter or fugitive economic offender. L&T was also asked to clarify on risk factors involved in the open offer and the current status of the various statutory approvals mentioned in the draft letter of offer. The document says that the open offer is subject to approvals from the Competition Commission of India, approval under the Act against Restraints of Competition from Bundeskartellamt in Germany and an approval as per rules for certain mergers and acquisitions in the US.