Home / Opinion / Views /  Opinion | L&T-Mindtree deal makes a case for dual-class shares in India

The hostile takeover bid for Mindtree Ltd by Larsen and Toubro Ltd (L&T) is a significant moment for the Indian corporate sector. While L&T sees a greater synergy in the combined company, Mindtree’s management is not in favour of this transaction. They worry about ceding control of a company they have built from scratch with sweat and blood. They also worry about their unique culture built over the years getting destroyed by the L&T-Mindtree deal.

It was always believed that doing a hostile takeover in a services business was difficult. The logic was that if all the key employees leave, what do you ultimately buy? This was evangelized by Infosys Ltd a long time back, when it said: “Our market cap becomes zero at 5pm every day when our employees go home."

But things have changed now. The IT services industry is more of a commodity business today with little differentiation between players. Like every commodity business, consolidation is inevitable in the industry and the only moat you can build against competition is size. L&T rightly believes that the combination will put it in the top league and make it a meaningful player. The issues of culture and people are manageable with staggered integration of businesses.

Founders in India should understand that the ground under their feet has changed forever. With the strict implementation of the Insolvency and Bankruptcy Code (IBC), change of control in large companies that were mismanaged is happening with ease. There is a visible increase in shareholder activism which, combined with more hostile takeovers, will keep managements on their toes.

I also empathize with the Mindtree founders. They put in their sweat and blood to build companies. It is difficult for them to cede control. The only way is to keep the company private so that they are not exposed to the vagaries of public markets. But this is easier said than done. The founders want the glory and value of public markets, but, at the same time, don’t want to cede control. Indian startups have been complaining about this for a long time. They raise lots of growth capital from venture capital and private equity investors. They also distribute lots of equity to employees to create a culture of inclusiveness, and ultimately end up being a minority investor, with little say on timing and value of the exit. Flipkart is a classic example.

The solution, therefore, is for India to allow dual-class shares. Companies can issue shares with differential voting rights that are superior to the financial investors. This will allow the founders to keep control of the company, while raising capital for growth. Google, Facebook and, more recently, Lyft, are great examples of companies with dual-class shares. There are concerns about all investors not being treated equally, but these can be addressed by proper disclosure and a willing investor who understands the risks and invests.

If India has to have a vibrant capital market, we need all of these. The dual-class shares will provide comfort for entrepreneurs to build great companies without the fear of losing control. Hostile takeovers and shareholder activism will make sure that founders come out of their comfort zone. All these will result in greater shareholder wealth creation.

V. Balakrishnan, a former chief financial officer of Infosys, is the founder and chairman of Exfinity Ventures.

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