SEBI's exemption on IFCI's open offer: What is it about?
SEBI passed an order on September 24 2012 exempting the Govt. of India (GoI) from making an open offer to the shareholder post allotment of 92.30 crores equity shares of IFCI.
SEBI passed an order on September 24, 2012 exempting the Govt. of India (GoI) from making an open offer to the shareholder post allotment of 92.30 crores equity shares of IFCI. This allotment was done for conversion of debentures of IFCI held by the GoI.
Govt. of India had given financial assistance in the form of convertible debentures to the tune of Rs 923 crore to IFCI Ltd. in 2001-02, which included Unsecured Convertible Debentures (UCDs) of Rs. 400 crores issued at 9.75% p.a. interest and Optionally Convertible Debentures (OCDs) of Rs. 523 crores issued at 0.1% p.a. interest.
Regulation 3(1) of SEBI (SAST) Regulations, 2011 mandates any party acquiring more than 25% shares in a company to make an open offer of 26% of the outstanding shares of the company. Also, Regulation 4 requires any party acquiring control over a company to make an open offer for the same amount as stated above.
Following its decision to convert the debentures into equity shares which would increase its shareholding in IFCI Ltd. from 0.0000011% to 55.57%, Govt. of India had applied to SEBI seeking exemption to make an open-offer, under regulation 11(1) of SAST Regulations which empowers SEBI to grant such exemptions if it is in interests of investors in securities and the securities market.
After due consideration, SEBI has accepted the exemption on basis of following reasons:
- IFCI was converted from a statutory corporation into a public limited company under the Companies Act, with a view to make it a Govt. company in future.
- The OCD of Rs 523 crore carried a nominal interest of 0.1% p.a., which in turn, has conserved the cash outflow on interest payments of IFCI Ltd. and has benefitted its shareholders.
- Conversion of these debts into equity would provide more public accountability and would stand as an additional safeguard to the investment of such public funds.
Dilutive effect on minority shareholders
The conversion of both the debentures will result in a dilution of 55.57% for the existing public shareholders. However, the decision that the shareholding of Govt. controlled institutions in IFCI would be maintained above 51% was public disclosure since 1994 and hence we can assume that market prices were reflective of the dilutive effect. In such a case, long term minority shareholders might not get adversely affected due to the conversion.
However, given the fact that the tenure of those debentures was 20 years, there could have been a possibility that the market believed these debentures will ultimately be redeemed and hence, the current market price doesn’t reflect the effect of conversion and in such case, investors might face a significant decrease in their share value post conversion.
Key concerns related to the conversion
• The current authorized equity capital of IFCI may not be enough to accommodate the entire conversion of debentures of Rs 400 crore and Rs 523 crore respectively into equity at par. If so, this would require approval of shareholders for reclassifying / increasing the authorized capital of IFCI Ltd.
• Another concern is on the terms of conversion of OCDs amounting to Rs 523 crore. The aforesaid loan of Rs 523 crore was issued in March 28, 2003 in the form of 0.01% OCDs and redeemable on March 28, 2023 and has a right of recompense on par. IFCI’s Board in its meeting held on December 17, 2007 had agreed to convert the said loan of Rs 523 crore into OCDs though the certificates for such OCDs has not been issued by IFCI till date.
Further, the terms of OCDs approved by the IFCI’s Board were silent on pricing on resultant equity shares. In such a case, the question arises whether the conversion should be done on SEBI mandated pricing formulae on preferential allotment. However, SEBI in its letter has clearly stated SEBI pricing formula applicable to preferential allotment will not be attracted in view of the provisions contained in regulation 70 of SEBI (ICDR) Regulations, 2009, which provide exemption to such acquisition of shares on conversion of loans/debentures by Govt. and PFIs.
From a corporate governance point of view, the decision of the government not to go for an open offer might not have been in the best interest of the minority shareholders. Any corporate action which resulted in excessive dilution and change in control should ideally have resulted in acquirer providing an exit route for the shareholders.
The ultimate result of the conversion has been that the GoI has become the dominant majority shareholder. This could bode a better future for the company. IFCI and its Chairman & Managing Director, Atul Rai, have recently been in the news for mis-governance and Atul Rai was also being investigated by the CBI. With the GoI acquiring control of IFCI, other shareholders should hope that the entire Board of Directors, the CMD and some key senior management are replaced and corrective actions are taken to bring better standards of corporate governance at IFCI.
Soumya Dash, Analyst, InGovern Research Services