Investors not to expect non-compete fee in AP Paper: SMC

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Investors not to expect non-compete fee in AP Paper: SMC

Speaking to CNBC-TV18, Jagannadham Thununguntla of SMC Global says that investors will be better off thinking there will not be a non-compete fee. "If any non-compete fee comes, it will be like a windfall gain, but entering the stock in the anticipation of that non-compete fee may prove to be costly," he warns.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets AP Paper Mills BSE | NSE 01/06/12 Are Mutual Funds betting on AP Paper Mills? Other Stocks in this news Mudra Lifestyle | Cairn India |

AP Paper had recently come up with an open offer at Rs 544 but there was a non-compete fee to the promoters of Rs 130. This fee is generally paid by an acquirer to ensure that the former promoter of the company does not compete directly in the same line of business for a specified period of time. SEBI has now directed the company to add the non-compete fee for retail investors as well. Will investors get lucky? Not quite, says Jagannadham Thununguntla, head of research, SMC Global.

Speaking to CNBC-TV18, he says that there is every possibility of the AP Paper issue going the Mudra Lifestyle way where only the promoters got a higher share. Investors will be better off thinking there will not be a non-compete fee, he opines. "If any non-compete fee comes, it will be like a windfall gain, but entering the stock in the anticipation of that non-compete fee may prove to be costly," he warns.

Also Read: Wary StanChart says Sensex may sink to 14000-15000

Below is the edited transcript of his interview. Also watch the accompanying video

Q: What do you think will this go the Mudra way or do you think there is chance that investors could get Rs 130 more?

A: Very tricky issue considering that the new takeover code has removed the non-compete fee portion. In that sense, it is very interesting to see that it also can set a precedence of whether the guideline about the takeover code will have retrospective effect or only the prospective effect.

There is good chance that this case will also go the Mudra way, because the company will claim that the open offer came before the takeover code guidelines came.

All in all, by spirit of the law, probably Sebi is right, but by letter of the law, the company still has the claim in its way. Investors will be better off thinking there will not be any non-compete fee. If any non-compete fee comes, it will be like a windfall gain, but entering the stock in the anticipation of that non-compete fee may prove to be costly.

Q: What if you already hold it does it make sense to tender any way?

A; If somebody is already holding it, it makes all the more sense. There is one more advantage in this kind of open offer situation, even if the market crashes these stocks tend to remain more or less at the same level. This is because if they fall very significantly, the buyers will come in and maintain the stocks.

So, there is a downside protection as well. If somebody is already holding it makes all the more sense holding it. But, only in the midst of all the legal cases, the whole procedure of open offer may delayed by three- four months. Thus, only time cast will be involved for current investors.

Q: We talked in the past about potential delisting and potential open offer plays that investors can play for. Within that list anything else where you think there could be this non-compete fee bumper that minority investor could look to get?

A: Cairn has lot more other technical issues also involved, but all this is setting a precedent that, we are coming to the end of era of non-compete fees as a context. For AP Paper, there is something called as exclusivity fee which is being paid to the promoters. While the open offer price of Rs 544 is arrived that exclusivity fee is being given to the other shareholders as well.

This means the price that is paid to promoters is Rs 520 and again Rs 21 is given additional as exclusivity fees that is included while arriving at the open offer fees. But non-compete fee is given exclusively to the promoter alone. SEBI is of the view that going forward this should not happen.

Barring this case I don't think any other case is left where that kind bump up may happen. Even if it is there, SEBI will say that non-compete fees should be given. This means companies eventually have to go to Securities Appellate Tribunal (SAT) if they don't want to pay.