Financial investors in India are scared of regulatory uncertainties. Not that uncertainties are exclusive to our country but it’s a critical risk factor that is assessed by those making substantial investments. Historically, one of the most important regulatory concerns for such investors is related to being categorised as ‘promoter’ of a listed company, both when the company is going public and also in cases where a private equity (PE) player intends to take a control position in an already listed company, by replacing its present promoters or by becoming co-promoters. Promoter liability theories have kept such investors away from taking control positions in listed companies. On the contrary, in the unlisted space where the promoter position is perceived differently, control deals are a way of life for certain PE funds in India.
Previously, investors used to hold sub-15% positions in listed companies as at 15%, a mandatory tender offer was triggered under the Takeover Regulations of 1997. The new Takeover Regulations of 2011 increased the limit for a tender offer trigger to 25%. However, despite this additional 10% headroom, the recent trend is for many investors to happily breach the 25% threshold. They are making tender offers and taking positions of controllers in public listed companies. This is instead of enjoying a sub-25% stake in one company coupled with investing in various companies in the same sector, whether for risk-diversification or simply to spread out holdings in one sector so as not to have a highly concentrated position in one company to become its promoter.
Today, such investors are doing a more detailed and practical risk assessment of the issue related to being categorised as ‘promoters’ of publicly traded companies and are moving forwards with a positive outlook towards the applicable regulations. When you run a business, there are certain liabilities that come along with it. There is more to gain than to lose for the investors if they avoid being cornered by a theoretical construct of co-relation between ‘promoters’ and ‘liability’. By way of example, if someone manipulates the market price of securities or blatantly violates disclosure norms, the market regulator will proceed against that person even if such a person is not categorised as a promoter but is just another stock market player, say a broker.
Investors have also not been keen to be named as promoters in an offer document because of potential liability issues under the Companies Act. However, their nominees have continued to be on the boards of their portfolio companies. One interesting example is an IPO-stage company in which a PE investor, Sequoia Capital, has been categorised as promoter. Sequoia has been disclosed as a promoter (with other individuals) in the second draft of the prospectus for the proposed IPO of Pratap Snacks (this is subject to SEBI review and clearance); the first draft of the prospectus did not classify Sequoia as a promoter. Another example of a company in which financial investors were at one point in time categorised as promoters is SKS Microfinance (with other entities).
In the M&A space, global PE players have started taking control positions in the Indian listed company across various sectors and are happy to be called promoters/controllers of that public company. Many of them want to move away from the “I am just a financial investor” epoch. For example, in 2016, Advent International made a tender offer to the public shareholders of Crompton Greaves Consumer Electricals to acquire a controlling stake in the company replacing the existing promoters. Blackstone did the same in Mphasis in the same year. Also, Blackstone had taken a control position in Gokaldas Exports previously from which it exited earlier this year. Before these deals, the Government of Singapore Investment Corporation (GIC) became a promoter of Nirlon in 2015, Barings PE became a promoter of Hexaware in 2013 and Warburg became a promoter of Future Capital (now Capital First) in 2012.
Recent newspaper reports suggest that few other global PE players are willing to take control positions in Indian companies. All this is a practical illustration of the fact that sometimes it is necessary to take the bull by the horns and give up inhibitions to achieve the balance between risk and reward. Times change, so does thinking!