ponderings & pennings

In the current issue of “MoneyLife”, R Balakrishnan in the article “Minority Shortchanged” has argued that Minority Shareholders need a better deal than the offer of 20% which the acquirer is required to make to the shareholders of the target company under SEBI’s regulations. The reason being that promoters get a better deal if they sell their 100% stake to the acquirer at a premium while the other shareholders get to offload only 20% of the stake (He cites the Ranbaxy-Daiichi deal to explain the minority shareholders’ disadvantage). I am unable to give a link to the article as surprisingly, the magazine has not updated its website!

I have a few doubts on this premise of minority shareholders being “shortchanged”. Firstly, if minority shareholders are to be given the option of offloading their entire holding too to the acquirer then on the same argument, we can say that all shareholders should get the shares at the same price as the promoters – in most cases being the face value. I believe that promoters who take the maximum risk beyond staking their money (in way of giving personal guarantees to banks for debt taken by the companies etc) are entitled to extra benefits.

Secondly, minority shareholders are not followed by anyone. Their holdings are more volatile than the promoters’. So they already have an option which theoretically is available to the promoters also but is not a practical one unlike in the case of minority shareholders.

Thirdly, one buys shares of a company when one is confident of the management, business model & strategy, and the future of the company. Now if an acquirer takes-over the promoters’ stake then it can be considered that the acquirer also has confidence in company’s future though it is another side of the same coin that promoters exhibit their negative confidence by selling their entire stake. Now the minority shareholders who will abide by the promoters and not management, business model & strategy would like to get out along with the promoters. My understanding is that such shareholders would be in the range of 20% only and hence SEBI’s laxman rekha of 20% seems fine.

Finally, regarding the tax benefit that is available to the benefit does seem unreasonable but it then forces the promoters to do the deal at 1% premium to the traded price if they want to save tax and if they want better price they shell out tax. I think it to be fair.

I’d like to have clarifications on this matter and while they come lets watch another of my favs: