Govt checks into IFCI through back door

Last Updated: Wed, Oct 17, 2012 19:21 hrs

In an unprecedented move that is in contradiction with its drive towards divesting stakes in companies it owns, the central government on Wednesday turned acquirer, gaining control over publicly listed institutional lender IFCI Ltd.

The government used an option to convert debentures it had issued 11 years ago when IFCI was in financial trouble to acquire control over the lender. IFCI Ltd has issued 400 million shares worth Rs 400 crore to the Government of India, making it the largest shareholder in the company.

“The Committee of Directors (constituted for the purpose of issue and allotment of equity shares on conversion of optionally convertible debentures held by the Government of India), at the meeting held on October 17 has allotted 400 million (40 crore) equity shares of the company at par i.e Rs 10 each to the Government of India,” the company said in a statement to the exchanges.

The shares were issued on conversion of optionally convertible debentures totalling the same amount held by the government. Following this, the central government has become the largest shareholder in the company, with a holding of 35.15 per cent. The issue has expanded the equity base of the company, as total shares increased to 1.13 billion from 737 million earlier.

This is likely to bring down the holdings of other shareholders substantially. For example, Life Insurance Corporation, which held 8.4 per cent before the issue, will see its holding down to 5.44 per cent. Similarly, PSU banks which held 5.97 per cent before the issue will now hold just 3.87 per cent.

The dilution does not end here. In the second tranche, the government is likely to convert another Rs 523 crore worth of debentures into equity. “The second tranche of debentures worth Rs 523 crore will be converted as soon as the government gets the debenture certificates,” said an official familiar with the development.

In August, the Union Cabinet approved conversion of Rs 923 crore of debentures held by it in IFCI into equity. The decision came after the privileges committee of the Rajya Sabha found irregularities in the appointment of chief executive Atul Rai and recommended a CBI inquiry. The committee also had expressed concern over the government’s apparent lack of control over an institution in which it had invested a substantial amount of money in the form of debt and grants. Some insiders also point out that Rai's closeness to Comptroller and Auditor General of India Vinod Rai made him a soft target for vested interests.

When the second tranche gets converted, the government holding will be 55.57 per cent. About 761,605 small investors own 33. 29 per cent. Some of them had resisted the move. Some even moved the Calcutta High Court, challenging the government decision. The court dismissed the petition yesterday.

In the normal course, such acquisition of voting rights would have attracted provisions of the takeover code, which requires the acquirer to provide an exit option to minority shareholders in the form of an open offer. However, the government was spared even this burden after the market regulator granted a special exemption from making an open offer. On August 29, the management of IFCI had written to the Sebi expressing concern over the deal affecting the interests of minority investors. But Sebi brushed aside these concerns saying, “Since a substantial amount of public funds have been pumped into IFCI by Gol, the enhanced accountability will provide additional safeguard to the investment of public funds.”

The takeover also puts a question mark over the future of the company’s mercurial CEO, Rai. The love-hate relationship between Rai, a former Indian Economic Services officer and North Block was a trigger that led to this forced acquisition, say observers. Though, Rai was given a second term in office by the board earlier this year, it is not clear if the new owner would like to continue with him. Rai declined comment.

IFCI shares gained 0.3 per cent to close at Rs 30 on the BSE.

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