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Opposition to Manappuram move for PE special rights

Source : BUSINESS_STANDARD
Last Updated: Wed, Jul 25, 2012 19:11 hrs

Institutional Investors Advisory Services (IIAS), a proxy advisory, has opposed a proposal by Manappuram Finance, a leading gold loan firm, to give certain special rights to a set of institutional shareholders. IIAS has advised minority shareholders to oppose this move, as it would give such institutions an unfair advantage over other shareholders.

In its annual general meeting scheduled on August 2, Manappuram is planning to move a special resolution, seeking to alter its Articles of Association. The Articles are a statutory document required to be maintained by every company, detailing its internal rules and regulations.

Manappuram says the change is required to reflect the terms and conditions of definitive agreements entered into with some of its institutional investors. According to IIAS, the proposal is for incorporating certain additional rights to Hudson Equity Holdings, AA Development Capital India Fund 1 LLC, and a set of investors referred to as ‘Subsequent Investors (Sequoia, Barings, etc) and Others’.
 

UNFAIR ADVANTAGE
  • Mannapuram seeking shareholder approvals to alter articles of association
  • Amendment to give special rights to some institutions
  • Hudson Capital, AA Development, Barings and Sequoia to be beneficiaries
  • IIAS opposes the move, recommends voting against resolution
  • Company in silent period

“As this is a listed entity, the amendments mentioned in the proposal give additional rights to one set of shareholders. We believe these rights should fall off once a company is listed. IIAS strongly recommends voting against the resolution,” the advisory firm said in a note issued on Wednesday. Hudson Equity Holdings, the investment vehicle of India Equity Partners, holds 8.54 per cent in the company and has nominated a director on the company’s board. AA Development Capital Fund owns 3.5 per cent, with a director on board.

Baring India Private Equity owns 3.01 per cent. Hudson Equity Holdings, the investment vehicle of India Equity Partners, holds 8.54 per cent in the company and has nominated a director on the company’s board. AA Development Capital Fund owns 3.5 per cent, with a director on board. Baring India Private Equity owns 3.01 per cent.

The additional rights Manappuram seeks to bestow on these institutions include anti-dilution rights, adjustments upon issuance of additional equity shares, adjustments for reclassification, exchange and substitution, and preference to specific investors on the occurrence of a liquidation event prior to conversion of the preference shares, the IIAS note said.

The shareholder agreements also specify that “till such time that either of the subsequent investors (ie Barings and Sequoia) hold at least one per cent shares, the following matters shall specifically require the prior approval of the board”. The items under this clause include transactions, agreements or arrangements between the company and any related parties in a financial year exceeding Rs 1 crore, change in statutory auditor or internal auditors, change in compliance officer, termination or modification of the terms of existing employment/services of key personnel, including I Unnikrishnan and B N Raveendra Babu”.

I Unnikrishnan, managing director of Manappuram, said: “We are currently in our silent period (the no-comment phase companies keep in the run-up to publication of their results). We can only talk on this after August 1.”

Private equity firms typically enter into such shareholder agreements with companies before issue of an Initial Public Offer. After listing, such shareholder agreements are generally considered invalid. “It is standard to have such agreements. But once listed, these rights should go. It is not in accordance with global standards to have such agreements in listed firms, as it gives one set of shareholders unfair advantage ,” said Amit Tandon, managing director, IIAS.

It is not clear at what stage these agreements were entered into and why the company is now trying to alter its articles. “If these agreements are entered into after listing, then it’s shameful,”Tandon added.




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