Management issue may upset IFCI sale again

MUMBAI: Lack of clarity on management control may once again dampen interest among investors who are seeking to bid for the strategic stake in IFCI. On May 29, the board of IFCI announced that it would be making a second attempt to sell 26% in the term-lending institution. Market observers say this time IFCI will be able to pull through the stake sale only if it is willing to give management control to the investors.

Less than six months ago, IFCI was forced to call off its plans to sell stake after talks with Sterlite and Morgan Stanley — the consortium selected among bidders — failed. The bone of contention then was that of management control. Banking analysts say with the slump in the stock market and the perceived slowdown in the economy, few investors may show interest in bidding.

"This makes it even more essential for the institution to being in clarity on what is in it for investors," said an analyst. Last time, IFCI had the advantage of calling for bids amid the boom in the stock market. While it had received ten bids, most bidders pulled out of race mid-way due to lack of clarity.

Market observers say IFCI will have to clearly spell out what they expect from the investors and what they have to offer to win suitable candidates as bidders. One development that irked investors was that after inviting bids but before shortlisting the final bidder, IFCI decided to allow PSU banks and insurance companies to convert IFCI bonds worth Rs 1,479 crore into shares. In effect, this would enhance the equity base and post-conversion, lower the stake of strategic investors below 26%.

Further, there was confusion on how much stake banks and insurance companies will hold post-conversion.
The last lap of bidding saw only three contenders in the fray — Sterlite Industries with Morgan Stanley, a consortium including Punjab National Bank, JC Flowers and Shinsei Bank and the third bidder were investors led by Cargill Financial Services.

Sources said investors were unhappy with the uncertainty over management control. After having acquired 26% stake, the successful buyer would have had to make an open offer for 20%, which would raise their stake to 46% — making them majority shareholder. But even at this position, they were not guaranteed full management control.

Yet another bone of contention was the bonds worth Rs 923 crore held by the government. There is uncertainty on whether or not they would be converted into shares. A conversion of government stake would widen the equity base and bring down the stake held by the strategic investor.

On June 12, the board of IFCI will meet to consider issues related to conversion of government's Rs 923 crore debt into shares and induction of strategic partner. This time, IFCI's CEO Atul Kumar Rai has been quoted by the media saying "IFCI will not repeat the mistakes of the past," which is being interpreted to mean that the management skills of the new partner would be better leveraged or that they may be offered management control. Banking analyst say if IFCI fails to pull through this time, it faces the risk of losing some credibility