Larsen & Toubro vs Nalanda Cap stand-off reaches Sebi’s doors

The man who initiated the private equity boom in India two decades back has been in the crosshairs of India’s largest engineering company ever since L&T launched its hostile takeover bid for Mindtree. The matter has now reached the doors of the stock market regulator.

A handful of institutional investors of L&T, Mindtree and in some cases both, have written to Sebi complaining against Pulak Prasad, the founder of storied investment manager Nalanda Capital, for allegedly provoking the minority investors of Mindtree to spurn L&T’s offer.

In their letter to Sebi, they have alleged that Prasad is effectively acting in concert with the promoters of Mindtree in an attempt to persuade institutional shareholders, like Arohi Asset Management, to hold back from tendering their shares in the open offer by L&T.

Prasad, as per the letter, has joined the Mindtree management in opposing the takeover bid, said people aware of the developments.

L&T declined to comment. Mails sent to Prasad remained unanswered till press time.

Sources said L&T so far complained verbally to Sebi, but after the announcement of its open offer last Friday, the investors decided to file a formal complaint.

Normally, the act of supporting the existing management should be confined to voting in favour of management proposals in venues such as AGMs or EGMs, as per those complaining against Prasad. “However, the open support from Prasad to the promoters by way of articles and soliciting other investors to join the group raises an important question of probity,” said an official familiar with the development.

The investors have asked Sebi to investigate if Prasad is acting in concert with Mindtree’s promoters and other investors opposed to L&T’s takeover. If so, according to the letter, their combined shareholding as Persons Acting in Concert (PAC) exceeds the regulatory threshold of 25 per cent (as per regulations 3(1) and 4 of SAST regulations) which makes it mandatory for them to launch a counter open offer to L&T’s. “The fact that they have not done so while continuing to act in concert seems to be a violation of SAST regulations, which merits investigation,” said one of the officials quoted above on the condition of anonymity.

The letter goes on to allege that the actions of Nalanda raise the possibility of a standoff between L&T and the PAC group led by Prasad in the upcoming AGM of the company and such a standoff, without an opportunity being given to the other minority shareholders to choose between one group or other due to lack of a competing offer, is not in the best interest of the company or the shareholders.

As long as it was only Nalanda Capital supporting the promoters (even if considered as PAC), their combined shareholding was less than 25 per cent and it was not a problem, the investors feel.

“However, joining up of even one investor tips it above the threshold, raising the above regulatory issues, which I would urge Sebi to investigate and take appropriate action against the people involved in this violation of rules meant to safeguard the interest of minority shareholders,” said one of the complainants in his letter.

With a 10.6 per cent stake in Mindtree, Prasad has come out in support of the incumbent founder-promoters of the IT company, against the $1.6-billion “hostile takeover attempt” by L&T. Prasad has written articles in newspapers and has sought to rally support from other minority shareholders like Baburaj Pillai’s Singapore-based Arohi Asset Management (2.44 per cent).

Prasad believes that L&T is undervaluing Mindtree and investors should hold out for a better deal. Interestingly, the fund’s average acquisition cost in Mindtree has been Rs 260 a share. It has been holding its stake for 10 years.

The four Mindtree founders, chief executive officer Rostow Ravanan, N Krishnakumar, Subroto Bagchi and N S Parthasarathy, together controlling 13.32 per cent of the company, have been citing various reasons – mostly differing cultures and work styles – to spurn L&T’s moves.

As of June 6, L&T’s holding in Mindtree stood at 28.9 per cent. L&T had in March mounted a takeover bid for Mindtree when it entered into a deal to buy Cafe Coffee Day owner VG Siddhartha’s 20.32 per cent stake in Mindtree and also placed an order with brokers to pick up another 15 per cent of the company’s shares from the open market. It has been buying from Nemish Shah’s ENAM Holdings, White Oak, Avendus Capital, HDFC Life Insurance and from other public shareholders like mutual funds and FIIs.

On Friday it announced an open offer for 51.3 million shares, or 31 per cent, of Mindtree at Rs 980 a share. In all, L&T wants to take its holding to 66 per cent.

NALANDA’S CONCENTRATED BETS
The $2-billion Nalanda Capital, founded in 2007 by the obsessively reticent Prasad, a former McKinsey and Warburg Pincus alumni, takes positions of 8-10 per cent in listed mid-cap companies. Nalanda Capital holds such stakes in companies as diverse as Mindtree, Havells, Kirloskar Oil Engines, Just Dial, Page Industries and Berger Paints, among others. Often it is the largest single institutional shareholder.

“They have been making public appeals to scuttle the deal,” said a Hong Kong- based institutional investor of Mindtree, who did not wish to be quoted. “It’s an existential question for them too. If they support L&T, future fund-raising will be a challenge. They have even reached out to several limited partners or sponsors of funds that own Mindtree shares. Do they have special rights that others are not familiar withRs ”

L&T has been arguing that it has paid a premium and has ruled out any price revision. Attempts by intermediaries to thaw the frosty relationship between L&T and Prasad have so far failed.