Govt to take over IFCI without open offer

Sebi clears the proposal small investors stare at significant erosion as government set to acquire 55.57%

The Securities and Exchange Board Of India (Sebi) on Tuesday cleared the government proposal to buy a majority stake in IFCI Ltd through conversion of debentures. The regulator also granted the government’s request to exempt it from making an open offer to minority investors, which is otherwise mandatory for any acquirer going over 25 per cent. After the conversion, the government stake will rise to 55.57 per cent.

Atul Kumar Rai, chief executive officer of IFCI, said the board would take it ahead. The move comes as a blow to minority investors of the lender, including 761,000 small shareholders, who could see significant value erosion when shares begin to trade tomorrow.

On August 24, when the proposal to convert debentures worth Rs 923 crore into equity shares at par was first announced by the government, IFCI shares fell from Rs 36 levels touched intra-day to Rs 29.25.

However, it had recovered to Rs 33.65 on Monday’s trade after last week’s news reports suggested that the company might buy back a part of these debentures. Shares shed 2.4 per cent on Tuesday to close at Rs 32.10.

“It’s likely to fall. Everything that is being done is violation. How can you decide to convert at par,” said Arun Kejriwal of Kejriwal Research and Investment Services.

IFCI investors are of the view that the conversion of debentures should be made at a price that is determined according to Sebi-mandated formula for preferential issues. This would ensure a fair deal for minority investors in the company. If debentures are converted at par, it erodes the value of small investors substantially.

The paid-up capital of IFCI is Rs 737.8 crore. If the government converts the debenture, this expands to Rs 1,661 crore, giving the government a 55.57 per cent stake. As a result, an investor holding one per cent stake in the company on Tuesday will hold less than half a per cent after the conversion.

The government under financial assistance to IFCI, after it became a company in 1993, has released about Rs 3,332.31 crore. Out of this, Rs 400 crore was convertible debentures, Rs 523 crore in the form of optionally convertible debentures and the remaining was provided in the form of grant-in-aid.

It is these two tranches of debentures totalling Rs 923 crore that the government wants to convert. While debenture certificates are available with the government for the first tranche of Rs 400 crore, it does not hold the certificates for Rs 523 crore tranche. IFCI has been writing to the government to convert these loans too, as grants and waive off repayment. It had also offered to pay back these debentures. But a committee headed by the finance secretary decided against these proposals and recommended the government to take charge of the company.