Small shareholders on collision course with PEs in Manappuram

Bangalore-based investor says will move Sebi, company says rights of small shareholders intact

Small investors have opposed the move by gold loan firm Manappuram Finance to bestow certain special rights on institutional investors in the company and are planning to move the Securities and Exchange Board of India (Sebi), seeking relief.

The company is planning to alter its Articles of Association through a special resolution at its annual general meeting (AGM) on August 2 to give these rights to some private equity (PE) investors, who have bought shares in the company recently.

Shareholders of Manappuram Finance have already written to the company opposing this proposal. N Venkatraman, who holds 3,000 shares in the gold loan firm, has said these rights vitiate the charters of the company and is planning to move market regulator Sebi to stop the company from proceeding with the move.
 

SMALL INVESTORS, BIG QUESTIONS

• Why should company alter articles to honour agreements between promoters and PEs?
• Are you not taking away the powers vested with the Board and specially the independent directors?
• How did independent directors agree to this?
• Why should an investor holding just one per cent get internal information about a company?
• How do we know if PEs will act in the interest of minority shareholders?

Source: Letter by shareholder to Mannapuram

In a letter written to the company on July 9, Venkatraman asked: “The company is proposing to give affirmative rights to an organisation with one per cent stake. How are we assured he will take all decisions in the best interest of the minority and/or the balance 99 per cent shareholders in the company?”

Venkatraman also questioned how a shareholder with one per cent shares determine the declaration and the payment of dividends, when this is a prerogative of the board to recommend and AGM to adopt. “By giving them so many reserved rights, are you not taking away the powers vested with the Board and specially the independent directors?”

“I hold equity shares. So does he. But he is having more rights than me. Why should he. We both should be treated equal in the eyes of law,” Venkatraman told Business Standard over phone.

Rajesh Kumar, company secretary, Manappuram Finance, said: “There is nothing new in these provisions. These rights were already incorporated in our articles in 2008. These amendments are required to extend these rights to some new investors, including Barings and Sequoia nominee investors.”

He added these amendments did not affect other shareholders exercising their rights. In June, Barings India had picked up a 5.94 per cent stake in Manappuram through an open market purchase.

Officials of India Equity Partners, Barings India and Sequoia, which are the main beneficiaries of these rights in Manappuram, did not respond to phone calls and emails.

While proxy advisory firm Institutional Investors Advisory Services has opposed the move which confers rights such as preferential treatment during liquidation and anti-dilution adjustments to ensure they maintain their stake and value, lawyers feel these rights have to be studied on a case-by-case basis.

Somasekhar Sundaresan, partner, J. Sagar Associates, said: “In my view, it would be wrong to take a one-size-fits-all approach of opposing any right in favour of financial investors. Many of these rights, in fact, work to the benefit of the voiceless minority, whose shareholder value gets enhanced by the policing brought in by the larger financial investors.”

Sundaresan added: “In a given company, having an anti-dilution right would act as a deterrent to wanton dilution and reckless fund-raising. In others, it may create a skewed upper hand.”

The tussle between small shareholders and PE investors in Manappuram Finance has reopened the vexed issue of “control”.

Certain affirmative rights bestowed by MSK Projects upon PE fund Subhkam Ventures by way of similar shareholder agreement was considered to be ‘control’ by Sebi and the regulator had directed Subhkam to make an open offer to the minority shareholders under a specific regulation of the takeover code that relates to control.

While the Securities Appellate Tribunal (SAT) ruled in favour of the PE firm, Sebi had moved the Supreme Court, challenging this.

Last November, the Supreme Court disposed of the case without any decision on the question of law. It also held the SAT decision cannot be held as a precedent, leaving the question whether such affirmative rights amount to control open for interpretation by Sebi. If Sebi is of the opinion that such affirmative rights amount to control, it can direct the acquirers of such control to offer an exit option to the minority investors by making an open offer under takeover laws.