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Bankers Push to End India’s Unusual Delisting Rules Amid Deal Boom | Rare Techy


(Bloomberg) — The buyout industry is making a renewed push to change some of the world’s least-friendly takeover rules in India.

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Driven by the surge in private equity deals that have mostly focused on non-listed Indian companies, bankers and other buyout specialists are lobbying to overhaul the process that leaves little room for buyers to determine a price based on their valuation of the company.

They hope the Securities and Exchange Board of India, under new chief executive Madhabi Puri Buch, will change the rules after the regulator makes changes to the framework in 2021 that make it easier to list companies in the event of a change in control.

“I would really like to see some reforms in regulations, especially for people who want to take companies in the private domain and do more with it,” Raj Balakrishnan, co-head of India investment banking at Bank of America Corp., said at an industry conference in the month of September.

Price uncertainty

As of now, under private bidding in India, the buyer sets the floor price based on the company’s valuation. The final price, however, comes after taking bids from all shareholders, a so-called reverse book building process that can significantly increase the bid price for the company.

This is different from the fixed price mechanism in the US and UK, where the buyer determines the offer price.

Such a process in India was instituted about 20 years ago to protect smaller shareholders who may feel squeezed, and it has admirable appeal. “It is unique to India and the cleanest and fairest price discovery mechanism,” said Hetal Dalal, president and chief operating officer at Institutional Investor Advisory Services, a proxy advisory firm. “Everyone gets a choice.”

Critics say the price uncertainty arising from this process in India has prevented companies from using the good private-equity playbook to improve operations and governance, which could have increased the company’s value. In this opposite book building, existing shareholders can unite to bid unrealistic levels, pushing up the final price for shares, they said.

Market participants have written a letter to the authorities and confirmed this during a conversation with government officials about why the current process is abusive and how easing the rules will help expand the flow of capital to the country, according to nearly a dozen fund managers, bankers and lawyers familiar. process.

“India’s process does not provide clarity or certainty about pricing and what happens next,” said Harsha Raghavan, managing partner of Convergent Finance, an investment firm that takes stakes in private and public companies.

Delisting Changes

The new rules established last year have a timeline for the delisting process and book value calculation if the offeror does not accept the price found and wants to make a counter offer. The regulator, however, did not accept the recommendation to change the price discovery process.

“There is a lack of sophistication on behalf of the regulator and they are playing catch up after years of lack of rigor on who they approve to be listed,” said Jahnavi Kumari Mewar, chief executive officer and senior portfolio manager at JPM Capital.

For years, there has been a dearth of privatizations in India amid a boom in deals.

Since 2003, only about 277 companies have filed to delist on Indian stock exchanges, according to data from the PRIME Database Group, which covers fundraising by Indian companies and the government. Private equity deals are just a handful, according to the data. In contrast, private equity firms have worked on nearly 130 private equity deals globally, worth more than $290 billion so far this year, data compiled by Bloomberg show.

In India, bigwigs like Blackstone Inc., Carlyle Group Inc. and KKR & Co Inc. have individually deployed more than $1 billion to take majority control in the company in the last three years, according to a June report from consulting firm Bain & Company.

“Expansion in buyouts coupled with large valuations led to a high emphasis on value creation through operational turnarounds, which funds to set up an internal operations team,” said the report.

the deal

Privatization has become a common tool for buyout firms toward this goal. This can be difficult to pull off in India, even for local tycoons. Billionaire Anil Agarwal’s Vedanta Ltd. could not be privatized after opposition from minority shareholders two years ago, while power company Gautam Adani recently withdrew its plans to divest.

This process can be expensive there as well. For deals worth more than $100 million that passed over seven years ago, four out of five buyers paid premiums in the range of 45% to 67%, almost twice the global premiums, according to data analyzed by Bloomberg.

In 2020, Baring Private Equity Asia acquired Hexaware Technologies Ltd. personally in one of the largest delistings in the country. The firm’s offer to delist Hexaware was eventually made at a “found price” of 475 rupees per share, a 66.7% premium above the floor price of 285 rupees per share.

Then there is Boston-based Advent International Corp., which is in the process of delisting DFM Foods Ltd. Shares of DFM, in which Advent bought a majority stake in 2019, have been trading above 370 rupees.

Advent and Baring declined to comment for the story. Regulator SEBI did not respond to an email asking if they were planning any changes to their delisting policy.

“The Indian market needs to be less protected to benefit those who can create more value for their shareholders,” Bank of America’s Balakrishnan said at the conference.

–With help from Julie Chien.

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