From financial services to manufacturing to engineering, multinationals have been increasing their stake in their Indian arm in the last two to three years.
And the purpose ranges from enhancing shareholder value in the parent company, increasing flexibility to pass resolutions, thwart hostile take-over bids or in some cases, de-list from the bourses.
Rangachari Muralikrishnan, Head – Institutional Equities, Karvy Stock Broking, says: “Growth in developed markets is stunted while there is growth in their emerging market arms. These companies through their dividend policy ensure that the parent’s shareholders are rewarded. An Indian subsidiary of a foreign company paying Rs 500 a share as dividend, recently, is a case in point. This is equal to 85 per cent of its free cash flow.”
Stake consolidation of its Indian businesses is another reason why companies hike their stake.
Tejesh Chitlangi, Partner IC Legal says: “MNCs, in particular, are raising stakes in their Indian subsidiaries to consolidate position in strategic emerging markets like India and attractive valuations being an added incentive. In certain cases, fear of a material subsidiary being taken over by a hostile bidder may be a reason for increasing the stake as well.” Such moves have a positive impact on valuation, say analysts. Paras Bothra, Vice-President, Research, Ashika Stock Broking, feels: “These MNCs have a strong franchise worldwide, and in most cases, the cash on their balance sheet is very high. Strengthening the stake in their subsidiaries improves valuation.”
Some feel that such a move points towards an intention to de-list. Akshay Gupta, MD &CEO, Peerless Mutual Fund, says: “There are have been examples where companies have raised their stake to the maximum permissible limit and have eventually de-listed fed up with quarterly reporting of numbers. Also the maximum shareholding allows them to have special resolutions passed in their favour without any hiccup.”
Market-men said that stock prices of such companies usually remain buoyant when the offer is on as also the repatriation of funds. Dhananjay Sinha, Head, Institutional Research, Emkay Global Financial Services Ltd, says: “The higher repatriation of profits by these companies is reflected in our BOP (balance of payment) account. The increase in stake usually does not have any positive impact on the Indian arm. In addition, there is an upside to the share price. Till the time the offer is on, the price is supported. Then, it automatically comes down.”