Mahindra & Mahindra promoter stake falls below crucial 26% mark

The shareholding of the promoters of Mahindra & Mahindra (M&M), the tractor and utility vehicles maker, has fallen to a low of 22.76% in the quarter ended December 31, 2010, well below the crucial 26% ‘safe level’ that’s preferred by most promoters.

And out of its 22.76% stake, at least 2% is pledged by the promoters with banks, according to Bombay Stock Exchange data.

While theoretically, this can entice barbarians to the gate, a hostile takeover appears unlikely.

The decline in promoter shareholding is also significant because a 26% stake affords owners the power to veto or block any resolution at shareholder meetings.

M&M officials did not respond to our queries.
Interestingly, promoter stake in M&M has been declining since the last two quarters. It fell from 26.31% as of June 30 to 25.83% in September before reducing afresh to 22.76% in December.

Incidentally, M&M is the holding company for group firms.

Among auto companies, M&M has the lowest promoter holding.

As on December 31, the Tata group, led by holding company Tata Sons, owned a 34.93% stake in Tata Motors, the Hindujas owned close to 38.61% in Ashok Leyland and Japanese automaker Suzuki Motor Corporation an impregnable 54.21% in Maruti Suzuki.

The M&M promoter holding is broken down into employee stock options 1.78%, M&M benefit trust 8.69%, employee welfare trust 0.35%, corporate bodies 11.10%, individuals and HUF 0.72% and foreign individuals 0.12%.

While this is not an uncommon practice, the negative implication of this is that in times of financial distress, the ability of promoters to bring in more capital is curbed.

The Life Insurance Corporation of India is the single-largest institutional investor in the company with a 14.8% stake.

In India, domestic institutions generally back promoters of well-run companies and are loathe to upset the applecart.

M&M has been a market outperformer in recent times — beating the Sensex’s 17% rise with a 44% gain in 2010.

The company has been saying that it would vest more power to employees and give a federal structure to the organisation.

M&M’s recent notification is a step in this direction, analysts said.

On January 27, the company said it will be issuing 1.73 crore equity shares (almost 2.9% of equity) to the M&M employees Stock Option Trust at par.

Companies like Wipro, TCS and Infosys have similar employee-friendly policies.

While some industry experts feel that this is large equity dilution at par, Prakash Diwan, head of institutional business, Networth Stock Broking says this is not about equity dilution at all.

“It is more about sharing equity through the Esop programme for the benefit of employees. The acquisition of Ssangyong, and its recent export thrust has prodded the company to search for global talent. Such initiatives (Esops) will help in retaining and acquiring international talent. That is why we see an upside in the form of Esops,” Diwan said.

An analyst with IDBI Capital concurs, saying it’s all about fulfilling a promise given to staff. “But the employees are unlikely to realise gains immediately. It will happen over a period of time,” he said, not wishing to be named.

But some say this move is a negative for minority shareholders since shares will be allotted to the trust at a face value of Rs5 while they themselves buy at market prices - which is Rs701.20 as of now.

“This raises the question, why this preferential treatment to staff? As per International Financial Reporting Standards, employee stock options need to be amortised and taken as a charge in the profit & loss account. This depresses profit, thereby affecting shareholder equity. This will miff the minority shareholders who would have to compete with a new crop of shareholders (in this case the employees) at a lesser price,” said an analyst with a domestic research firm.