Sequoia bid to buy stake in CARE runs into a wall

Regulatory requirements are learnt to have stymied the efforts of Sequoia Capital, a private equity fund, to pick up a stake in rating agency Care. The minimum foreign investment norm is reportedly playing spoilsport.

The Foreign Investment Promotion Board has allowed the transaction but it has been stuck with the Reserve Bank of India.
The regulator has apparently taken the stand that the investment may not meet the minimum requirement of $500,000 (around Rs 2.25 crore) that foreign entities must invest in non-banking finance companies or credit rating agencies, according to sources.

While the actual deal size is larger than the minimum, since it is a third-party transaction, the face-value of the shares and not the actual amount paid for them is being considered to calculate the deal value.

Care is a full-service rating agency, an organisation that rates various instruments that companies and other entities use to raise capital as well as the entities themselves. The ratings act as a measure of the associated risk. Its current services include the rating of debt instruments, companies, municipal corporations, financial entities and small and medium enterprises.

Sequoia is said to have been in talks with a number of stakeholders to purchase anywhere between 10% and 15% of the organisation.

IDBI Bank, Canara Bank and State Bank of India together hold 60.39% stake in Care. The other shareholders include Federal Bank, IL&FS and ING Vyasa Bank.

Of these, the latter two are the most likely candidates for a deal, a source said. But this could not be independently verified.

Since Sequoia would not be buying its stake from Care itself, the
money paid does not go to the company.

As such, the banking regulator is reportedly looking at only the face-value of the equity in the transaction rather than the premium paid for the same.

For example, say a company has shares of face value Rs 10 each and an investor picks up 1 lakh shares at Rs 1,000 per share. Although the value of the transaction would be Rs 10 crore, it would only be considered as Rs 10 lakh for regulatory purposes.
Interestingly, Care only has a paid-up capital of Rs 9.5 crore. This means, the only way Sequoia can meet the RBI threshold is by acquiring almost a third of the company.

Care is said to be valued at close to Rs 1,000 crore with earnings per share of Rs 70 for FY09.