Will you, won’t you, will you clear the way, Religare?
The question sums up the Securities and Exchange Board of India’s interim order-cum-show-cause notice that the securities market watchdog posted on its website on June 19. The trigger: the reluctance of the Rs 6,300-crore Religare Enterprises Ltd (REL), a listed company, to get the paperwork done for the Burmans of Dabur to wrap up the open offer they made to its shareholders in September last year.
Sebi wants to know why Religare is not getting the clearances required from the regulators that govern its various businesses for the open offer to proceed and why it has ignored Sebi’s “explicit” advice. The Burmans’ open offer requires “a logical conclusion,” Sebi says, after listing every recorded step in the nine-month saga and Religare’s failure to back its charges against the Burmans.
Sebi’s 12-page document, over 4,400 words long, says Religare must promise to apply for clearances to the regulators concerned on or before July 12, 2024, or Sebi will restrain Religare from accessing the securities market. Religare is a diversified financial services company that operates in retail stockbroking, health insurance, and lending to small and medium businesses, among others. REL is registered as an NBFC with the Reserve Bank of India.
“ The REL board has just been stalling applying to RBI for the open offer... The Sebi order is clear that the board has not furnished any documentary evidence of why the Burmans are not fit and proper ”
Shriram SubramanianFounder and MDInGovern Research Services
On July 10, the Securities Appellate Tribunal (SAT) directed Religare to file the necessary open offer application with “regulatory authorities including RBI to comply with the directions” contained in Sebi’s interim order. An extension of time was granted till July 22 to submit this application. SAT has also given an interim stay on the show-cause notice issued to REL’s top management and provided relief till the next hearing on August 29. This was after REL moved SAT seeking relief from Sebi’s order.
But first, let’s go back to how the Burmans accumulated stake in REL. Starting in April 2018, the Burmans, promoters of the Rs 12,400-crore Dabur India, a big gun in the FMCG space, used four group firms to start buying shares of Religare from the market. When their holding hit 25% last September, India’s securities markets law required them to make an open offer to acquire 26% from the market, which would have given them majority control. The Burmans announced the open offer at Rs 235 per share (the stock closed at Rs 243 on the BSE on July 15, 2024), armed with the Rs 2,116 crore required if the issue had been fully subscribed.
But what should have been an open-and-shut case has turned into a long-drawn battle, with REL’s board digging in its heels. It said the company is worth much more and that the Burmans are not fit and proper to run a financial services firm such as Religare. The company’s independent directors levelled allegations of fraud against the Burmans in letters written to Sebi, RBI and the Insurance Regulatory and Development Authority of India (Irdai).
The Burmans, whose Burman Family Holdings controls their businesses in life and general insurance, hospitality and media, said they were surprised by the opposition. They said they had discussed the open offer with REL before making it. The Burmans then retaliated with insider trading charges against Rashmi Saluja, Religare’s Executive Chairperson, and accused REL of overpaying her. This was in addition to her having received high compensation through stock options at REL’s finvest business, and Care Health Insurance. To this, the REL board said no additional stock options had been issued to Saluja. This was preceded by a report by corporate governance advisory firm InGovern Research Services that said the value of stock options in Care was more than Rs 480 crore.
So far, Religare has approached not only Sebi (for the takeover part) but also Irdai (since both groups are in the insurance business) and RBI (which regulates the NBFC business)—but not to seek their clearances for the Burmans’ bid. Religare has raised objections to the bid.
Shriram Subramanian, Founder and Managing Director of InGovern Research Services, says the Sebi order-cum-show-cause notice leaves Religare with only one option: apply to RBI for clearance so that the Burmans’ open offer draws to a conclusion.
“The board of REL has just been stalling applying to RBI for the open offer by giving lame excuses. The Sebi order is clear that the board has not furnished any documentary evidence of why the Burmans are not fit and proper,” he says.
Subramanian says the Burmans’ open offer is a fait accompli, and it is only a matter of time before they take control of REL and replace its board and management.
The Sebi interim order says the SAST or Substantial Acquisition of Shares and Takeovers Regulations, 2011, does not specify any fit and proper criteria for the acquirer, except that it should not have been declared as a wilful defaulter/fugitive economic offender.
Religare, Sebi says, had not submitted any documentary evidence to show that the “acquirers suffer from any of the said infirmities”.
Subramanian says Sebi’s first order “was in the form of advice… But Religare contested it, saying Sebi lacked jurisdiction. However, this order is quite hard-hitting and makes it clear that the board of Religare behaved in an arbitrary manner and gave itself disproportionate rights without any basis.”
The Burmans are clear about the way forward. “Our priority was, and has always been, to complete the open offer immediately upon receipt of the statutory approvals. Although we have aggressively pursued such approvals, the board of REL, led by its Executive Chairperson, has deployed illegal means to block the open offer,” a Burman family spokesperson says in a reply to BT.
In a conversation with BT before Sebi’s interim order, Saluja had said that, until the open offer succeeds, the existing management and board will run Religare Enterprises. “I am executing my responsibility, and the regulators are doing their job. Why do you want to mix the two?” she said (see full interview).
The Burman-Religare battle has left minority shareholders in the lurch. Arush Khanna, Partner at Numen Law Offices, points out that Sebi’s interim order has made some damaging observations about how the Religare management’s stand is not in the interest of its minority shareholders.
Specifically, on the role of Sebi, he says, “Being a creature of a special statute, Sebi cannot supplant RBI, Irdai, or any other regulator in the discharge of their respective functions. However, Sebi is vested with sufficient discretion and broad powers to protect the interest of all stakeholders in the securities market.” Khanna refers to Section 11B of the Act read with Regulation 32 of SAST, which says Sebi is empowered to issue directions to protect the interests of the shareholders wherever necessary.
Barely a month after the Burmans announced the open offer, Religare’s board wrote to Sebi claiming that the Burmans were not “fit and proper” to become a promoter of a financial services company.
The Burman family spokesperson tells BT that Saluja was informed of their intention to launch an open offer. “We never expected the Executive Chairperson or the board to stall the open offer. We voted for the appointment of the Executive Chairperson in the shareholders’ meeting after the launch of the open offer. The board publicly welcomed our open offer,” the spokesperson claims.
Those familiar with the issue say Religare’s management became hostile because it feared losing control. Religare has no defined ‘promoter’, so Saluja calls the shots. Besides, each of the three regulators—Sebi, RBI, and Irdai—has different criteria for “fit and proper,” especially for NBFCs.
Ashish Kumar Singh, Managing Partner at law firm Capstone Legal, says that when it comes to a listed NBFC’s or bank’s shares being acquired, there is an added layer of scrutiny by RBI. “The primary purpose is to protect the interests of customers of the said company and to ensure that there is no conflict of interest with that or its businesses.”
He elaborates that RBI’s decision is based on many considerations and that includes credentials of proposed shareholders, proposed new directors of the company and conflict check with the target entity. The other factor is whether the new shareholders are fit and proper persons to conduct financial service activities. “That decision rests with RBI and the existing board has no role to play in this process other than to just forward the names and credentials of the proposed shareholders.”
Singh says that until RBI studies that matter, it is difficult to say whether the Burmans’ open offer is a clear “open and shut case”.
“Each application submitted to the RBI is determined on its own merits, and one cannot assume that the approval is a mere technical formality,” Singh says. That means the issue could take even longer before it is resolved.
The Burman family spokesperson says the immediate priority is to extend full support to the regulators and obtain their approvals “to ensure the public shareholders get their exit and REL/its shareholders are able to move forward with their respective businesses”.
The Burmans expected the open offer process to have been a lot smoother. “More than it being challenging, it is unfortunate that the interest of REL and its shareholders are being jeopardised by the board and its Executive Chairperson. We have faith in the regulatory process and, to that extent, remain confident in overcoming these challenges created by the board and REL’s Executive Chairperson,” says the spokesperson.
Religare has had a rocky ride since 2018, when its promoters, Malvinder and Shivinder Singh, were accused of diverting over Rs 2,000 crore from group company Religare Finvest, and arrested. The Singh brothers had to divest their stake and step down. Saluja came aboard, and in March 2023, the company did a one-time settlement of Rs 2,178 crore with 16 lenders of the finvest (SME lending) business (see chart ‘Current Business Structure’). By February 2024, the finvest business had repaid over Rs 9,000 crore in all. “We had tried a debt restructuring earlier but the fraud tag came in the way. There was no question of a credit rating since a negative perception existed,” recalls Saluja. The situation is vastly different today and REL is now profitable (see chart ‘Back in the Black’).
Financial services are familiar territory for the Burmans. They hold stakes in Aviva Life Insurance and Universal Sompo General Insurance; earlier, they were involved in ABN Amro Securities and Fidelity Mutual. The Burman family spokesperson says Religare is a business with potential for growth and expansion. No wonder, then, that they want it badly.
“We have a strong record of turning around companies where the full potential is not realised because of management and governance-related concerns,” the spokesperson says. Religare’s wide range of financial services also makes it attractive. “With the Burman group’s record and ability to access capital and attract and nurture top management, we believe there is a lot that can be done to significantly bolster REL’s business,” the spokesperson says.
Analysts say Religare has a promising business model. Says Vinit Bolinjkar, Head (Research) at brokerage Ventura Securities, “The business can be easily capitalised with a financially strong promoter. Plus, the Burmans are known to be long-term players with a lot of patience,” he says.
Meanwhile, under Saluja, Religare’s businesses are growing. Take housing finance. Bolinjkar says there is room for at least 10 more players. “The need in REL across its businesses comes down to the ability to invest, raise capital and address the negative governance perceptions. There is an obvious momentum,” says Bolinjkar.
He says most of the valuation in REL comes from Care. “In Kedaara Capital, they already have a good investor, and there is more room to unlock value,” Bolinjkar says. Saluja points out that Care, as a standalone health insurance firm, is the second largest and fastest growing entity with a CAGR of 35%. “Health insurance will grow as a nation progresses, and we are in a sweet spot. Our combined ratios [claim-related losses and expenses upon total premium earned] have come down, and there is a great partner in Kedaara,” she says.
Vineet Patni, an insurance sector veteran, says, “Health insurance penetration in India continues to be low with limited or poor access to quality healthcare. There is also a growing cost of healthcare leading to significant pressure on individuals.” Patni, a Partner at Wepartner Consult LLP, was earlier CXO at Bajaj Allianz and Bharti AXA.
Rising per capita incomes also lead to more cases of non-communicable diseases, making health insurance even more necessary. Patni says Care focussed on quality products and individual businesses rather than group businesses. “That is way more profitable and rewarding to a player in the long run. It has a strong niche with higher price points but offers simpler and better service,” he explains. From his point of view, Care is an established player with the potential to scale up significantly with funding.
What is the way ahead? As things stand, nothing is more important than growing the business in a market full of opportunities, and protecting the interests of minority shareholders. Whoever gets control of the new-look REL will have to focus on these two aspects.
There is still much that will play out in this hostile takeover, and time is a key player in this tale.