Fortis-SRL deal is legally watertight
The Fortis-SRL deal is legally watertight, but the jury is out on whether it is proper or not.
Shivinder and Malvinder Singh
A deal last fortnight between two entities controlled by New Delhi businessmen, Malvinder Mohan Singh and brother Shivinder, has raised questions about its propriety. With the memory of a December 2008 attempt by the promoters of Satyam Computer to acquire a family-run company, Maytas Infrastructure, still fresh in minds, this deal has corporate circles abuzz.
One of the companies involved in the deal announced on April 15 is publicly-listed Fortis Healthcare, a hospitals firm that bought an 86 per cent stake in unlisted diagnostics chain Super Religare Labs, or SRL, which is planning an initial public offer.
The Singhs and their families owned 81 per cent in Fortis and a little more than 74 per cent in SRL. The deal price was not disclosed; it was to be determined by an independent valuation. A few days later, a private equity fund Avigo Capital Partners provided a benchmark for Fortis when it paid Rs 100 crore for a 9.27 per cent stake in SRL's expanded capital.
After the Satyam-Maytas fiasco, "related party transactions involving listed promoter group companies have been on the radar of various stakeholders on account of serious corporate governance issues.
Such related party transactions should be undertaken only after following highest standards of corporate governance," says Nishchal Joshipura, head of mergers and acquisitions at the legal firm Nishith Desai Associates.
The promoters' defence is that the decision was voted on by independent directors of Fortis only, and that there is a benchmark valuation in the Avigo deal. Prithvi Haldea, Chairman of Prime Database and a keen watcher of M&A deals, says voting by independent directors in India need not mean much. Indeed, Satyam independent directors Vinod Dham, Krishna Palepu and M. Rammohan Rao were panned after the Maytas episode. Fortis's independent directors, listed on its website, include Gurcharan Das, former CEO of Procter & Gamble India and retired judge S.S. Sodhi.
To the extent that Fortis is significantly bigger than SRL, the upside in the deal for the Singh brothers may not be much. The hospital company reported Rs 1,067 crore revenues and Rs 95 crore net profit in April to December of 2010. SRL made net profits of Rs 65 lakh on revenues of Rs 128.2 crore between April and September 2010, the latest period for which data is available.
Still, the deal will come under the scanner, says Garima Kumar, Executive Director of Lotus Knowlwealth, a Mumbai brokerage. But, if the Fortis's claims hold up, "there is unlikely to be a finger pointed at the deal, especially if it unlocks shareholder value," she adds. Munesh Khanna, Managing Director, investment banking, Centrum Capital, agrees: "Valuation by all counts seems to be fair."
Fortis, through a company spokesperson, says it "sees great benefit in augmenting the Fortis presence with new speciality-based verticals". Diagnostics through SRL will enhance patient care, it added. Whether Fortis's minority shareholders were short-changed or not will become clear only when the SRL IPO is priced.
One of the companies involved in the deal announced on April 15 is publicly-listed Fortis Healthcare, a hospitals firm that bought an 86 per cent stake in unlisted diagnostics chain Super Religare Labs, or SRL, which is planning an initial public offer.
The Singhs and their families owned 81 per cent in Fortis and a little more than 74 per cent in SRL. The deal price was not disclosed; it was to be determined by an independent valuation. A few days later, a private equity fund Avigo Capital Partners provided a benchmark for Fortis when it paid Rs 100 crore for a 9.27 per cent stake in SRL's expanded capital.
| TIMELINE February 2011 Super Religare Labs fi les a draft red herring prospectus with a mandate to raise Rs 160 crore from pre-IPO placement April 2011 Fortis (81% owned by the Singh Brothers) declares its intention to acquire 86% of SRL which is promoted by them. Valuation was to be decided by independent valuers April 2011 Avigo Capital Partners picks up 9.27% stake in SRL for Rs 100 crore setting the valuation benchmark |
Such related party transactions should be undertaken only after following highest standards of corporate governance," says Nishchal Joshipura, head of mergers and acquisitions at the legal firm Nishith Desai Associates.
The promoters' defence is that the decision was voted on by independent directors of Fortis only, and that there is a benchmark valuation in the Avigo deal. Prithvi Haldea, Chairman of Prime Database and a keen watcher of M&A deals, says voting by independent directors in India need not mean much. Indeed, Satyam independent directors Vinod Dham, Krishna Palepu and M. Rammohan Rao were panned after the Maytas episode. Fortis's independent directors, listed on its website, include Gurcharan Das, former CEO of Procter & Gamble India and retired judge S.S. Sodhi.
To the extent that Fortis is significantly bigger than SRL, the upside in the deal for the Singh brothers may not be much. The hospital company reported Rs 1,067 crore revenues and Rs 95 crore net profit in April to December of 2010. SRL made net profits of Rs 65 lakh on revenues of Rs 128.2 crore between April and September 2010, the latest period for which data is available.
Still, the deal will come under the scanner, says Garima Kumar, Executive Director of Lotus Knowlwealth, a Mumbai brokerage. But, if the Fortis's claims hold up, "there is unlikely to be a finger pointed at the deal, especially if it unlocks shareholder value," she adds. Munesh Khanna, Managing Director, investment banking, Centrum Capital, agrees: "Valuation by all counts seems to be fair."
Fortis, through a company spokesperson, says it "sees great benefit in augmenting the Fortis presence with new speciality-based verticals". Diagnostics through SRL will enhance patient care, it added. Whether Fortis's minority shareholders were short-changed or not will become clear only when the SRL IPO is priced.
