What Wipro's de-merger means for Azim Premji

Wipro Ltd on Thursday announced that it is hiving off its non-IT businesses into a separate, non-listed entity. The company said its Board has approved the demerger of Wipro Consumer Care and Lighting, Medical Diagnostic Product and Services, and Wipro Infrastructure Engineering into a separate company to be called Wipro Enterprises Ltd.

While Wipro Ltd, the IT services business, will remain a publicly listed company, Wipro Enterprises will be an unlisted company.

The move could lower promoter Azim Premji's stake in these businesses, in line with new public holding norms mandated by the Securities and Exchange Board of India (Sebi).

The promoter holding in private sector companies needs to be diluted to 75 per cent by June 2013. Premji currently owns 78.37 per cent in Wipro Ltd.

Investors have been given various exit options.

One of them is exchange of Wipro Enterprises equity shares for Wipro Ltd equity shares held by the promoter. The exchange ratio will be one equity share in Wipro Ltd for every 1.65 equity shares in Wipro Enterprises Ltd.

If all minority shareholders were to use this option, Premji's holding would be diluted by 2.7 per cent. This would bring it closer to Sebi's 75 per cent limit. Premji has until June 2013 to comply with that limit.

While the company's management commented that the demerger would help the IT business grow in competitiveness, analysts remain sceptical.

Sharekhan's Sanjeev Hota does not expect any re-rating of the stock given the IT business's string of poor performances in comparison with its peers.

Shashi Bhusan of brokerage house Prabhudas Lilladher also said that he does not expect any material upside from the demerger.

Markets, however, reacted favourably to the announcement. Shares of the IT major surged nearly 7 per cent intra-day before closing the day's trade 3.02 per cent higher at Rs 361.40.

Wipro will announce its second quarter results on Friday.