Thursday, April 19, 2012

Escorts Shares Bought by RBS for Rs. 4.70 Crore, as Takeover Buzz Starts


Nikhil Nanda, Joint MD,
Escorts India Ltd
Escorts Ltd (BSE: 500495, NSE: ESCORTS) counter in National Stock Exchange witnessed a notable buy of 5.80 lakh shares by the FII, The Royal Bank of Scotland (RBS) on Thursday, 19th April 2012.

The buy amounted to a 0.55% stake for RBS in this leading Indian manufacturer and supplier of Agri Machinery Products, Auto Suspension & Ancillary Products, and Railway Equipment.

The move follows a peculiar transaction on Wednesday in which a promoter group company of Escorts Ltd bought 4% stake from Reliance Mutual Fund, a leading domestic institutional investor and the largest non-promoter investor in the company.

In a related development on Thursday, the promoter group company also disclosed that it had acquired around 1% through open market purchases in recent days.

The market was quick to sense the underlying signal. In India, promoters are allowed to buy only a maximum of 5% stake in a year, and Escorts promoters had done that. Usually, promoters go for such an extreme step when they fear a hostile takeover.

There is no doubt Escorts was susceptible to a hostile takeover, at least theoretically, as the promoter stake was only 27.67% as of Q3 end. But in India, takeover attempts have had little success so far, and Escorts itself had thwarted a major attempt in the 80s by UK based PIO and businessman Lord Swaraj Paul.

The main reason why hostile takeovers are not successful in India is because existing institutional investors often support the incumbent promoters.

However, the recent battle for control in infra major IVRCL, between promoter E Sudhir Reddy and Essel / Zee Group led by Subhash Chandra, were full of rumours that institutional investors may support Essel.

Though nothing much happened finally, other than IVRCL’s share price soaring, and institutional investors like Norges Bank part exiting with sharply better prices, that episode is clearly cautioning other promoters like Escorts Chairman, Rajan Nanda.

And Thursday’s buy by RBS into Escorts stock, seems to be an attempt by the noted FII to enter at an opportune time that may lead to rapid mark-to-market gains, if a takeover battle indeed ensues, with a still unconfirmed rival business group.

Largest institutional investors in Escorts are Reliance Capital Trustee Company, FID Funds Mauritius, Ashmore Emm LLC A/c EMSAF-Mauritius, Life Insurance Corporation of India, Goldman Sachs, Sundaram Mutual Fund, Franklin Templeton, Emerging Market Management LLC, Macquarie Bank, and Dimensional Emerging Markets Value Fund.

The buy by RBS was executed at Rs. 81.04 a share, making Thursday’s deal worth Rs. 4.70 Crore. There were no identifiable institutional investors selling above 0.50%, and thus acting as counterparties to the buy.

Escorts closed trade at Rs. 81 in NSE, up by 5.61% and with traded volume more than 5.5 times the average monthly volume.

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