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Thursday, November 8, 2012

‘Wipro’s Plan to Keep Demerged Co Unlisted won’t Help Investors’

Management should have gone for reverse book-building to delist, says investor advisory firm


    The proposed demerger by Wipro to separate its IT division from a set of other businesses without listing the spun-off entities has been criticised by proxy-advisory firms. 
Stakeholders Empowerment Services (SES), formed by former Sebi ED JN Gupta, has said that benefits of such a demerger may not be fully passed on to all shareholders because the demerged entities Wipro Enterprise (WEL) will be unlisted companies. According to SES, a fair way of demerging the businesses would have been to demerge and list WEL. "If the management wants to convert WEL into an unlisted company, the best way would be to go for reverse book-building to delist," it said in a note. 
"The valuation of the demerged entity remains subjective despite independent valuations and the best intentions of the promoters and management," said SES. The debate over whether the valuation is lower or higher may carry on indefinitely and could potentially cast a shadow of doubt over the demerger process, without any real basis," it added. 

An email to Wipro went unanswered till the time of going to press. In a statement issued to the media on November 1, Wipro chairman Azim Premji said, "I am confident that the demerger will enhance value for our shareholders and provide fresh momentum for growth. Each of our distinct businesses is best of breed in its respective industry and we are committed to both the businesses," said On November 1, the Wipro board approved the demerger of the non-IT businesses into a separate company to be named WEL. Existing shareholders are given the option to receive one equity share in WEL for every five shares or receive one 7% redeemable preference share in WEL with face value of . 50 for every five equity shares of Wipro or alternatively exchange the equity shares of WEL with shares held by the promoter as consideration. The valuation was done by Deloitte and NM Raiji & Co, while fairness opinions were provided by JM Financial Institutional Securities and Citigroup Global Markets. JM Financial also acted as a financial advisor to Wipro. According to SES, by keeping the demerged entity unlisted, a pressure point is created on shareholders to exit the illiquid investment through 
areadily available exit route. Institutional Investor Advisory Services or IIAS, another voting advisory firm, said that while offering deferred liquidity through redeemable preference shares seems thought through, offering shares in an unlisted company "is not a real choice".
SES said that the demerger is structured to help the promoters comply with the listing agreement and could set precedent for other companies to follow. "While giving options appears to be investor friendly, it is apparent from the statement of the company that one of the options is 
designed to facilitate another objective relating to compliance with promoter holding." 
IIAS said any demerger scheme needs stock exchange approval which usually insists that the spinoff entities shares are listed. But, the exchanges have not said anything so far. SES has advised Wipro shareholders' to urge the board and the management to reconsider the demerger scheme and list the demerged entity enabling investors to realise its fair price in the market.


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