|No longer a hero|
|Thursday, 10 March 2011 00:00|
Hero Honda’s shareholders have reason to be worried about what’s happening in their company, but more than that, Wednesday’s decision of purchase of Honda’s shares by some Munjal investment firms throws up interesting issues for both taxmen and regulators. The immediate question in shareholders’ minds, of course, is why Honda has sold its 26% shareholding in Hero Honda at R740 per share, or less than half the current market price. Are shareholders to assume that it means the two former partners know something about the company that they don’t; does it mean the royalty being paid to Honda is in some way higher than it would have been otherwise; is this the price the canny Munjals, who own 26% of Hero Honda, have managed to extract from Honda for allowing it to go its own way without any non-compete clause being exercised? There are many more questions and, sadly for a group that prides itself on its corporate governance ethic, there is little clarity on this.
The other question is of what happens to the sales various
Munjal investment firms had lined up with private equity players. The Munjals had applied to the FIPB to sell 45% of their stake in investment firm Hero Investment Pvt Ltd—since HIPL owns 17.33% of Hero Honda, effectively 7.8% of Hero Honda’s shares are to be sold to PE players (another 8.67% of Hero Honda is owned by group investment firm Bahadur Chand Investments Pvt Ltd, taking the total Munjal holding to 26%). The Munjal FIPB application says it hopes to raise up to R4,250 crore for this transaction. R4,250 crore for 7.8% versus R3,842 crore the Munjals are paying for 26% of the company! It would be interesting to see if the PE firms will now demand a reduction in prices.
It would also be interesting to see how the taxman approaches the sale. The taxman can levy capital gains tax based on the sale value of R3,842 crore, or he can refuse to accept this valuation and say the market price of Hero Honda shares will determine the capital gains. There are few precedents to go by, so how the taxman treats the case will have an important bearing on future transactions.
In other words, interesting times ahead for the Munjals and the company they will get to own 52% of.