Mint Explainer: Dissecting the Burmans' hostile takeover bid for Religare

But the Burmans’ offer of ₹235 per share for Religare is far lower than the company’s board anticipated, sparking a debate on whether they undervalued the company for their own benefit or whether REL’s star leader Dr. Rashmi Saluja, who has been pivotal in turning around its fortunes, can take it to greater heights by preventing the Burmans from checking in.

What’s behind the Burmans' financial services ambitions?

The Burmans are a co-promoter of Aviva Life Insurance, and own 19.9% of Universal Sompo General Insurance Co. Ltd, 50% of brokerage firm Haitong Securities India Pvt. Ltd., 39% of Eveready Industries India Ltd, and 100% of M.B. Finmart, A.V.B. Finance Pvt. Ltd., Burmans Investments Pvt. Ltd, and Burmans Finvest Pvt Ltd, apart from at least five dozen other firms. This in addition to their flagship company Dabur, which owns popular brands such as Hajmola, Dabur Amla, Odomos and Odopic.

“The next big play is in the financial services space, where the Burmans want a stronghold," said a veteran investment banker who has known the Burmans and the Religare group closely over the past two-and-a-half decades.

A February report by Mint said conglomerates such as Godrej, Adani and Reliance are enthused by the pace at which Indian consumers are devouring credit. The interest of these business houses in financial services epitomises their aggressive push to muscle into the non-banking financial services market and embark on a digital lending journey. 

As per current regulatory norms, it is impossible for a business house to set up a bank. All these big business houses, therefore, are setting up non-banking financial companies and other businesses that ensure a 360-degree offering in the financial services space.

As for the Burmans, they could certainly do with a fast-growing health insurance business that is missing in its current financial services portfolio. Ever since the pandemic broke, Indian health insurers have seen their businesses surge relative to other types of insurers. 

Under Saluja’s chairmanship, the Religare group’s standalone health insurance subsidiary, Care Health Insurance, has become its golden goose, having grown five-fold-plus since 2018. That was the year when Saluja and a group of independent directors took charge of Religare’s board to save the business from a major crisis and insolvency fears that erupted after Malvinder and Shivinder Singh – Religare’s promoters – were arrested for allegedly siphoning off funds from the group.

Do Saluja and Religare’s board have issues with the Burmans’ offer?

Saluja, an MBBS, MD, MBA (Finance), LLB and PhD by education, is chairperson of Religare Enterprises and Religare Finvest Ltd. (the NBFC arm), and non-executive chairperson of Care Health Insurance Ltd, Religare Housing Development Finance Corp Ltd, Religare Broking Ltd and other subsidiaries.

She holds 1.42% stake in Religare Enterprises, while other critical managerial personnel hold 0.49%. But this may not be the only reason Saluja and the incumbent board are vociferously resisting the Burmans’ takeover bid and demanding a higher value for their shares.

When Saluja took over the reins at Religare in 2018, the group’s health insurance business was small. It had a 9% market share in the standalone health insurance space and ₹1,091.61 crore in gross premiums underwritten in FY18. 

Five years on, through the Covid crisis, Care Health Insurance underwrote premiums worth ₹5,141.52 crore, commanding a market share of 20% as the second-largest health insurer in India. Health insurers’ contribution to the general insurance industry has grown from 5.5% in 2018 to almost 40%, buoyed by Covid fears. Under Saluja and Anuj Gulati (CEO of Care Health), Care Health Insurance has benefitted the most from this trend.

Religare was in firefighting mode in 2018, when the Singh brothers were found guilty of illegally diverting funds. Investors wrote off the company and the stock plummeted.

From ₹17 a share at that point in 2018, Saluja’s revival drive, capital raising and growth strategies have propelled Religare’s stock to a high of ₹300 recently before it fell back to around ₹230 following the Burmans’ open offer announcement.

Saluja has settled Religare’s old cases with Sebi, proposed fresh terms to lenders in the form of one-time settlement, and plans to raise ₹600-700 crore through a qualified institutional placement (QIP). Religare has clocked over 30% revenue growth in the past year alone, mainly on the back of its broking and insurance businesses. Care Health grew by 56% during FY2023.

Religare Finvest Ltd. (RFL) continues to be under the Reserve Bank of India’s stringent prompt corrective action (PCA) norms, but is likely to exit the framework in the next financial quarter. REL has become debt-free after repaying debts of RFL.

Why Saluja and the Religare board may fail to stop the Burmans

Saluja has demanded at least ₹275 a share for Religare against ₹235 offered by the Burmans on 25 September. However, Saluja’s demand may not go through, given Sebi’s open-offer-pricing formula and the way the Burmans have thoughtfully crafted the takeover deal.

According to Sebi’s takeover code, the price of shares in an open offer must be higher than these four numbers – the 52-week volume-weighted average price of the stock, the volume-weighted average market price (VWAP) of the stock in the 60 days preceding the announcement, the highest price paid by any acquirer in the 26 weeks before the open offer announcement, and the highest negotiated price under the share purchase agreement.

Mint’s research reveals that the 52-week VWAP of Religare shares (before 25 September) is ₹175.9; the 60-day VWAP is ₹175; and on 16 August, 2023, Investment Opportunity Fund sold a 7.5% stake to the Burmans at ₹217.95 a share (the third and the fourth criteria).

In effect, the Burmans’ open offer price is more than 8% higher than the most recent share deal and a massive 34% higher than Sebi’s VWAP pricing criteria. This is why the open offer price offered by the Burmans seems unstoppable, if one goes purely by the takeover rules.

“Only if there is a counter offer higher than the Burmans’ offer can Sebi reconsider the hostile takeover offer," said another investment banker, who added that this was highly unlikely, adding that it is very unlikely that a business house would go against another well-known business house that has been known for turning around businesses.

Another option before the Religare board is to issue fresh equity shares in a bonus issue that would be large enough to substantially dilute the Burmans’ effective holding and prevent a takeover. But investment bankers said Sebi would consider this a direct, deliberate threat meant only to thwart the takeover and unfairly prevent public shareholders from potentially gaining on their investments in Religare. 

Given these scenarios, the Religare board’s attempts to prevent a takeover may prove futile.

According to a Business Standard report on Thursday, Saluja and a few top Religare executives spoke to top Sebi officials, arguing that the Burmans’ offer was below fair value and demanding that the offer price be backed by at least two fresh valuation reports from two independent advisory firms.

The board and management fear a dominant shareholder

This fear is accentuated by Mohit Burman’s (the Burman family’s key member) statements that after the takeover, Religare’s board and management structure may be overhauled to strengthen the businesses. If not a loss of designation, Burman’s statements imply at least an imminent change in how Saluja and her board run Religare and Care Health.

In addition, the history of recent hostile takeovers also doesn't bode well for Saluja and the Religare board.

Last December, before the Adani group took over veteran journalist Prannoy Roy’s NDTV by buying out his majority stake for over ₹602 crore, the company’s board had demanded a higher open offer price. However, the hostile takeover was successful as the pricing was in accordance with Sebi’s formula.

And in June 2019, L&T bought out Mindtree Ltd. in a ₹10,800-crore hostile takeover that was vehemently opposed by the latter’s founders and board members.

In Religare’s case, too, the Burmans’ plan to create a 360-degree financial services behemoth through a hostile takeover will most likely pass regulatory muster, according to the bankers Mint spoke to.

Are public shareholders likely to sell to the Burmans at ₹235?

The Burmans will have a controlling stake in a $1-billion company that will compete head-on with Bajaj Finance, Ambani’s Jio Financial Services, Aditya Birla Financial Services and Piramal Enterprises Ltd.

Following the Burmans’ open offer announcement, broking firm Ventura Securities last week recommended shareholders buy Religare’s shares, estimating a target price of ₹471. It should be noted that Ventura does not specialize in determining the value of businesses, but it is indicative.

“REL’s health insurance arm has industry-leading margins and strong operating metrics, while its affordable housing finance and SME lending divisions are embarking on a new growth phase," said Ventura.

Ventura expects REL’s consolidated revenues to grow at a compound annual growth rate (CAGR) of 20.1% to ₹8,096 crore in FY23-26E. This, it said, will be primarily driven by a 35.7% CAGR in revenue in RFL’s revenue to ₹305 crore owing to an expected rise in its SME loan book from ₹711 crore in FY23 to ₹2,500 crore by FY26. It said the company would do better under the Burmans' strong and proven management.

Ever since the Burmans announced a price of ₹235 a share for Religare, the stock has been sliding closer to this price.

“ ₹235 is the industry’s best possible premium that could be given to Religare Enterprises. In the history of hostile takeover in India, a 30% premium to the average market price has never been offered in any open offer," said the veteran banker cited above, predicting that most of the public shareholders will happily sell their shares in the open offer and wait for a better time to re-enter the stock.

To be sure, the Religare board will rely on specialised valuation experts to estimate a fair value for its business. It’s early days yet, and shareholders will likely wait to decide whether or not to exit at the Burmans’ offer price.