The government has blocked private equity firm Blackstone’s plans to hike stake in Nagarjuna Construction Company (NCC) on the grounds that the construction firm has been operating as a ‘foreign-owned Indian holding company’ without prior permission from the Foreign Investment Promotion Board (FIPB).NCC has been asked to first pay a penalty to RBI and then seek a fresh permission from the FIPB to offload an additional 3.5% stake to US-based Blackstone.
The construction company had sought government permission to issue 91 lakh convertible share warrants to Blackstone at a conversion price of Rs 225 each, a deal size of Rs 205 crore. This was the second tranche of investment planned by the private equity firm in the company. In August 2007, Blackstone struck a deal to invest about Rs 616 crore to pick up a 12% stake. This was a two-tiered transaction in which it was to get convertible warrants in the second leg.
Blackstone, however, stands to benefit from the government’s decision to reject the proposed investment. NCC’s stock price has crashed and on Monday closed at Rs 68.55 on the BSE. The private equity firm would not like to pay more than a two-fold premium on the existing stock price while subscribing to the convertible warrants.
According to Press Note 9 guidelines, laid down by the Department of Industrial Policy and Promotion (DIPP), a foreign-owned Indian holding company is a domestic firm in which foreign investment is 51% or more. In NCC’s case, though, the total foreign stake is 30.83% as of August 2008. Of this, Blackstone holds 8.85% as a foreign institutional investor (FII). NCC has RBI’s permission to take FII investments up to 74%.
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