Have Mindtree promoters and L&T reached a compromise?

Have Mindtree promoters and L&T reached a compromise?

Even though the promoters of Mindtree once vehemently opposed the takeover by L&T, the appointment of new additional directors from L&T on Mindtree's board has come through a board resolution

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As the L&T's acquisition of Mindtree enters its last leg with Larsen & Toubro launching an open offer to acquire up to 5,13,25,371 equity shares representing 31 per cent of the voting equity share capital of the company,  Midntree has now given a nod to induct L&T representatives as board of directors.

The board of the company will be seeking shareholders' approval at the annual general meeting of Mindtree, scheduled to be held on the 16th of July, to induct five new members to the board. Three new non-executive directors from L&T -- S.N. Subrahmanyan, CEO and MD of L&T; Shankar Raman, CFO of L&T and Jayant Patil, Senior VP, L&T's defence business and two additional independent directors -- Prasanna Rangacharya Mysore and Deepa Wadhwa, will be the new faces on the board. In what comes as the first promoter casualty of the takeover, Subroto Bagchi, who earlier was to seek a re-appointment, has now decided to end his directorship position in the company on the expiry of his tenure on July 16.

If we take a look at the current composition of Mindtree's board of 8 members, four members belong to the promoter group Rostow Ravanan, KrishnaKumar Natrajan, N.S Parthasarathy and Subroto Bagchi and the others are independent directors. As Subroto Bagchi has stepped down from the company and with three of L&T's board member and two new independent directors, Mindtree's board will now consist of 12 members, in line with the Companies Act that prescribes a minimum of three and a maximum of fifteen directors for a public listed company.

Even though the promoters of Mindtree once vehemently opposed the takeover by L&T, the appointment of new additional directors from L&T on Mindtree's board has come through a board resolution. The said resolution was approved by the nominations committee headed by independent director Apurva Purohit, in which Subroto Bagchi and Krishnakumar are members. So, have both the warring parties now softened their stand and come to some consensus on the next course of action?

Jidesh Kumar, Managing Partner, King Stubb & Kasiva says, "If the existing board members have approved of the appointment of new members on the board then it surely indicates acceptance. "According to the latest annual report of Mindtree, the current board tenure of Krishnakumar Natrajan, Executive Chairman is up till June 30, 2020; of Rostow Ravanan CEO & Managing Director till March 31, 2021 and of N S Parthasarathy Executive Vice- Chairman until January 31, 2021. Now that board is has three seats for the old guard and three seats for the new and six for independent directors, it looks like an even power play between the two.

While one will only know the total shareholding of L&T in Mindtree after the closure of the open offer, the next big question would be if L&T wants to classify itself as a promoter? Eshwar Sabapathy, Managing Partner, Eshwars says, "A company after becoming the largest shareholder by the virtue of acquiring shares has the option of getting themselves classified as a promoter or remain as just the largest shareholders". However, if L&T's ultimate goal is to merge all the three tech entities -- L&T Infotech, L&T Technologies and now Mindtree -- experts feel that the company could perhaps seriously weigh the option of being classified as a promoter. Legal experts feel that at a future time when L&T decides to go ahead with a merger, it would be easier for promoters to look at a share-swap arrangement with the other entities. Again in case, L&T is able to bring its shareholding in Mindtree to 51 per cent, then by virtue of law Mindtree would be considered a subsidiary and L&T will be classified as a promoter.

Though the takeover raised several concerns around the continuity of the current management and promoters, and the possibility of removal of promoters though now looks bleak. "There is always a possibility that an executive director of the company can be removed by the other members of the board through a resolution and later seek shareholders' approval for removal as a member of the board," says Eshwar.

While the existing promoter directors still have nearly two years of their tenure on the board of Mindtree, "There is a dual role that one plays when a board member is also the employee of a company. The employment contract could state their tenure of the office they hold or continuance in the company and the board membership tenure could be different," he adds. With even representation of both large shareholder groups on the board (promoters and L&T), independent directors will play the most vital role in any action that boards intend to take in the future and hence will be crucial in shaping the company's future.

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