Promoter holding in any company is considered an important indicator of good corporate governance as it is expected that promoters understand their company ‘inside out’. Promoters are well-placed to assess the ‘financial condition’ of the company as they are major shareholders. Any increase of stake by promoters is considered a positive sign as it bolsters the confidence of other shareholders. Promoters tend to increase their stake if they believe that their company’s share is undervalued, or their stake is less than the desired level for control purpose. Increase in promoter stake is also attributed to restructuring exercise. Decline in promoter stake in a specific company is attributed to multiple reasons such as stake sale and use of funds for other business considered promising, regulatory requirements, stake sale and use of funds for lowering debt, sale of pledged shares by bankers, among others.
Pharmaceutical sector in India is dominated by family-owned companies. Higher promoter stake in Indian pharmaceutical companies allowed promoters to dilute their stake to raise the funds as and when needed, facilitated retention of their control in the company, entitled the family members of promoters to remain on the driving seat in the company, kept them in a better bargaining position whenever promoters wanted to dilute their stake partially, and permitted promoters to counter any hostile bid.
In many pharmaceutical companies, the decline in promoters’ stake has acted as a precursor to loss of control for promoters, or acted as a signal for exit by promoters over a period. Most recent case in this regard is of Bharat Serums and Vaccines (BSV) which was incorporated in 1971. In February 2020, US-based Private Equity (PE) firm Advent International acquired 74 per cent stake of BSV which resulted into partial exit of the promoter – Daftary family, and a complete exit of PE investors – Kotak PE and OrbiMed Asia. In a short span of time, Advent International acquired the remaining 26 per cent of Daftary family. Bharat Vinod Daftary, the Chairman and Founder passed away on December 7, 2023.
Pharmaceutical companies in India have different levels of promoter ownership. The first category is of companies in which promoters hold stake anywhere from 75 per cent to 100 per cent. In companies like Macleods Pharma which was set up in 1989, Serum Institute of India which was incorporated in 1966 as partnership firm, to name a few, promoters hold significant majority. Macleods and Serum Institute of India are unlisted companies so dilution of promoter stake in such companies is possible through stake sale to PE firms, or to opt for Initial Public Offer (IPO). Macleods deferred listing plans in September 2022. A recent example in this context is of Emcure Pharmaceuticals, 13th largest pharmaceutical company in India, in which promoters hold 82.97 per cent stake. In December 2023, preliminary papers were filed with the SEBI for raising the funds via IPO route. The company intends to utilize the proceeds mainly for ‘repayment of debts’ to the tune of Rs. 640 crore, apart from general corporate purposes. Namita Thapar, Executive Director of Emcure Pharma on February 10, 2024 shared about the company’s plans to go public within three months, and to launch a direct-to-consumer (D2C) product. Intas Pharmaceuticals also falls in this category. In Intas Pharma, Chudgar family as the promoters held 83.84 per cent by November 30, 2023.
Second category of companies is the one in which promoters hold majority stake but that is below 75 per cent, e.g., in Torrent Pharmaceuticals, promoters held 71.25 per cent stake in March 2024 quarter. In Zydus Lifesciences too, promoters held 74.98 per cent stake in March 2024 quarter. In September 2023, Torrent Pharma was contemplating acquisition of majority stake in Cipla. At that time, ‘partial divestment’ of holding by promoters in Torrent Pharma to raise funds, and ‘pledging a portion of promoter stake’ in Torrent Power, were considered as a means for financing. There are occasions when promoters dilute their stake so as to meet regulatory requirements as the SEBI guidelines require all listed firms should maintain a minimum public shareholding (MPS) of 25 per cent. In February 2024 Mankind Pharma promoters divested part of their stake to meet SEBI’s MPS norms. Aggregate promoter and promoter group shareholding was 76.5 per cent of the total paid-up equity share capital of the company as on February 7, 2024. Sheetal Arora, Arjun Juneja and Puja Juneja as promoters decided to sell a combined stake of 1.62 per cent in the company to comply with regulatory requirements. Post completion of the stake sale, aggregate promoter holding came down to 74.88 per cent.
In Bharat Biotech too, promoter family – Dr. Krishna Ella and family, has around 73 per cent stake. Two PE firms namely MindTree Trading Company and Vistra ITCL India hold 7.56 per cent and 7.4 per cent stake respectively. Multiple entities hold the balance equity of about 12 per cent and each entity holds less than 5 per cent stake. If promoter stake is close to 75 per cent then promoters remain in comfortable position even if they want to dilute a small percentage of their stake, or need funds for some purpose, e.g., without any major change in controlling stake, promoters of Dabur India, a prominent player in FMHG/Wellness segment, sold 1 per cent stake on December 20, 2022 for a consideration of Rs. 1,089 crore. As on September 30, 2022, promoter and promoter group that comprised 26 shareholders held 67.24 per cent stake in Dabur India, and stake went down to 66.25 per cent by March 2024.
Companies such as Alembic Pharmaceuticals, FDC Limited, Ajanta Pharma, Albert David Limited, Jagsonpal Pharmaceuticals, RPG Life Sciences, and Gufic BioSciences fall in second category. By March 2024, promoters held 69.61 per cent stake in Alembic Pharma, 69.66 per cent in FDC Limited, 66.21 per cent in Ajanta Pharma, 62.13 per cent in Albert David, 68.09 per cent in Jagsonpal Pharma, 72.81 per cent in RPG Life Sciences, and 72.51 per cent in Gufic Biosciences. In these pharmaceutical/biopharmaceutical companies, promoters own significant stake thereby putting them in a comfortable position so far as control is concerned.
Third category is of those pharmaceutical companies in which promoters/founder family hold little more than 51 per cent stake. Companies such as Sun Pharma, Eris Lifesciences, Alkem Labs, Emami, and Indoco Remedies, fall in this category. By March 2024 quarter, promoter and promoter group held 54.90 per cent stake in Eris Lifesciences, (up from 52.66 per cent on December 31, 2021), 56.7 per cent in Alkem Labs, 54.84 per cent in Emami Limited, and 58.72 per cent in Indoco Remedies. In this category of companies, promoters have to ensure that their stake does not go below a threshold, i.e., majority control. Even in case of acquisitions, promoters opt for debt financing rather than offering shares. Otherwise, promoters become concerned due to dilution of equity due to acquisition. An interesting case is of Sun Pharmaceuticals. In April 2014, Sun Pharma acquired controlling stake (63.4 per cent) in Ranbaxy Labs from Daiichi Sankyo. Sun Pharma offered 0.8 Sun Pharma shares for every Ranbaxy share held by Daiichi Sankyo. Due to this transaction, Daiichi Sankyo held 8.93 per cent share in the merged entity, and as a result, promoter stake fell to 54.7 per cent from 64 per cent. Through bulk deal, Daiichi Sankyo sold its entire stake in April 2015. Promoters did not buy any shares in this transaction. Promoter stake in Sun Pharma remained 54.48 per cent by March 2024 quarter. Another prominent example is of J.B. Pharma which was a promoter-driven company till July 2020 when PE firm KKR acquired 54 per cent stake. Mody family held just 1.9 per cent stake after stake sale to PE firm thereby losing the stake as well as management control. Decline in promoter holding has been observed in case of Wockhardt Limited too. Promoters held 51.60 per cent stake in the company by March 2024 that was 67.1 per cent in December 2021, and 74 per cent in July 2014.
51 per cent stake or 75 per cent stake has relevance given the provisions of the Companies Act, 2013 as Ordinary Resolutions require the approval of at least 51 per cent of members in order to be passed. Special Resolution is one that requires the approval of at least 75 per cent of the members voting in favour of the resolution.
Fourth category is of those pharmaceutical companies where promoter stake is more than 25 per cent but less than 50 per cent. These companies become vulnerable to shift in controlling stake. Companies like Dr. Reddy’s Laboratories (DRL), Cipla, Lupin, IPCA, Natco Pharma, Jenburkt, Glenmark Pharma and Lincoln Pharma fall in this category. By March 2024 quarter, promoters held 26.65 per cent stake in DRL, 33.4 per cent in Cipla, 47.01 per cent in Lupin, 46.3 per cent in IPCA Lab, 49.71 per cent in Natco Phama, 47.23 per cent in Jenburkt Pharma, 46.64 per cent in Glenmark Pharma and 49.53 per cent in Lincoln Pharma. Vulnerability of shift in control can be observed from the example of Cipla in which the promoter group holds 33.47 per cent stake. On May 14, 2024 a news item stated that Cipla promoters and promoter group entities were looking to sell up to 2.53 per cent stake in Cipla. Before this, in later part of 2023, Cipla remained in news due to exit plans of promoters. Exit plan of promoters in any case can be attributed to the absence of a successor, reluctance of the successor, or even infighting among promoter family. Another example is of Curatio Healthcare which fell in this category before its acquisition by Torrent Pharma. By January 2022, Sequoia and ChrysCapital held 33 per cent and 20 per cent stake respectively in Curatio Healthcare. Promoters, including G. K. Ramani, and the management held the rest. Due to PE investment, and decline in percentage holding of promoters, it became vulnerable, and finally, it was acquired by Torrent Pharma in September 2022. Those pharmaceutical companies in which promoter holding is below 25 per cent are soft target for acquirers.
In India, there are many examples from different sectors where promoters remained on the driving seat even with a minority stake, e.g., Goenkas hold just 3.99 per cent stake in Zee Entertainment in January 2024 and Punit Goenka could retain his position as CEO, Zee Entertainment. Activist shareholder Invesco tried to remove Punit Goenka as MD and CEO but failed. Finally, Invesco divested its shares in Zee. Corporate history offers another parallel in case of B. Ramalinga Raju (of Satyam fame). Raju’s family held just 8.61 per cent stake in Satyam Computer Services by September 2008, and still, Ramalinga Raju remained the Chairman till he resigned after admitting fraud. In pharmaceutical sector in India, skin in the game as observed in the form of promoter stake directly affects the management control.
Dr. Anil Kumar Angrish, Associate Professor (Finance and Accounting),
Department of Pharmaceutical Management, NIPER, SAS Nagar (Mohali), Punjab
Disclaimer: Views are personal and do not represent the views of the Institute.
