Kotak: Wipro Demerger explained

Wipro demerger: How does that help investors? Wipro, the third largest software services company in the country, started off as Western India Products (WIPRO) in 1945 after establishing an oil crushing unit at Amalner, near Jalgaon in Maharashtra. In 1980, the company started its technology business. Over the years, IT services became a dominant part of the business. For 2011-12, the IT business contributed 86 per cent of Rs 32, 053 crore revenue and 94 per cent of Rs 6,413 crore operating profit of Wipro Limited.   Here are some pointers that could help you comprehend the development: The demerger: Wipro is hiving off non-IT business (consumer, lighting and medical diagnostic) offering an exit to investors interested only in the IT services business. According to the scheme, existing shareholders of Wipro have multiple options. The first one is a simple allotment of shares of the company Wipro Enterprises which would host the consumer, lighting and other non-IT businesses. So for every 5 shares of Wipro, you get an allotment of 1 share of the new company. How can investors exit: Those not interested in holding shares of Wipro Enterprises can choose to take preference shares that offer a fixed rate of interest at 7 per cent. Preference shares are more of a debt than equity. Preference shareholders get preference for dividend over ordinary shareholders. However, they do not have a voting right. At the end of the tenure (12 months in this case), preference shares can be redeemed at a pre-determined value. So Wipro investors can get 1 preference share for every 5 Wipro share held. Shareholder friendly: The third option for investors is to receive Wipro shares from the promoter in exchange for the non-IT business or Wipro Enterprises shares held. The best part of the exchange is that the company is not issuing any new shares. Shares held by the promoter Group would be allotted to investors in exchange. This protects the earnings per share of the company as it does not expand the equity capital. Wipro shares rose 4.2 per cent while the BSE Sensex traded flat on Thursday. This shows that investors are pleased with the move. Promoter holding needs to fall: This means the promoter group led by Azim Premji will own more of the consumer business and less of IT services. Currently, Azim Premji and the promoter group control 78 per cent of the company. According to new rules drafted by Securities and Exchange Board of India, publicly traded companies have to have a minimum of 25 per cent public –shareholding by June 2012. According to Credit Suisse, a global bank, Wipro promoters have to sell shares worth Rs 3,700 crore. The demerger helps Wipro promoters achieve the objective. Clear focus: The IT services business is highly competitive and needs a clear focus. Wipro has invested significantly over the past 18 months to win new customers for the IT services business. This is reflected in the sharp rise in high-revenue customers. Wipro has 8 clients who give over $100m revenue as of June 2012 quarter against 3 in March 2012 quarter.

Wipro Demerger Announcement: Wipro’s statement to stock exchanges on Thursday lists out details of the demerger scheme. Read more To understand the concept of a demerger, you may want to go through this elaborated piece. Read more

$240bn Foreign institutional investors (FII’s) currently own $ 240bn worth of Indian equities, according to Morgan Stanley, a global bank. This is nearly a quarter of $ 1.1 trillion market value of all shares listed on the Bombay Stock Exchange. The non-promoter holding or free-float is half of this number. This means FIIs control nearly half of the value of shares traded on BSE.

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