Private equity major Actis may be mulling an exit from Nilgiri Dairy Farm as its internal battles with original promoters, who still hold around 35% stake, is reaching a flash point. Serial investor and Sterling Infotech Chairman C Sivasankaran could be a contender to buyout 65% stake of Actis, since he could be acceptable to the founding Mudaliar family, said a source familiar with the developments.

Actis had acquired controlling stake in Nilgiri Dairy Farm, which in turn carries out retail operations under Nilgiri's brand, for roughly Rs 300 crore in September 2006. This was amongst the earliest PE buyouts in India, and clearly a trophy asset for Actis in a rapidly expanding domestic consumption story.

But its ties with the founding family members soured in recent times. A dispute has been raging between Actis and the Mudaliar family shareholders on a range of matters starting from the sale of company's real estate assets to a more recent rights issue being peddled by the controlling investor.

One source said there was a breakdown of communication between Actis and some of the minority shareholders, and the situation was probably irretrievable, prompting Actis to explore an earlier than anticipated exit, if it fetches an attractive valuation.

Actis is unlikely to make any hurried decisions and possibly open up discussions with other suitors who would be waiting in the wings. This could include one of India's largest private business conglomerates, Bharti Group, which has nascent interest in domestic retail. VCCircle learns that Bharti had made an offer to Actis in the past and might still be in play if an opportunity evolves to scale up its operations.

Bharti has a joint venture with Wal-Mart for wholesale trading while it operates EasyDay branded retail stores in the front end on its own. The latest developments at Nilgiri's is also likely to attract the attention of other corporate houses such as AV Birla (operating in retail under 'More' brand) and Reliance Retail even though they are grappling with an early ambush in India's complex retailing landscape.

"It is not our policy to comment on speculation. Hope you understand our position," said Actis MD JM Trivedi, in response to an email from VCCircle raising queries about exit from Nilgiri Dairy, and also on the ongoing dispute with the minority shareholders. Sivasankaran's Sterling Group could not be contacted for immediate comments, while a mail sent to Bharti did not elicit a response at the time of posting this copy.

Meanwhile, the founding family shareholders have been upping  the ante after locking horns with Actis in the last 18 months. Sources said they have explored buying back some stake in the company and are on the lookout for a white knight who would partner them in this pursuit.

VCCircle has been tracking these developments that are still some distance away from any definitive talks. There is speculation that Actis may be having "drag rights" in its acquisition agreement, which in normal circumstances means that minority shareholders will have to go along with the investor identified by the former.

But whether the drag rights are enforceable in Indian courts, especially when it is with the majority shareholder, is not very clear.

The maverick investor Sivasankaran's name has been doing rounds as a potential suitor after he was approached as an agreeable candidate to the warring investors. Siva, as he is known in close circles, has the reputation of negotiating deals in troubled situations like in the case of Tamil Nadu Mercantile Bank (TMB), where he stepped into an intense infighting between prominent shareholders of the Nadar community who controlled the financial institution.

Siva also took controlling stake in cafe chain Barista by acquiring the shares of Tatas and Turner Morrison, only to make a blockbuster exit when he offloaded it to Italy's Lavazza.

The trouble between Nilgiri shareholders started when the company's board of directors approved a Rs 35 crore rights issue proposed by the management under Actis in November 2009. While Actis plans to pump in more money for future expansion, some shareholders of the founding family, now led by Prabhu Ramachandran, opposed this issue. The shareholders of the original promoter group said the company cannot proceed with an issue without agreeing on a valuation. This issue was dragged on to the Company Law Board (CLB) of Chennai, which earlier this month asked the company management to hold the rights issue till further notification. But sources told VCCircle that Actis has not yet gone ahead with the proposed issue. The CLB has also asked the company on details about the utilisation of the rights issue proceeds.

Another major issue between Actis and the original promoter group has been the sale of the company's real estate assets in Bangalore, Chennai and Avinashi in Tamil Nadu. While the original promoter thinks this money should be distributed to shareholders in form of dividends, Actis plans to invest these further into the expansion of the retail business.

The original promoters have also alleged that the new management (read Actis) has violated foreign investment norms, as FDI remains barred in mainstream retailing, and concerns were being raised that the proposed rights issue was also violative of the deal agreement struck over three years ago.

Nilgiri Dairy has also recently appointed former IDBI Bank chairman PP Vora as chairman replacing Raja Chellyan, member of the Nilgiri family who was appointed after Actis bought the stake.

UK-based Actis, along with Singapore's GIC Special Investments, acquired the stake in Nilgiri Dairy Farm, the back-end firm of the retail operations, to circumvent the FDI restrictions. Some stores that Nilgiri's owned were spun-off as franchisees before Actis took over. Currently Niligiri's operates around 100 stores through franchisees and its own private labels also amount for a substantial part of the sales.

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