Sources close to Modi Rubber management said a memorandum of understanding was signed recently with Continental for acquisition of the stake.

The proposal is likely to be put up for board approval around October 10, sources said. The proposal would be later forwarded to financial institutions, which together form the single largest block of shareholders, for their approval.

Modi Rubber managing director BK Modi confirmed talks were on with Continental but refused to give further details. "I would not like to comment on anything beyond this," he told The Financial Express.

Sources said Continental AG would most likely acquire the equity holding from promoters BK and VK Modi as well as financial institutions. The FIs together hold about 40 per cent stake in the company while the Modis are believed to be incontrol of about 30 per cent stake through closely held companies. The company has a paid-up capital of Rs 25 crore.

Financial institutions, led by Unit Trust of India, have been keen on selling their equity holding in the company for about three years now. BK and VK Modi had offered to buy their stake as they had the first right on the FIs' holding in case of a divestment. However, the deal had never come through owing to differences between the two sides over the pricing part.

Financial institutions had then decided on the open offer route for divesting their holding. SBI Capital Market, which was appointed by them to work out the divestment, was confident that they would be able to fetch a over Rs 125 per share against the Modis' offer of around Rs 75 per share.

Modi Rubber has consistently lost market share over the last few years which has affected its financial performance. This had prompted the FIs to hasten their decision to exit from the company even as the Modi brothers had stepped up theirefforts at expanding the technical collaboration with Continental through new launches. The Modis were also looking at the possibility of bringing in Continental as a financial partner.

Modi Rubber reported a gross profit after interest but before depreciation and taxes of Rs 5.24 crore during the quarter ended June against Rs 5.19 crore in the corresponding quarter of the previous year though turnover rose about 10 per cent to Rs 241.41 crore. Net profit fell marginally to Rs 2.20 crore from Rs 2.79 crore during the quarter.

INSIGHT:

A strategic step

Continental's move is its second major investment in the country after it picked up a stake in Apollo Tyres. With a number of foreign car manufacturers entering the country, international tyre majors are following suit. This is because a car manufacturer normally prefers to procure the components from the same company. As far as Modi Rubber is concerned, the company has improved its performance in the recent past and its stock price hasdoubled in the past three months.

-- Deepak Singh Tanwar