Investor Issues
Escorts’ restructuring detrimental for minority shareholders, says InGovern

The Nandas, promoter family of Escorts, hold a 31.7% control of voting with only 12.43% of shareholding in the company and yet after the merger their controlling stake has gone up to 41.1%

In yet another example of poor corporate governance, the Nanda family-promoted Escorts increased its voting control to 41.1% from 31.7% through a complicated cross-ownership amalgamation and merger proposal. Bengaluru-based InGovern Research Services that provides proxy voting advisory, which advised the shareholders to vote against the merger proposals put forth by promoters of Escorts, says the scheme passed on 29th May is detrimental for minority shareholders.

“Since, the voting pattern has not been revealed by Escorts, it is not easy to know who supported and who opposed the scheme. It would only be possible to figure out how mutual funds voted when they report the votes at the year end," InGovern said in a report on Escorts’ scheme of arrangement and amalgamation.

(Image- InGovern Research Services)

“The complex proposal placed in front of shareholders seems to be to increase the promoters’ shareholding and is detrimental to the interests of minority shareholders. Such amalgamations should be a matter for concern by institutional shareholders and regulators as value of minority shareholders is destroyed overnight and promoters justify it by saying that it simplifies shareholding structure and enhances wealth of all shareholders,” it added. 

In a court-convened meeting held on 20th May, Escorts sought shareholders approval for the arrangement and merger between Escotrac Finance & Investments Pvt Ltd (ESCOTRAC), Escorts Finance Investments & Leasing Pvt Ltd (EFILL) and Escorts Construction Equipment Ltd (ECEL) with itself.

According to a filing by Escorts to the Bombay Stock Exchange (BSE), EFILL and ESCOTRAC are part of the promoter group and not persons acting in concert. Escorts holds 49.81% each in both EFILL and ESCOTRAC, thus making both the entities its associate companies. Both EFILL and ESCOTRAC hold 6.5% and 12.83% stake in Escorts, which when clubbed together with the stake of Nanda family (12.43%), takes the promoter and promoter group shareholding and thus voting rights of 31.76% in Escorts. 

“EFILL and ESCOTRAC are classified as joint ventures even though Escorts holds 99.62% in each either directly or indirectly. Hence, they should be classified as subsidiaries. EFILL and Escotrac hold a total of 19.33% in Escorts, which tantamount to violation of Section 42 of the Companies Act 1956,” InGovern said.

According to Section 42 of the Companies Act, 1956, “a body corporate cannot be a member of a company which is its holding company and any allotment or transfer of shares in a company to its subsidiary shall be void”. However, by keeping their stake in both EFILL and ESCOTRAC below the 50% threshold, Escorts and the Nanda family, are allowing these units to have voting rights in the parent.

Here is the analysis of Escorts’ scheme from InGovern...

1. The amalgamation of ECEL should result in treasury shares. Escotrac’s (12.83%) and EFILL’s (6.5%) holdings in Escorts are just convoluted holdings and when amalgamated shouldn’t result in any increase in promoter shareholding.

2. However, it is only through a convoluted structure, cross-holdings and unclear valuations, the promoter holding is increasing from 27.67% to 37.68% due to the above amalgamation of a wholly-owned subsidiary and the two joint ventures (which are actually subsidiaries!).

3. Valuation multiple for ECEL is far higher than the valuation multiple of Escorts itself, thus enhancing the value controlled by Escorts promoters and the trusts by over Rs69 crore. 

4. Creation of treasury shares through trusts leads to lack of transparency and dilution of minority interest. 

5. No disclosure of the valuations or rationale used to arrive at the swap ratios.

6. The above transaction leads to a 13.83% dilution for existing non-promoter shareholders.

7. The company should have gone for a merger wherein ECEL shares are extinguished and only the 0.38% other shareholders of EFILL and Escotrac, where issued shares of EL. In such a case, EL would have derived the benefit of simplification of shareholding structure and the existing non promoter shareholders of EL would have suffered negligible dilution.

8. The promoters and management argument that the trusts are not in their control is untenable and voting control still continues to rest with them.

9. The role of independent directors is questionable. They haven’t done justice to protect the interests of all shareholders. 

Earlier, while refuting similar concerns raised by Institutional Investor Advisory Services Ltd (IiAS), Nikhil Nanda, joint managing director, Escorts, told the Times of India that neither he nor any member of the Nanda family will have any representation on the trust that will house the treasury stocks which come in as part of the merger of the three companies into Escorts. "This merger will add at least Rs1,000 crore to the top line and will strengthen our balance sheet and profit and loss statement," he had said.

(Image- InGovern Research Services)

InGovern also asked shareholders to raise concern for attaching the latest financial statements of the amalgamating companies along with the valuation report by an independent valuer with the notice of scheme.

As on March 2012, Escorts has Dr PS Pritam, Dr MGK Menon, Dr SA Dave and SC Bhargava as independent directors. Dr Dave is the chairman of Centre for Monitoring Indian Economy (CMIE) and also former chairman of SEBI and UTI. 

The proxy voting advisory firm also questioned the role of independent directors of Escorts—which includes many eminent people, including an ex-chairman of SEBI. It said, they (independent directors) should not blindly act in the interest of promoters. 





5 years ago

independent director as a concep i think is good. its the implementation in its true spirit that is lacking. make a few of them examples like in the escorts case or even KFA where the whole board should be behind bars, and you will see the independent director's post will become truely independent.india has enough laws. start implementing them soon.

R Balakrishnan

5 years ago

This clearly demonstrates that "Independent" directors are a joke. Cronyism at its best is in evidence here. Frankly, what is surprising is the names of institutional investors who have thrown away investor money in to this company. The best they should be doing is to vote with their feet.

MCX biggest gainer on debut among IPOs in 2012

Reflecting the overall sluggishness market conditions, initial share sales have not been so successful this year and many entities shelved their IPO plans owning to poor investor response

New Delhi: With its shares skyrocketing 26% on debut trade, country's largest commodity bourse Multi-Commodity Exchange (MCX) remains the most successful initial public offering (IPO) so far this year amid turbulent market conditions, reports PTI.

Out of the five companies that entered the stock market in 2012, just two -- MCX and education services firm MT Educare -- managed to close with gains on the first day of trading.

The rest -- realty company NBCC, jewellery retailer Tribhovandas Bhimji Zaveri and greeting cards maker Olympics Card -- ended the debut trade at a discount compared to their issue prices.

Meanwhile, Speciality Restaurants got listed on the BSE on Wednesday at Rs153, a premium of over 2% over its issue price of Rs150. Within minutes of listing, its scrip gathered momentum and touched an early high of Rs160.65, up 7.1% from its issue price.

Reflecting the overall sluggishness market conditions, initial share sales have not been so successful this year and many entities shelved their IPO plans owning to poor investor response.

Apart from market situation, the performance of an IPO on debut is also much dependent on credit ratings as well as the fundamentals of a particular company, according to market experts.

Listed on 9th March, shares of MCX opened at Rs1,387 on the BSE -- a premium of 34% compared to its issue price of Rs1,032. Even though, the scrip lost its initial momentum, it managed to close with about 26% gain at Rs1,297.05. On the first day, it even touched the high of Rs1,420.

Interestingly, MCX shares are trading way below their issue price levels and closed at Rs893 yesterday on the BSE.

"The commodity bourse clocked a gain of 26% on debut day, mainly due to higher ranking given by credit rating agencies and the company's sound fundamentals," Wellindia Vice President Vivek Negi said.

MT Educare clocked a gain of 13%, with the shares ending the debut day at Rs90.35 on the BSE. The issue price of the scrip, which got listed in April, was Rs80.

The three other stock market debuts this year -- NBCC, Tribhovandas Bhimji Zaveri and Olympic Cards -- tumbled in the range of 5% to 8% on the first trading day.

Notwithstanding high expectations, shares of state-run National Buildings Construction Corporation (NBCC) lost 8.44% to close at Rs97.05. The company, which got listed last month, had the issue price of Rs106.

Making stock market entry earlier this month, shares of Tribhovandas Bhimji Zaveri, dropped 7.33% to end the day at Rs111.20 on the BSE. The scrip made the debut with an issue price of Rs120.


Aurobindo Pharma makes Govindrajan new MD as Q4 net profit dips 14%

Aurobindo Pharma reported a marginal increase in total revenues due to sharp drop in income from contract manufacturing and US sales

Hyderabad: Aurobindo Pharma on Wednesday reported 13.6% fall in net profit at Rs108 crore for the fourth quarter ended March 2012 due to sharp drop in income from contract manufacturing and US sales, reports PTI.

During the fourth quarter of 2010-11, it had reported net profit of Rs 125 crore, Aurobindo Pharma said in a statement.

Aurobindo's income grew at 2.5% to Rs1,170 crore in the January-March quarter 2011-12, from Rs1,142 crore in the previous fiscal.

Dossier income or sales from contract manufacturing in Q4 dropped 89% to Rs3 crore from Rs27 crore in the same period last year.

Aurobindo Pharma CEO N Govindarajan said the year has been challenging and they are trying to improve the situation by new product launches.

"We have concluded a challenging year highlighted by full impact of the USFDA alert on our Unit 6 Cephalosporin manufacturing facility, high cost of materials, inflation and notional loss on restatement of foreign currency borrowings," Govindarajan said.

"We are looking at improving trends in our business and expect improving financials through planned launches of new products and increasing market shares of existing commercialised basket supported by our growing business of high value APIs on the regulated market thereby augmenting the capacities," he added.

The company said, meanwhile, that K Nithyananda Reddy will relinquish his responsibilities as Managing Director of Aurobindo and has been appointed as Wholetime Director designated as Vice Chairman from 1st June. Besides, Govindarajan has been appointed as a Director and Managing Director.

The pharma major suffered a net loss of Rs123.5 crore for the financial year 2011-12, against net profit of Rs563 crore in FY 11.

Consolidated net sales for the whole year grew 10.7% to Rs4,568 crore from Rs4,126 crore in FY11.

The profitability during 2011-12 has been impacted mainly due to sharp decline in dossier income by Rs195.8 crore which is non-recurring and subject to periodic variability, Aurobindo said in a statement.

The company also lost revenues to the extent of $36 million (about Rs201 crore) due the impact of USFDA alert on Unit VI in Hyderabad.


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