Piramal Healthcare, Kanoria Chemicals and Laffans Petrochemicals are some of the companies that have earned huge amounts of cash recently by selling their businesses; but minority shareholders have got little out of this

Recently, promoters of quite a few companies have sold off parts of their business, saying that the sale proceeds are to be used for expansion and growth. But how much of this amount is actually being used for expanding business? Or, are they depriving shareholders of their legitimate dues? We looked at five companies that have taken this step over the past year.

Piramal Healthcare, India's second largest pharmaceutical company, made headlines when it announced on 20 May 2010 that it had signed a deal to sell its stake in its domestic formulation business (the Healthcare Solutions division) to Abbott Healthcare, the global, broad-based health care company.

The deal included an upfront payment of $2.12 billion, plus $400 million annually over the next four years, amounting to a total Rs17,000 crore. In reaction to the announcement, the share price of Piramal Healthcare fell by 11.81%, from Rs569.65 to Rs502.35, whereas the price of Abbott India surged by nearly 9%.

In the first week of May 2011, Piramal Healthcare said it plans to enter the financial services sector, by setting up two non-banking financial companies (NBFCs). The business will fund real estate and infrastructure projects. It is seems odd that a company engaged in the manufacture of pharmaceuticals would be interested to enter the financial services business. To add to this, the company says it plans to invest around Rs24,000 crore by leveraging its equities.



Having two completely unrelated businesses raises the risk profile of a company and this has not gone down well with investors. Therefore, in spite of announcing a 300% dividend payout amounting to Rs12 per share, the Piramal Healthcare stock price fell once again, from Rs458.80 to Rs417.55, a drop of nearly 9%. Investors who have put their money in Piramal Healthcare during the past year will be disappointed with the company's management, as the stock price has fallen about 30% over the past 12 months and the dividend payout has not been interesting either.

It's a similar story with Maharaja Shree Umaid Mills, a composite textile company that makes cotton yarn, cotton fabrics and synthetic yarn. On 21 August 2010, the company informed the Bombay Stock Exchange (BSE) about the sale of a 22,000 square yards property in downtown Jaipur, which housed the registered office. The property which was said to be valued at Rs200 crore, was sold for Rs158 crore, as per the agreement. The stock hit a 52-week high of Rs243, gaining about 19% in two days.

Towards the end of March 2011, the company made another announcement that it was selling its 21.65% stake in Andhra Pradesh Paper Mills to IP Holding Asia Singapore PTE, a subsidiary of International Paper Company, USA. The deal is to be completed by 14 June 2011. This time the company's stock price shot up by 43.96% in the two days following the announcement. On 26 May, Maharaja Shree announced a dividend payout of just Rs5 per share, amounting to a mere Rs4.32 crore. The dividend is identical to that in the previous year.



When we asked the company how it planned to use the funds from the sale, Govind Sharda, executive director, said, "The investment plans of the company to utilise the funds generated/likely to be generated would be announced in due course, keeping in mind the potential of growth for stakeholders."

"In the interim, the company has begun its process for implementation of its expansion plans for value addition in the existing line of textile business, where it could invest in excess of Rs1 billion over the next two years. The commercial closure of the process is underway and once accomplished, the same would be suitably communicated to the stakeholders," Mr Sharda said.

The other companies that have taken a similar course are Laffans Petrochemicals, Kanoria Chemicals and JB Chemicals and Pharmaceuticals.



Laffans Petrochemicals is a leading manufacturer and exporter of chemicals, textiles and dyeing finishing chemicals. On 3 April 2011, Laffans said it was selling its chemicals division at Ankleshwar, in Gujarat, to Huntsman Corporation, the global manufacturer and marketer of differentiated chemicals. Despite both the companies being listed on reputable stock exchanges, the price of the deal has not been made public. The Laffans stock price jumped by 19.8% after the announcement. However, the company which has made profits has no history of paying dividends.



On 17 April 2011, Kanoria Chemicals and Industries (KCI), the chemical intermediates manufacturer, announced the sale of its chloro-chemicals unit to the Aditya Birla Group for Rs830 crore. The Kanoria stock price shot up by 20%. The company said funds from the sale would be used for growth of its core businesses. When asked for details of the plans, NK Nokhla, CFO, said, "Considering that the deal was concluded quickly, KCI is yet to firm up detail plans for utilisation of the sale proceeds." At a meeting on 28 May, the company board decided on a 100% dividend payout.



A few days back, JB Chemicals and Pharmaceuticals also announced the sale of its over-the-counter business in Russia for Rs938.51 crore. The proceeds from the sale, it said, will be used for expanding the business. Investors were understandably unhappy as this was a major revenue generating arm, and the share price fell by 13.06% following the announcement.

It seems that some companies can be really tight-fisted when it comes to sharing capital gains with shareholders. Usually, they will claim-legitimately-that they plan to use the cash for growth. And while institutional investors rarely pressure companies to pay dividends, minority shareholders who hope for higher dividends hardly have a say in these matters. Clearly, investors must take into consideration the attitude of company managements in such matters, before putting their money into such companies.