Opposing Raymond Ltd's decision to sell its premium property at a throwaway price to its own promoters and their extended family, proxy advisory firm Institutional Investor Advisory Services India Ltd (IiAS) has advised shareholders to vote against the proposal.
Raymond in its forthcoming annual general meeting (AGM) on 5 June 2017 has proposed to sell its four duplex apartments in JK House, near Breach Candy in Mumbai.
"Should this transaction go through, we estimate that it will result in an opportunity loss of over Rs650 crore for the company and its shareholders. In our opinion, the board has failed to protect the interests of the minority shareholders. The company and its directors must prepare themselves for shareholders seeking recompense," IiAS says in its advisory.
JK House is a recently rebuilt building located at Breach Candy, one of the most expensive real-estate locations in Mumbai. According to IiAS, Raymond’s own valuation report states that the residential property is valued at Rs1.17 lakh per square foot (built up), putting the value of the entire transaction at Rs710 crore. "Raymond, however, proposes to sell the property to the Singhania family factions for Rs9,200 per square foot of carpet area – an over 90% discount to market rates," it added.
IiAS estimates the opportunity loss at over Rs650 crore, which is large in the context of Raymond’s own limited size, which aggregates to over Rs100 per share.
According to the proxy advisory firm, Raymond has spent Rs270 crore – not including the cost of land - in rebuilding JK House. It says, "The sale price of Rs9,200 per square foot is lower than JK House's average cost of construction, estimated at over Rs11,000 per square foot. If the company were to sell the residential properties at market value, it would more than recover its cost of development."
"The transaction lends credence to an investor’s allegation that the promoters are using the company to support their own lavish lifestyle. Not only is the price of the transaction nefariously low, the structure itself is inefficient. Only 36% of the total area is being utilised for commercial and residential purposes - the remaining 64% of the total area constructed is attributable to ‘other saleable amenities and service space’. The company can use, for its own purposes, only the commercial property, which is just 8% of the total structure by square feet," IiAS says.
According to the proxy advisory firm, transactions relating to JK House with promoters in the past too have been below prevailing market price and, therefore, prejudicial to the interests of Raymond’s minority shareholders.
"Previous agreements required the family to pay rent to the company at a flat rate of Rs7,500 per month per duplex flat, which we estimate is at less than Rs2 per square foot per month. Management asserts that to incentivise the promoter families to vacate the old premises, which had become structurally weak and therefore needed to be rebuilt and surrender their tenancy rights, the agreement to give them an option to purchase property at Rs9,200 per square foot was signed in 2007."
"This is a fallacious argument. The promoter family was living in the premises under a nine-year rent agreement signed with the company. At the end of the agreement – which would have been in 2012 – the family would have had to vacate the property. Given that the property was structurally weak, making it dangerous living conditions for the tenants themselves, Raymond should have had a stronger negotiating platform, unless the company was given to understand that the promoter family would purposefully violate the rent agreement and not vacate. It seems unconscionable that the company cowed down to a sale transaction at such low prices," the proxy advisory firm says.
Terming disclosures made by Raymond as “inadequate or misleading”, IiAS says, "During 2006-2008, when the board approved the tripartite agreements and these were signed by the company, annual reports were silent on the transaction. It is only in the 2013-14 annual report that the company first specifically mentions the capital-work-in-progress towards JK House, in the fixed asset schedule. By 31 March 2014, the company had already spent Rs150 crore on the redevelopment. Even then, the company did not disclose that it proposed to sell the residential piece of the property to the promoters at Rs9,200 per square foot of carpet area."
Raymond's management asserts that there was no regulatory requirement for such disclosure. "While this may well be true, we believe good corporate governance transcends compliance requirements. The company should have considered this material information for shareholders and made the disclosure."
The 2016-17 annual report, despite a disclosure regarding the tripartite agreement, does not mention the price of the transaction. The company continues to maintain that “All transactions entered with Related Parties for the year under review were on arm’s length basis and in the ordinary course of business and that the provisions of Section 188 of the Companies Act, 2013 and the Rules made thereunder are not attracted.”
"While the company may have its technical and legal arguments for these disclosures or lack of disclosures," IiAS says it believes that from the perspective of transparency and good governance, the board has failed in discharging its fiduciary responsibilities towards shareholders.
IiAS contends that the details of this transaction have come to light only on account of regulatory changes that mandate shareholder approval for transactions with related parties, which are not at arm’s length pricing. Without this regulation, the transactions could have well been undertaken without shareholders’ knowledge.
It is unclear whether the audit committee has approved the transaction: the AGM notice seems to suggest that, based on legal advice, the audit committee and the board have “deferred the matter to shareholders”. The exercise of the option to purchase will come under the ambit of related party transactions under the Companies Act 2013, and needs shareholder approval because the transaction is not at arm’s length.
However, regulations require the audit committee to first approve the transaction before it is brought to shareholders. "While there may be several legal considerations given the timelines of the transaction, the on-going legal battles, and changes to regulation for this approach, we believe the audit committee and the board should provide guidance to shareholders. In deferring the decision to shareholders – and thereby suggesting that the audit committee and the board do not want to articulate a decision – the board has abdicated its responsibilities and prioritised its own (legal) protection over the interests of the company and its shareholders," the proxy advisory firm contended.
According to IiAS, the quality of board oversight at Raymond is of concern if the board is unable to separate the interests of the company and its promoters. It says, "The audit committee is entrusted with the review and approval of related party transactions. But, at the time the tripartite agreements were approved and signed, and even now, Raymond Limited’s audit committee was conflicted – its members included Vijaypat Singhania, a direct beneficiary of the transaction."
IiAS recommends that shareholders vote against resolution #10 carried in the company’s 2017 AGM notice. Because this is a related party transaction, the promoter group will not be allowed to vote on the transaction.
"Raymond’s shareholders must engage with the company and seek the removal of promoters from the audit committee and the nomination and remuneration committee, and ask for both committees to be comprised only of independent directors. These measures will ensure that the committees are devoid of any potential conflict. They must also seek to separate the role of Chairperson and Managing Director, and push for a non-family Chairperson who can provide stronger oversight over the Singhania family, and one that can separate the interests of the company and its promoters," the proxy advisory firm concluded.
