INDIAN CARD CLOTHING - Consolidation or ‘Reverse Split’ To Prepare for Delisting?
An interesting notice was brought to my attention last week. It is a disclosure by Indian Card Clothing about its proposal to reduce the number of shareholders by implementing what is known as a ‘reverse split’ but has been referred to as a consolidation exercise by raising the nominal value or face value from Rs10 to a hefty Rs2,000 each. 
 
Here is what the notice, issued on 14 August 2023 under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 to the National Stock Exchange (NSE), has said. 
 
 
Now let me explain what this notice means. First of all, you may recall, most companies used to split their face value (especially those that had a FV of Rs100 to Rs10 each or even Rs1 or Rs2) to make it easier for retail investors to buy shares, especially high-priced shares of good companies. 
 
Indian Card Clothing is doing the opposite. So, if you are holding 100 shares of Rs10 each, the total face value of the shares you hold is just Rs1,000. In order to get even one single share of the new face value of Rs2,000, you will need to buy another 100 shares. 
 
The company presently has 59,41,120 shares of Rs10 each. Once this ‘consolidation’ goes through, there will be just 29,705 shares of Rs2,000 each.  
 
As of 31 August 2023, this was the shareholding pattern (BSE website)
 
 
There are 9,658 shareholders in the ‘public’ category holding 19,40,954 shares. Given that 200 old shares will become ONE new share, this will now become 9,704.77 shares. 
 
This page on the Bombay Stock Exchange’s (BSE’s) website provides more information https://www.bseindia.com/corporates/shpPublicShareholder.aspx?scripcd=509692&qtrid=118.00&QtrName=June%202023 . It shows that there are 9,332 shareholders under the ‘less than rupees two lakh’ category who, together, hold 13,50,920 shares. These will stand reduced to 6,754.6 shares after consolidation. Clearly, not everyone of the 9,332 shareholders can be a shareholder. Interestingly, the Investors Education & Protection Fund (IEPF) shows 39,191 shares have been transferred to it; this means there has been no claimant for over seven years.
 
Now, take a look at another interesting extract which is part of the disclosure.
 
 
The rationale is clearly stated. The company wants to give an ‘exit’ to small shareholders at a ‘fair’ consideration (emphasis is mine). I have two thoughts on this:
 
1. The stock is listed on the National Stock Exchange (NSE) and BSE, giving a possible exit to small shareholders who want out. In fact, I tried to buy a few shares and was able to do it very easily without too much of a price variance from the quoted price. I am now a ‘small’ shareholder in the company.
2. The ‘fair’ consideration is what I am drawn to.  
 
When the notice says that the company wants to give an exit to the small shareholders at a ‘fair’ consideration, I assume that the present quoted price on the exchanges is not to the satisfaction of the company or its promoters. So, if I hold less than 200 shares, they will perhaps buy the shares from me at ‘fair’ consideration. If so, what would this ‘fair’ consideration be? Would the company use the ‘formula’ for ‘buyback’? Or would it go for ‘valuation’ by an ‘INDEPENDENT’ valuer? We will have to wait and see. 
 
However, what could also happen is that this exercise of consolidation will allow the promoter holding to increase from the current 67.33% to well over 75%. If that happens, the promoter may well push for ‘delisting’ the shares and making the company private.  
 
Indian Card Clothing is an interesting company. It is of old vintage; has a niche business and is asset-rich. In fact, during the previous year, the company sold some property at Pune for Rs220 crore. Here is a snapshot of the balance-sheet of 31-3-2022.
 
 
The cash and cash equivalent is Rs182 crore plus other bank balances of Rs6.56 crore!
 
The annual report for March 2023 is not yet available; but, from the quarterly results declared so far, this is what the year looked like:
 
 
There is no reason to believe that cash on hand would have declined. The above information is from the BSE website.
 
In May and July of 2022, the company has distributed Rs50 per share as dividend. So, that could have consumed around Rs30 crore. Hence, a substantial part of the cash should still be on the books. No information about any capital spend is available. The quarterly results show that the company has made a profit of around Rs5.52 crore on a stand-alone basis. It also appears that the operations are not profitable and ‘other income’ is propping up the bottom-line.
 
What does the future hold for the shareholder? I would be keen look at the annual report for March 2023, although these documents have all the statutory information but they do not communicate much about the future of the company. 
 
To me, the promoters seem to be clearing the path for delisting. Is it perhaps because the core business is not doing too well? This is what www.screener.in tells me about the company:
 
 
The book value is Rs400 and the share has traded in a range of Rs275 to Rs184 in the past one year. Clearly, there is some asset play.
 
In the past few days, notices have been published about a shareholder poll for ‘consolidation’. If it goes through, it is very likely that the promoter will be able to ramp up his shareholding and move for delisting. The Securities and Exchange Board of India (SEBI) is currently debating the buyback rules and its outcome would probably decide the buyback price. If it is decided on the basis of market price, it would clearly be below the reported book value. I am not sure what the true book value would be. 
 
The company ought to provide shareholders with some additional information. For instance, I would be keen to know the following:
1) Would this consolidation mean that shareholders holding less than 200 shares would be forced to exit?
2) What future does the promoter have in mind for the company? What is its business outlook? Does it plan further asset sales and are there any other assets that have considerable value? 
3) What would be the fair market value of the company’s owned assets?
4) Independent directors on the board need to advise shareholders about this need for this proposed corporate action. Would they recommend that shareholders vote in favour of or against the move? 
 
As far as I can see, a shareholder does not have sufficient information to take an informed decision. Why couldn’t this ‘consolidation’ ballot wait till the annual general meeting? It would have helped investors to make a better decision about the future of the company after seeing the audited accounts and the directors’ report.
 
In all such corporate actions, there is never any advice or guidance that is forthcoming from the ‘independent’ directors. Shouldn’t it be their responsibility to the guide non-promoter shareholders? Clearly, our legal framework on the role and responsibility of independent directors needs some re-think. 
 
I will be following what happens very closely. I bought the shares after the ‘record’ date for eligibility to vote on the issue of consolidation. If I were eligible, I would have voted ‘NO’ for this consolidation until I got the answers to my questions. Fairness extends not just to governance but also to the price that one can get.
 
Comments
parthi1961
9 months ago
Does it mean that any Public Limited Company can do whatever the Promotors are decided to do without bothering the minority share holders. One can bring out an IPO and get oublic money and latr in the name of consolidation , drive out the minority share holders. If the INDIAN CARD CARD Clothing Consoldation of equity is through, then many will follow. The Book Value of Rajapalyam Mills is Rs.2431 and CMP is just Rs.824. I am expecting such compnies will follow the suit if no action is taken by SEBI.

himanshu9169
9 months ago
Good information, if the book value is Rs 400+ & CMP is well below of book value as a long term investor i would like to buy this share for 6 months to 2 years of horizon.
Ramesh Popat
9 months ago
other income in all quarters and yearly. Net profit is less than half of other income.
so there is loss on operating basis all the time. It is very opaque disclosure.
Lack of governance. The move is very unusual and detrimental to small shareholders.
SEBI requires to ask for the same and should not permit. Though SEBI ignors such wrongdoings
too many cases. And Moneylife rightly reports and take up such cases always.
akaj188
9 months ago
So called Independent Valuers are always appointed and paid by the Company. So these Valuers are Agents of the Managements. Affected Non Promoter shareholders should be allowed o appoint their own Independent directors.
akaj188
Replied to akaj188 comment 9 months ago
Games Promoters Play ( on Minority Public Shareholders ).
Promoters use clever moves to forcibly eject Public shareholders when ever they feel like i.e. when the Company has excellent future prospects or when it suits the Promoters.

1 ) Selective cancellation of Non Promoters shares.

2 ) Conversion of Equity shares in to Redeemable Preference Shares.

3 ) Consolidation of face value of one share to a Higher Denomination .


In all cases , valuers are appointed and Paid by the Company. Thus they are Promoters' Agents.
akaj188
Replied to akaj188 comment 9 months ago
Compulsory Buyback - Bad in Law - Are Anti Public Shareholders - Reed Relays Latest
OPPOSE COMPULSORY BUY BACK OF SHARES

Delisting may be OK .
But forced cancellation of Minority shares is not done even in Capitalism
Capitalism means Demand and Supply.
If the Majority wants the Minority 's shares then , to Quote from Mario Puzo 's Godfather " " They should make an offer we cannot refuse "

. Let them approach us and buy at a mutually agreeable price but not at a Dictated Price.
Free will transactions are the essence of Capitalism
---------------

If the Company feels that the rate it is offering is " FAIR " then it should , also , be willing to offer to sell its entire majority holding at that rate . The minority share holders ( and other Indian share holders ) should have a Right of Pre emption at that " FAIR " rate
Kamal Garg
9 months ago
Interesting read.
rsndave
9 months ago
I am a shareholder since last over 40 years. Holding very few shares acquired as rights renunciation. I think the management when they say will get the fractional shareholder a fair price at exit upon consolidation, I would trust them on their word.
pallavoorsubramanian
9 months ago
Promoters think that they can do what they want and get away. Small shareholders are always given a raw deal. Governance goes out of the window. Independent Directors are ' independent ' only on paper. They dance to the tunes of the promoter and are more keen to enjoy all the perks. Another instance of failure of SEBI!
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