Private Partition of Public Property?
Splits and separations in business families necessitating segregation of the hitherto commonly held assets, including controlling holdings in corporate entities, is not a subject that would kindle any special interest, given that it has been and continues to be quite commonplace.
Accountants and business advisors may know a catalogue of such cases in the Indian context and some of them turned out to be more famous in the past than others received little notice. There is no intent to revisit the details of any of those that happened in the past and done and dusted for all practical purposes, except perhaps for the inquisitive tax man who never deems anything final!
Most well-known splits between siblings or other similarly related family members, who held a common sway over a clutch of businesses, whether held together in a single corporate conglomerate or in desperate entities, involved segregating different businesses and distributing them among contending hands.
Whether it was the conglomerate that split the oil and chemicals as one business, and the unrelated ones like telecom, infrastructure, and power as another; or where the auto business and financial services, which nestled together was separated into a clumsy structure for the public but convenient for the family, the businesses dealt with were like chalk and cheese.
Now comes the case of a listed company that has a monolithic business of sugar and allied by-products, being split based on physical factories producing identical products. There are about five physical units producing almost the same combination of sugar, captive power, alcohol, and chemicals, being divided between two contending families wanting to individually own their respective share of the business.
Dhampur Sugars Ltd is one of the biggest sugar producing company in India, based in Uttar Pradesh (UP) and listed for many years, with the promoters holding a shade lower than 50%. The company’s board has approved a scheme of separation of what was hitherto run as a single composite business, into two entities whereby three of the five factories will remain with one entity and the other two move to another entity.
A detailed scheme of the arrangement conceived under the relevant legal provisions has been filed before the National Company Law Tribunal (NCLT) for approval. The scheme has to be approved by the shareholders of the company before the Tribunal can sanction it. 
The document explains in adequate detail and in a transparent manner that the two parts of the promoter family which hitherto controlled the entity as one block, seeks to do so independently going forward. Since the business of sugar and its ancillary products are not operationally separable, the split is designed on the basis of the factories producing the primary product, namely, sugar.
The promoters under the operation of the scheme of arrangement would be scrambling their shareholding in such a manner that each block of the two families will have control of only one of the two clusters and there would be no cross shareholding of the promoters. The non-promoter shareholders would each have their percentage of shareholding identical in the two companies and shall not be impacted in respect of their percentage of voting rights.
It is quite commendable the way the document sets out the objectives and the operational details, and scores quite high on disclosure of information which is typically a challenge in most such transactions in the Indian context.
Be that as it may, a question that arises is, when a company is listed with significant public shareholding, which in this case, is more than the shares held by the promoters, can it be subject to a division of assets only because the promoter family wants to have two or more entities to independently enjoy control? 
There is no denying the fact that the non-promoter shareholders have the right to vote against the scheme and can, if they so decide, defeat the resolution. Their rights are preserved and intact. 
Nor is a grievance made out that the promoters are acting behind anyone’ back. If at all, it is the very opposite as they are acting entirely above board. But these decisions are taken purely on the convenience and consideration of the family in control and generally on the basis that the rest of the shareholders would fall in line and not explicitly demur. 
It is on record that the audit committee consisting essentially of independent directors approved the scheme as being in the interest of all the shareholders. These averments are more often seen to be a conclusion than a clear exposition of the considerations taken into account, the alternatives evaluated etc.
No one can say with prescience if the split entities will cumulatively get a better market valuation as compared to a single entity and that will be known only in the long run. It is also not clear whether the members of both the families have equal competence to manage the business. 
The split is seen as good for all stake holders because the promoters seek it. That is the nettlesome issue from the angle of corporate governance. Our entrepreneurs perceive little difference between a purely privately owned business and a business owned by a dominant promoter(s) along with other public investors. 
The forum of independent directors that is expected to function with a cerebrum of its own, mainly echoes the thoughts of the promoters!
The public shareholders may pay little attention to this as they would end up with shares in two entities going forward and may see this as a bounty! 
It is to be seen if the larger institutional shareholders will wish to come in the way of this and how the proxy advisory firms view this. They have been vocal in recent times and certainly offer some hope to improve corporate governance. 
As an observer for many years of such corporate splits, I would think that a case like this would need to be justified with an independent expert’ report that the split is not likely to cause value destruction and the business efficiencies would not be impacted by the separation of a single business based on the location of the factories. 
There could be issues like usage of common brand and other softer aspects which no document can fully explain.
It would be difficult for the regulator to intervene if the shareholders stamp their approval. Nor is such a step recommended and it is best left to the shareholders to settle.
Dhampur may set a trend in motion! 
Corporate advisors and consultants would do well to identify new targets which have a single business with more than one identifiable group of promoters and canvass to help them separate harmoniously! 
At least to my limited horizon a famous paint company that was started by more than one family looks like a future candidate! Someone may say “curse your tongue for saying this!”
Our promoters still rule like the sovereigns of the yester years, who by their diktats decide which of their sons or daughters oversaw which fragment of their kingdom!
(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.)  
11 months ago
An excellent perspective. The future will have both entities loaded with some extra administrative costs. At some point, the shareholders will figure out where to shift loyalties. We will see where the loyalties of the independent directors will be. Hopefully they will not be on both boards
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