On 6 May 2022, Elcid Investments Ltd, listed on the Bombay Stock Exchange (BSE), a name unknown to many until then, with an issued share capital of 2,00,000 equity shares of Rs10 each, with the promoters holding 1,49,950 shares, announcing that the postal ballot to initiate the delisting process was approved by the promoters in toto and by the non-promoter members holding 7,695 shares. The shareholders holding 20,261 shares voted against it.
Why does a corporate Lilliput, which last traded on the Exchange a few months back at a trifling price of Rs17 per share, compel anyone’s attention?
Do read till the end to find the reason and none shall be disappointed for the labour involved!
In the past few years, specimens of ‘XXX Financial Holding Companies Ltd’ have mushroomed and some of them had the veneer of a high-profile board with directors being paid handsome sitting fees and, in some cases, commissions. The main activity of these was to ensure that dividends from the downstream companies were duly deposited in the bank accounts!
A few bucked even this trend and the phenomenon of a textiles company holding a cement venture or a construction company with financial services and software as appendages and the like continue to coexist in the capital markets and are justified as good risk diversification for investors!
For unfathomable reasons, many large investors play along and seldom question the wisdom of trapping valuable assets in a structure that benefited just the majority to move cash around conveniently but was sub-optimal for the minority investors.
In 2016, when one among the most respected auditors in service valued Tata Sons at Rs3.14 trillion and the stake of the SP group of about 18% around Rs57,600 crore, the sum of the parts valuation of the shares held by the company in various listed companies was an astounding Rs9.7 trillion and the stake of the SP group was reckoned at Rs1.7 trillion!
Expectation of an amicable settlement in this scenario can exist only in the imagination of the learned judges who converged to expound some unprecedented principles in corporate law!
The valuer cannot be pilloried for any partisan work because the stock market believes in valuing holding companies with the logic of illiquidity of the underlying shares which are assumed to be held for perpetuity and never to be sold!
But the same shares of the investment companies, when part of a sale by the majority (promoters) in a typical deal, would command a completely different value. The sauce for the goose is not the sauce for the gander!
To return to the main story, the promoters of Elcid had made an offer to buy out the minority at Rs11,455 in the year 2013 and the delisting offer met with no response.
On 19 March 2022, JM Financial Ltd, in its capacity as manager to the current delisting proposal, filed with the BSE the document without mention of the floor price to be adopted for the reverse book building.
Subsequently, a floor price of Rs1,61,023 was announced. If it was a fact that the last traded price was indeed Rs17, as mentioned in the beginning, there would be little in the form of any surprise if those who read this thought it was a typographical error or someone involved in the delisting was in need of immediate medical consultation!
Actually, the investors were shocked by the brazen offer that chose to undervalue the company by almost a factor of 75%! The question now pops up if the investors’ sanity needed questioning!
The fact of the matter is that Elcid and its subsidiaries held about 4.3% of Asian Paints Ltd, whose market cap is almost Rs3.0 trillion even after the recent sharp fall. Once this fact is plugged into the workings, the claim of the investors gets full credence.
There is no easy solution to balance the fair expectations of the exiting investors and the temptation of the majority to take shelter under the prevailing logic of valuation adopted by the experts. But it is not impossible to find tailor-made solutions based on the facts of each case.
In 2015, India Cements Ltd, which had promoted the IPL franchisee of the Chennai team as a subsidiary, decided that the ownership of the franchisee should move to the shareholders of the parent company. The following news report dated 9 October 2015 captures the matter succinctly.
‘In a BSE filing, the firm said it "has fixed Record Date as October 9, 2015 for the purpose of distribution of shares of CSKCL to the shareholders of India Cements Ltd."
The filing said that one share of CSKCL will be equal to a single share of India Cements.
"The shareholders would be benefited by having a direct ownership interest in a franchise in the IPL, which has been one of the most successful franchises in the history of IPL," it added.
The firm said the rationale behind the share distribution is to enable India Cements shareholders "to own and manage affairs of CSKCL".
CSKCL still remains unlisted but the shareholders of the parent that promoted it, directly own it and retain the flexibility to exit once the company is listed.
Similarly, whereever possible the investment holding companies should come forward to distribute the underlying shares to the non-promoter shareholders so that the portfolio choices are not imposed on the investors.
The burden of arriving at a fair valuation, which seems impossible in the current milieu, is obviated. The promoters need not find the expensive cash to buy out and follow the tedious process to make the book building happen. The promoters keep the original structure with public holders exited after the distribution.
Experts may bring up questions like allocation of the debt, if any, in the holding company or shares held in private companies or the presence of non-fungible assets like real estate. All this can be dealt with suitably. An inhospitable tax regime for such actions will need to be bitten as a cost of addressing minority concerns.
Historically, the evolution of corporate India involved a nucleus entity spinning off many ventures, more often unrelated to the main enterprise and ending up a clumsy conglomerate. One should hasten to add that this is not exclusive to our country.
The lack of maturity in the capital markets, the dominance that promoters typically enjoyed in calling the shots, and the compulsions of the lenders and the debt market, together with a distorted tax system, placed a premium on this form of corporate growth.
The advent of sophisticated institutional investors , the market maturity reflecting in differential valuation of distinct sources of cash-flow, and where the promoters had achieved the objective of a stable set of businesses that had fed off each other’s cash-flow and intermingling of resources, saw the benefits of separating such clusters.
Another domestic driver was allocation of portfolio among aspirants within a family to manage separate businesses.
The process of separation and spinning off of these clusters into individual companies was invariably done in a manner to help the promoters, directly and indirectly, keep the controlling interest and preferred structures that made it difficult for any hostile party to take over.
On the flip side, these became unfriendly to non-promoter investors as true price discovery of these intermediate entities in the market became difficult though these were invariably listed.
The million-dollar question is: Will the regulators apply their mind and find a quick solution so that the Elcid case eludes the waiting lawyers, who see a major opportunity to gain a windfall irrespective of the final outcome?!!
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)