TVS Holdings: A Cute Corporate Cashtration!
The TVS family settlement entered into between all the branches of the family on 10 December 2020 involved the separation of the shares held in all the group units by the three nodal companies, TVS Sundaram Iyengar & Sons P Ltd, Southern Roadways P Ltd and Sundaram Industries P Ltd into specific holding companies set up by the different branches of the family.
 
To the extent the settlement involved the movement of the shareholdings, it was orchestrated through a scheme of arrangement approved by the national company law tribunal (NCLT). However, the private cash settlement between the family members is not part of the public disclosures.
 
In the case of the branch headed by Venu Srinivasan (VS), the ‘two-wheeler diecast and auto components business along with the shareholding in Sundaram Clayton Ltd (SCL)’ was vested in TVS Holdings P Ltd (THP), effective 4 February 2022.
 
This resulted in THP securing a 64.72% shareholding in SCL.
 
Contemporaneously, it was reported that THP pledged its holdings in SCL for a loan of about Rs1,600 crore raised by VS Investments P Ltd.
 
VS Investments P Ltd (VSIPL) was incorporated in September 2021 with an authorised capital of Rs1 lakh. To all intents and purposes, it appears that the sole purpose of its emergence was to facilitate this loan transaction. 
 
Based on the accounts of the above company for the year ended 31 March 2022 and other information available, the amount borrowed was lent in full to VS or his entities.   
 
On 9 February 2022, less than a week after the vesting of the shares of SCL in THP, the board of SCL approved a composite restructuring scheme with four objectives.
 
The first objective was the issue of 116 number 9% redeemable preference shares of a face value of Rs10 each (NCRPS) for each equity share held in SCL as a bonus. This would constitute an issue of about 234.69 crore NCRPS, out of which the principal promoters represented by VS would be entitled to about 151.90 crore NCRPS.
 
The second part was the merger of THP into its subsidiary, SCL, to help the shareholders of THP, VS and associated entities to hold the equity and NCRPS of SCL directly.
 
The third limb of the scheme involved the merger of VSIPL into SCL. This entity, as stated before, was a newly minted one and had borrowed Rs1,600 crore and had lent it to VS.
 
The fourth aspect was the demerger of the manufacturing business of SCL, its core operations, into a separate entity which would be baptised as SCL.
 
The existing company, SCL, would be renamed as TVS Holdings Ltd and will continue to remain listed on the exchanges.
 
Each of the above parts of the scheme was to be sequentially brought into operation on different preset dates such that, legally, specific outcomes were ensured.
 
The first part of the scheme for the issue of NCRPS was made effective on 24 March 2023. By virtue of this, THP and other minority holders were issued the NCRPS.
 
The next effective step involved the merger of THP into SCL. By virtue of this, VS and other family entities who held the shares in THP came to have both the equity shares and the newly issued NCRPS of SCL in the proportion in which their original holding in THP stood.
 
Thus, the NCRPS, which was issued to all the shareholders of SCL originally on 24th March and listed sometime in June 2023, had to be replaced with a fresh issue to the shareholders of THP due to the second event of its merger with SCL.
 
A fresh trading approval was obtained for the 151.9 crore NCRPS issued to VS and connected entities.
 
Once this process concluded, VSIPL bought the entire lot of NCRPS from VS to square off the loan taken from VSIPL earlier.
 
The scheme had sequenced this carefully such that VSIPL, when merging into SCL, would have the NCRPS as its assets and its borrowing of Rs1,600 crore (plus interest) as the matching liability.
 
This leg was completed on 4 August 2023 and, as provided in the scheme, no fresh NCRPS was issued and instead it was extinguished. As per the data available, 147.39 crore NCRPS was cancelled on merger.
 
The scheme had recorded that the net worth of this company was Rs78,504 and the consideration on the merger was discharged by the issue of 19 shares of SCL, making it abundantly clear that this entity was as hollow as a burnt cracker!
 
The various steps that helped VS to extract a sizeable sum of about Rs1,500 crore from the coffers of SCL for the purpose of defraying the payouts necessitated by the family settlement were innovative and unparalleled.
 
The uncanny smart step was interposing VSIPL to raise the money needed for VS and to have it squared by exchanging the NCRPS received as a bonus.
 
When VSIPL merged into SCL, the loan borrowed by the former from an outsider was taken over by the latter and subsequently settled by it, as evidenced by the results published for September 2023 quarter.
 
The NCRPS that VSIPL acquired from VS got extinguished upon merger, without necessitating a redemption, avoiding an actual cash disbursal to the NCRPS-holders, with a possible tax planning objective.
 
The due date for the redemption of the NCRPS is 2 February 2024. However, these worth Rs1,470 crore have effectively been extinguished in less than five months from its issue.
 
The moot question is the status of the 9% dividend on these. Does VS forgo it as the extinguishment happened before the due date for the dividend declaration? 
 
The scheme has been meticulously planned and implemented with military precision. Incidentally, SCL has an 83-year-old (retd) vice admiral of Indian Navy as the chair of its audit committee!
 
The final leg of this multi-step scheme was completed on 31 August 2023 when the spinoff of the manufacturing unit, together with its investment in a US-based subsidiary, was accomplished and the new entity issued shares to all the shareholders of SCL.
 
In October, the company filed the necessary documents for getting the shares duly listed in the two stock exchanges.
 
This is a good case study for any student of corporate law, taxation or finance to study all the related documents and get awed by the concept, construction and completion which happened with the complete cooperation of the independent board, auditors, valuers, regulators and the minority shareholders who approved it almost unanimously.
 
From a corporate governance angle, the role of the independent audit committee that recommended the scheme can raise some eyebrows. The step involving the merger of VSIPL which had its sole object of helping VS raise cash for private use with no other business objective, is difficult to justify as a step with any commercial relevance to SCL or its shareholders, especially the minority.
 
It is not clear whether the audit committee factored in the potential tax issues and consequences that can befall the surviving entity as VSIPL has been wound up after the merger. The scheme has no specific indemnity clause for VS to compensate SCL in the event of an adverse tax consequence of this sequence of transactions.
 
The audit committee referred to VSIPL as “The Transferor Company 2 is also engaged in the business inter alia of making and holding investments and trading in raw materials and components relating to automobiles.”
 
The above description is quite at variance with the fact that VSIPL came into existence on 21 September 2021 and was put on the block on 9 February 2022 when the SCL board approved the merger. The company showed some trading transactions but the same may have been artificially infused to just dress it up like an operating entity.
 
The cumulative age of the four IDs who constitute the audit committee is 311 years! One of the members has been part of the board since 2006. Two other distinguished IDs have been in harness since 2009!
 
With all the steps completed, TVS Holdings Ltd is an investment holding company (IHC), deriving its value almost entirely from its 50.26% shareholding in TVS Motors Ltd.
 
TVS Motors Ltd has a current market-cap of Rs76,000 crore. TVS Holdings Ltd’s market value is Rs11,000 crore. There is a Grand Canyon between the two!
 
The complex restructuring exercise was undertaken only to help VS raise cash for the family settlement. Except for the bonus NCRPS, which anyway would be fully taxable as a dividend when the redemption happens, the minority holders did not benefit in any way. Therefore, their interest should be duly considered.
 
A practical way to benefit the minority would be to delist TVS Holdings and distribute to the minority the pro rata holdings in TVS Motors.
 
Should this be done, a healthy precedent would have been set for the other IHCs to follow suit.
 
Befittingly, then the name of TVS Holdings Ltd can be changed to Thiru Venu Srinivasan Private Holdings Ltd and the IDs can be politely retired!
 
Note- Cas(h)tration—A compound word for cash extraction!
 
Another case of cash extraction to benefit the promoters was written on in this column titled ‘Corporate Maya’ in May 2021, a company that subsequently went public.
 
(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)
Comments
ca.nishantshukla
4 months ago
Dear Ranga sir,

Amazing article as always....
ca.nishantshukla
Replied to ca.nishantshukla comment 4 months ago
However, I am not able to find Corporate Maya article in May 2021 archives (Is it Elicid Investment article), else do share link.
Many thanks for sharing such wonderful insights with your readers
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