The Hindu : Demerging metal business: Sterlite move to hit minority shareholders

Online edition of India's National Newspaper
Sunday, May 18, 2003

Business

Business

Demerging metal business: Sterlite move to hit minority shareholders

By Oommen A. Ninan

MUMBAI MAY 17. The move by Sterlite Industries (India) (SIIL) to demerge its metals business through a scheme of arrangement for purchase and cancellation of shares under Section 391 and 394 of Companies Act is likely to hit the interests of minority shareholders. Further, if SIIL has its way and it becomes a precedent, many companies may follow suit including multinationals. This is likely to set a new predicament for family-run companies and could also virtually finish-off the capital market in the country.

SIIL has decided to hive-off its copper business into a separate entity while retaining the aluminium conductor business, power transmission line and other non-metal related assets with the parent company.

The metals business of the company will be demerged from SIIL to an unlisted group company, Sterlite Copper Ltd (SCL). This move surprised the investor world. If a company decides to focus on core business — comprising most of the company's turnover and assets — it usually shifts out the non-core business to another company. Here, SIIL has chosen to demerge more than 90 per cent of its core business to another company and keep the non-core business as a listed entity.

Under the scheme of arrangement and valuation proposed by the SIIL promoters, shareholders will be entitled to one equity share of Rs. 5 in the new company for every share held by them in SIIL. Alternatively, the shareholders can opt for Rs. 175 per share held in the parent company. In the normal course, pricing of shares of a profitable business with good prospects is based on its earnings and cash flows. There are allegations that SIIL has not valued the business on the basis of earnings. The Life Insurance Corporation of India, which is holding 7.5 per cent stake in SIIL, has reportedly sought a clarification on SIIL's valuation in the demerging business.

SIIL found safe passage in two clauses of the Companies Act 1956

to by-pass the Securities and Exchange Board of India (SEBI). Sec. 391 — power to compromise or make arrangements with creditors and members — helps buy-back shares. Sec. 394 talks about arrangement which involves amalgamation and restructuring to help companies focus on their core business.

One reason cited by the company in its application at the High Court of Mumbai for delisting from Indian stock exchanges is that, "Stock exchanges in India do not give significant values to companies in the metal business, for example, the average price-earning ratio for such companies is much lower than that of similar companies on the London Stock Exchange".

However, the contrasting aspect of this claim is borne out by the fact that the company says that the offer price of Rs. 175 was arrived at based on the market price on the Bombay Stock Exchange.

Answering a question at a general body meeting to consider the scheme of arrangement, the chairman of the company, Navin Agarwal, stated that "The cash option is based on market value of SIIL's shares". He also stated that it represented a premium of 20 per cent to the past three months closing average market price and a premium of 22 per cent based on the market price as quoted on the Bombay Stock Exchange with reference to the date of board meeting approving the scheme, that is, January 29, 2003.

If the proposal of SIIL goes through smoothly, several multinational companies will also follow suit as the recently introduced SEBI's Reverse Book Building guidelines are not favourable for companies planning to delist from stock exchanges. There are already several listed multinational companies, which have their separate unlisted Indian subsidiaries. If these companies also decide to shift the business of their listed companies to the unlisted companies and offer investors unattractive exit prices (skirting the reverse book building process), it would not give a positive signal to the equity market, which is already in the doldrums.

Other than this, the shareholders should be more active when decisions such as these are taken. This gains importance as SIIL had the approval of its shareholders for the scheme of arrangement in a recently convened meeting appointed by the High Court of Mumbai. LIC with 7.14 per cent stake and GIC with 2.43 per cent stake are the other shareholders in the company. As retail investors, the Indian public is holding 21.69 per cent stake. Being representatives of public institutions, LIC and GIC should ask for a due-diligence of the company to arrive at an offer price. This aspect comes into focus when it noticed that SIIL has not valued on the basis of earnings. The transfer of business is reportedly done at book value. Here, when book value of the company is nearly Rs. 500 per share, the price offered to shareholders is at Rs. 175 per share, nearly 35 per cent of book value.

In addition, policymakers should make some changes in the current legislation, so that the promoters of a listed company are not allowed to vote for these kinds of decisions, if the business is being transferred to a company owned by the same promoters of the listed company. This change is important because in the case of SIIL, the promoters' holding is nearly 70 per cent and even an objection from a minority shareholder will not have any impact.

Printer friendly page
Send this article to Friends by E-Mail

Business

Stories in this Section

Demerging metal business: Sterlite move to hit minority shareholders

Forex reserves surpass $78 b

SIL to invest in Zambian mine

Development Credit Bank's plans

Allahabad Bank net doubles

Astra Microwave's hardware facility