Godrej Industries follows the Sterlite path (26 August 2002)
Sterlite Industries caused an unprecedented controversy with it delisting plans, but Godrej Industries Ltd. (GIL) too seems headed for similar trouble in trying to follow Sterlite’s path. Sebi is completely opposed to companies using Section 391 of the Companies Act to delist their shares through a court approved Scheme of Arrangement, which tends to give the go by to several other capital market regulations.
Sterlite Industries had sparked off a controversy when it attempted to force investors into tendering their shares by mailing them cheques for the value of their holding and seeking a negative consent to its offer. A flood of investor complaints had forced the Sebi and the DCA to file an intervention in court on behalf of investors. The Bombay High Court however rejected their stand. Sebi had filed a similar appeal against Godrej’s scheme too, but that was also rejected. Despite the Bombay High Court’s double rebuff, Sebi has moved the Supreme Court against Sterlite and Godrej, on the grounds that recourse to Sec. 391 allows them to bypass Sec. 77 A of the Companies Act which deals with buyback of shares. Sebi has apparently raised issues of law and contented that Companies cannot bypass various capital market related statutes specifically meant to protect investors and opt to delist their shares by approaching the high courts with a Scheme of Arrangement.
The Godrej case is as follows: The Godrej family owns over 67 per cent of GIL and along with persons acting in concert its holding is over 71 per cent. The company in its present form is the result of a series of restructuring moves by the group. But given the large promoter holding, any corporate action or buyback price would sail through on a majority vote without opposition. Moreover, when the holding of banks and insurance companies is also a negligible 1.6 per cent – any opposition is inconsequential. The company has offered investors a price of Rs 18, which retail investors insist is paltry in relation to the true worth of the company. GIL shares were quoted at just under Rs 24 per share until a few days before trading was halted on July 26 this year. Even on the last day, the scrip traded at Rs 20, which is higher than the price offered to investors. Investors also point out that the book value of this profitable company would be in the region of Rs 45. What is perplexing is that GIL, like Sterlite has sought a negative consent from investors to its offer, unconcerned about good corporate practices. If investors do not specifically reject the offer, it would be assumed that they have accepted it. As in case of Sterlite, the NSDL has also sought a clarification from Sebi with regard to transfer of shares from investors account without a positive consent from investors. The depository regulations do not allow it to transfer shares without investors’ specific consent. One shareholder, Sanjiv Shah who along with his brother owns 100,000 shares in GIL wrote to chairman protesting against what he believes is an unfair price. He alleges that GIL had neither sent a balance sheet to investors nor declared a dividend for the year ended March 31, 2002 making it difficult for him to evaluate the true worth of the shares. (Since then, GIL has declared a 10 per cent interim dividend on shareholders on August 14, 2002).
Shah says that the company reported net profit before tax Rs 15.4 crore for June 2002 giving it an EPS of Rs 16.4 (annualised on face value of Rs 6) even without taking into account the profit from subsidiary companies which is not known to investors without the annual report. He points out that in the previous year, GIL had sent its annual report to investors at the beginning of May. At the root of the disinvestment decision seems to be the management’s worry over the hidden value of the land at Vikroli that was leased to GIL for a 33-year period. When the lease came up for renewal in 1994, it was extended for nine years and is due for another renewal in 2003-04. Investors believe that the Godrej family would probably like to keep the valuable leasehold rights to this land with themselves and hence the move to go private. Clearly, the Godrej family with its majority shareholding in the company is well within its rights to do so. But the issue is the exit price. Despite investors’ protests, the company justifies the price as being higher than its market quote. In fact, lucky shareholders who sold their shares in a hurry on July 17, 2002 got a better price than those who looked to management for a fair deal. It must be remembered that GIL had paid a 30 per cent dividend last year and even at its lowest the price was never below Rs 12 while it had reached a high of over Rs 24 this year.
Given the group’s reputation, it seems fair to have expected that it would offer a decent exit price to its shareholder instead of claiming that Rs 18 is higher than market price. One would also expect, that a group, whose other company boards are packed with business luminaries would not adopt a controversial Scheme of Arrangement route to make its exit. These actions are certainly not in keeping with expectations from Godrej. And this is precisely why Sebi has now sought to plug other routes to delisting and plans to put in place a clear mechanism to decide the exit price – that to one in which all shareholders who will tender their shares will have a major say in deciding the price. The battle is now in the Supreme Court and it remains to be seen if the court rules in favour of investors or otherwise. -- Sucheta Dalal