Hopes of better valuation post takeover a pipe dream
Last week, shareholders of Adhunik Metaliks, who were hoping for a better deal from the prospective buyer for the ailing company, got a rude shock when the new owner, Liberty House, made a delisting offer at ₹0.09849500 a share. Listing in the stock was suspended by the exchanges due to the insolvency process. It last traded at ₹0.49 on the BSE on November 29, 2019.
It’s not just 21,200 retail shareholders holding 14.49 per cent stake in the company who will now receive this price; even big institutions such as LIC of India (Profit Plus Growth Fund), which holds 2.12 per cent, and IL&FS Financial Services, which holds 10.68 per cent, are affected by this decision. According to the BSE, 192 listed companies are presently under reference to the Insolvency and Bankruptcy Code. Among these, some are actively traded stocks such as Alok Industries, Ballarpur Industries, Digjam, Gitanjali Gems, Gujarat NRE Coke, HDIL, IVRCL, Indosolar, Jet Airways, Jyoti Structures, Karuturi Global, Lanco Infratech, Orchid Pharma, Punj Lloyd, Reliance Communications, Ruchi Soya and Unity Infraprojects.
Shareholders at the bottom
Shareholders should bear in mind that they have the last claim over any assets of a company in the event of the company’s liquidation as the Insolvency and Bankruptcy Code puts financial institutions and workers’ dues at the top of the creditors’ list, even before statutory dues. However, what is intriguing is that the settlement process is not standard and differs widely on a case to case basis, leaving minority shareholders confused about what they may expect from a corporate resolution plan.
For instance, Adhunik Metaliks has offered delisting to its existing shareholders. In the case of Ruchi Soya and Electrosteel Steels, the shareholders’ equity capital was reduced, valuing their holdings at a tenth of what they had possessed. In the case of Bhushan Steel, which was taken over by Tata Steel and renamed Tata Steel BSL, the public holding was retained without changes.
Probably the worst is the case of Essar Steel, which was acquired by ArcellorMittal along with Nippon Steel. In the process, the shareholding of public shareholders was cancelled. According to the resolution, the entire existing issued, subscribed and paid-up share capital (both equity and preference) of the company was cancelled and extinguished with effect from December 16, 2019, leaving investors with zero value.
MS Sahoo, Chairman of the Insolvency and Bankruptcy Board of India, recently said in a newsletter that the IBC Code envisages maximisation of ‘value’, and not maximisation of ‘price’. The value improves if the business is continued and its assets are used more efficiently. Efficiency may improve from a change of management, technology, or product portfolio; acquisition or disposal of assets, businesses or undertakings; restructuring of the organisation, business model, ownership, or balance sheet; strategy of turnaround, buyout, acquisition, or takeover; and so on. The Code, therefore, envisages a resolution plan to provide for anything and everything, subject to applicable laws that maximise the value of the assets, Sahoo said.
In cases where a company continues as a going concern under a new owner, maybe the process should also factor in the interests of minority shareholders, who would be more than happy if they were allowed to retain their holdings in the company with the new management, ostensibly eyeing a better future. It’s time SEBI joins hands with IBC to evolve a clear cut formula for minority shareholders.