Promoter Opportunism Vs Minority Protection

At a time when stock prices are at or near long-term lows, one promoter has proposed to delist his company, and the other has opted for a cheaper route of capital infusion. In both cases, governance advisory firms have cried...promoter opportunism. Hoping the regulator will intervene.

Meanwhile, others have proposed regulatory relaxations to permit businesses more flexibility in raising capital in the midst an unprecedented economic crisis.

Thereby, fanning the flames on an important debate—promoter opportunism versus minority protection.

Vedanta Delisting Offer

In the case of Vedanta Ltd., the delisting proposal comes at a time when the stock price is at half the 52-week high. And though minority shareholders will determine the final price, the offer has been criticised as “opportunistic” by Institutional Investor Advisory Services; and as one that “does not reflect intent, seriousness and fairness,” by Stakeholders Empowerment Services.

Both governance advisory firms said in their reports that the board, specifically independent directors, should have rejected the delisting proposal. It didn’t.

The timing is objectionable, according to Anil Singhvi, IiAS founder. At a time when shareholders are watching wealth deplete, a promoter is trying to “squeeze them out”; this is unfair, he said on a BloombergQuint show. While the regulations have in-built safeguards, such as reverse bookbuilding where shareholders offer their shares at their preferred price —“we have not seen as yet in India minority shareholders stand on their feet,” Singhvi argued. He thought independent directors should have sought an external valuation assessment, before approving such a low-priced delisting offer. He also argued that lenders should object to the delisting of companies with large outstanding debts, like Vedanta, as private companies have to abide with lower disclosure standards.

Rule of law permits availing legitimate opportunities, taken in compliance with law, advocate Somasekhar Sundaresan countered in favour of a promoter choosing such a time to make a delisting offer. Besides, discovered prices (the price arrived at through reverse book building) are most often a multiple of the floor prices, he said. Sundaresan argued that the delisting offer is not a squeeze out, it presents an opportunity for price discovery, one that the board, especially independent shareholders, should be duty-bound to enable. “I don’t imagine how disallowing a price discovery process is good fiduciary discharge as opposed to allowing a price discovery process,” he said.

Sundaresan also highlighted how the pandemic-led economic crisis posed serious challenges to businesses and the ease of doing business as a listed company.

Deepak Fertilisers: Warrants Out, Rights In

In the case of Deepak Fertilisers & Petrochemicals Corporation Ltd., the promoters owed the company Rs 125 crore towards a warrants issue they committed to in 2018. Despite receiving a one-month extension from SEBI to pay the money in May, the promoter didn’t pay up, forfeiting some Rs 40 crore. And just days later, the company board approved a rights issue, which the promoter will participate in. If the warrants were to cost the promoter Rs 309 a share, the rights issue at current market price would cost roughly a third that. It prompted IiAS to question the subsequent additional equity dilution.

The promoter has violated a contractual obligation, Singhvi said. He also criticised the company’s board that in April sought a month’s extension from the Securities and Exchange Board of India to give the promoter more time to pay for the warrants. And then when the warrants were forfeited, the board promptly agreed to a rights issue, he said. The promoter was not transparent about his intent. The forfeiture of the higher-priced warrants and the decision to subscribe to a lower-priced rights issue also amounts to the promoter trading in his own company’s shares, Singhvi argued.

The law allows a promoter or any warrant holder to forfeit the option to convert to equity shares and penalises him for it, Sundaresan pointed out. That 25% forfeiture goes to the company. If a price no longer seems rational and the contract allows a termination clause, then a ‘cure period’ doesn’t take away the promoter’s right to terminate the contract, Sundaresan explained, referring to the extra month the board sought for the promoter.

“We have to remember that we are looking at an extraordinary situation ahead of us over the next 24-36 months,” he said. Conserving every rupee in the balance sheet is the sine qua non for a director to think about and lose sleep over today, he argued. If the company is getting the forfeited amount, and there is a rights issue, should a board say, no the promoter should not subscribe to his entitlement, he posed. “Or say, no the promoter has to fulfill the (warrants) contract, we’ll convert an optional instrument into a mandated instrument?”

Promoter Opportunism Vs Minority Protection

At a time when Singhvi believes more promoters will turn opportunistic and minority shareholders will need stronger protection, Sundaresan argued for less paternalistic regulations and giving minority shareholders more decision-making powers.

In a recent column, he proposed it is time that SEBI allowed public shareholders to waive the open offer mandated in its takeover regulations. A high threshold for shareholder approval to waive such an offer, say 90% of the public shareholders’ votes, should be a sufficient safeguard, he argued.

In pandemic times, this will make it easier for companies to find new investors and even white knights, who would rather invest in the company than buyout public shareholders, Sundaresan said in the debate. “We have to think very differently. We have to think of a scenario where capital is scarce,” he added, explaining what prompted his suggestion.

The argument that these are extraordinary times can’t support only the promoter (or acquirer), Singhvi countered. If these are extraordinary times and laws must adapt, then why not suspend delistings - because prices have come down to artificial lows, he said. Laws should stand the scrutiny of times, he said.

Somasekhar Sundaresan has in the past represented the Deepak Group in legal matters.