Proxy Advisory Firms Raise Concerns On JSPL’s New Deal To Sell Power Arm

Proxy advisory firms have raised concerns against Jindal Steel and Power Ltd.’s revised proposal to sell its power business to a promoter group entity, citing the deal valuation and transparency.

The transaction, first announced in May, attracted shareholder scrutiny around the related-party transaction, forcing the company to revise its valuation. The company then said it received positive feedback from investors on the sale and subsequent reduction in debt and carbon footprint, but there were requests to simplify certain terms of the transaction.

On April 27, JSPL’s board approved the sale of its power business (Jindal Power Ltd.) to Worldone Pvt., a private firm owned by Naveen Jindal and his family, promoters of JSPL. Worldone was to pay JSPL an equity value of Rs 3,015 crore in cash for a 96.4% stake in JPL. The deal also involved Rs 4,386 crore in advances and intercorporate deposits made by JPL to its parent being converted into an unsecured loan.

The key reasons for the sale were stated to be:

• Debt reduction using sale proceeds.

• Reduction in carbon footprint and improvement in environmental, social, and governance matrix.

• Focus on steel business.

Here’s what proxy advisory firms have to say about the revised deal, which is expected to come up for shareholder approval at the company’s extraordinary general meeting slated to be held on Sept. 3, 2021.

IiAS

IiAS recommended voting against the revised proposal to sell 96.4% equity stake in Jindal Power to WorldOne. According to IiAs, this isn’t first time the company is selling its silver under the garb of debt reduction. It earlier sold entities like Jindal Shadeed Iron & Steel LLC and its Oman business to a promoter entity.

The advisory firm made the following arguments against the offer.

• JPL is a stable cashflow generating entity that can support its own debt.

• Valuations are low and pegged at distress sale levels.

• Sale of power business would neither reduce carbon footprint by 50% nor reduce overall ESG risks.

• Just having pure steel play will be more cyclical in nature.

• Lack of clarity from audit committee to disclose comparable transactions before accepting the final bid.

• Lack of clarity on the degree of promoter pledge increase since WPL, the acquiring company, is a promoter entity and it’s not known in public the ways and means of funding this acquisition.

SES

SES has raised concerns ranging from lack of transparency, conflict of interest to unfair related-party transactions. The entire scheme, SES said, is orchestrated such that Naveen Jindal is handed ownership of JPL.

Its concerns against the revised offer are:

• The transparent process was a strategically devised process to lead to promoter-owned company.

• Company has not disclosed the valuation report of material related-party transaction.

• Company thinks investors have amnesia and it can paint a rosy picture one day and pessimistic picture another day and pull the wool over investors’ eyes.

• Related-party transaction prima facie looks unfair to the company and its shareholders.

• Board and management think fancy terms such as “ESG score” and “debt reduction” are a gate pass to bulldoze unfair transactions.

• How the company and its board would justify divesting power plant because it uses coal. But JSPL itself produces 5 million tonnes of coal.

• The entire transaction is to facilitate giving valuable asset to promoter for a song.

Glass Lewis

The American proxy advisory services firm has voted in favour of the revised proposal but highlighted disclosure concerns. According to the firm, JSPL has not disclosed the share purchase agreement nor disclosed the valuation on which the consideration amount was accepted by the company. Its analysis is:

• Management of business and decisions associated with business operations are best left to management.

• Board members can be held accountable on these issues when they face re-election.

• Proposed transaction appears fairly reasonable.

• There seem no problematic contingencies attached to the terms of the transaction.

• Company has restructured the transaction to quell investor concerns and for reasons of simplification.

ISS Proxy

The advisory firm, while voting in favour of the revised proposal, said it may not attract universal support as concerns remain on the purchase price, lack of transparency around the bidding process and failure to disclose an independent valuation report. But it supports the proposal on the following grounds:

• Revised offer suspends all financial linkages between JSPL and JPL—this reduces overhang of future defaults and related-party transactions.

• Sale will facilitate company to pay existing debt and deleverage the balance sheet.

• Proposal is in line with the group's strategic objective to focus on its India steel business

JSPL said in a statement said it has undertaken all steps to protect the interests of its minority shareholders and maximise value for them. Valuation of the asset, it said, was done by two independent valuation firms and an independent opinion was sought from YH Malegam, a valuation expert.