Minority investor advisory firms such as Institutional Investor Advisory Services and InGovern Research Services have criticised Escorts’ reorganisation plan, involving three of its associate companies, calling it a breach of corporate governance. The company has put in place a complex proposal, which if approved by its shareholders at court-convened meeting to be held on
May 20 will give the promoter Nanda family voting rights in excess of 40 per cent, way beyond their direct shareholding in the company, which is currently at just 12.43 per cent.
Under the proposal, three associate firms — Escorts Construction Equipment, Escotrac Finance and Investments and Escorts Finance Investments and Leasing Private — will be merged with Escorts. Further, ECEL shareholding in Escorts and treasury shares will get transferred to Escorts Benefit & Welfare Trust, which would be settled by Escorts upon the approval of the scheme.
IIAS and InGovern, entities that advise minority institutional shareholders, have asked the shareholders to vote against the merger proposal citing that the move is detrimental to the interests of minority investors.
The company has used shareholders' money to create these subsidiaries. Then, these are being merged with the parent. The treasury shares created by doing this should be extinguished," said Amit Tandon, founder and managing director, IIAS.
According to Tandon, the current structure makes the company a hostile takeover target and the the purpose of restructuring is to gain voting control over 41 per cent of the shares. “The promoters of Escorts seem to be controlling the company through a convoluted shareholding structure. The maze of amalgamations and trusts is just to increase the promoters stake in the company, almost as if pulling a rabbit out of a hat,” said Shriram Subramanian, Founder and MD of InGovern.
Escorts, however, claims that the intention behind the the merger is to ensure economic prosperity of all shareholders. “It will add Rs 1,200 crore to our top line, Rs 100 crore to our bottomline,” said Rajeev Dass, associate vice-president, corporate affairs, Escorts.
As per March 2012 shareholding data, the Nanda family's stake in Escorts stands at just 12.43 per cent. However, if one adds the holdings of Escotrac, EFILL, who own 12.83 per cent and 6.5 per cent respectively the holding, the promoter holding in the company stands at 31.76 per cent.
Dass claims shareholding of the Nanda family and its affiliates will be maintained at current levels post-merger. “The entire process is being controlled by the judiciary and they are ensuring that all laws and regulations are complied with. If any shareholder has any issues with the process they can raise it in the meeting scheduled to be conducted by the Court on May 20”, Dass said.
The proposed merger will expand the company's capital base by 16.9 million shares, which will go to Escorts Benefit & Welfare Trust. The trust will hold over 30 per cent of shares in Escorts post the merger.
Dass said the trust which will be controlled by independent directors and the Nanda family will not be part of it.