Advisory firm opposes Gammon's restructuring plan

Cites lack of disclosure, information asymmetry between lenders and common shareholders

Proxy advisory firm Stakeholders’ Empowerment Services (SES) has asked the shareholders of construction and engineering major Gammon India to vote against the company’s proposals to bring an outside investor in certain businesses and provide guarantees to lenders.

The debt-laden company has put up a set of resolutions for shareholders’ approval that will enable it to transfer certain businesses to Transrail Lighting (TLL), a subsidiary company.

Units transferred to TLL include a tower manufacturing factory in Deoli and a conductor factory in Silvassa.

It, then, plans to sell a 75 per cent stake in TLL.

SES has opposed four of the six resolutions that are up for voting, which concludes on Thursday, on the grounds of governance issues and transparency concerns.

These include the approval for amendment to business transfer agreement entered with TLL, approval for amendment to the shareholders’ agreement with TLL and Bilav Software (investor), creation of mortgage/charge on assets for securing the debts transferred to TLL and to provide security and corporate guarantee to the lenders of TLL.

Two key areas where SES has raised issues are non-disclosure of basis of valuation and a lack of information provided on the proposed ‘investor’, Bilav Software and its suitability as an investor. Though shareholders had approved the proposals in a postal ballot in December, the lenders of Gammon, which is under a corporate debt restructuring (CDR) have asked for certain changes in the agreements and demanded safeguards in the form of guarantees and mortgages.

The current resolutions have been put up to enable these. Gammon’s capital structure has undergone a major change since the December resolutions. The capital has increased almost three-fold by issue of new shares to lenders under the CDR mechanism and promoters now own only 13 per cent shares against 35 per cent at the time of the previous postal ballot.

Public institutions (including lender banks) now own 67 per cent. After the allotment of equity to DBS Bank, which is one of the resolutions for approvals in the current ballot, the lenders will hold approximately 64 per cent equity.

“This shareholding structure has put the lenders in the driving seat,” said SES, adding: “It is common knowledge that in CDR cases, all such decisions on divestment etc are taken only after the approval of lenders. Therefore, the company and lender banks must have agreed upon these resolutions.”

The proxy firm raised the issue of asymmetry of information between the lenders and other public shareholders.

"In this particular case, there is information asymmetry between CDR Lenders and general public shareholders as lenders are certainly in the know of the rationale for sale and all other details. But, general public shareholders do not have any other source of information except what is given in notice," which SES found "absolutely incomplete and insufficient."

An email seeking comments sent to the company secretary of Gammon India on Tuesday did not elicit any response. "The resolution would certainly sail through given the brute majority of banks, however shareholders can still protest and convey to the management and lenders their dissatisfaction by expressing their 'Against' vote," the proxy firm said.