Gujarat NRE merger proposal faces governance group's ire

IIAS recommends investors to vote against move as valuation allegedly favours promoters

Proxy advisory Institutional Investors Advisory Services has asked investors to vote against a merger proposal by met coke producer Gujarat NRE Coke with one of its associate companies. Gujarat NRE is seeking shareholder approval for a scheme of amalgamation with Bharat NRE Coke.

The rationale given by the company for the scheme of amalgamation is that the process will strengthen the position in the met-coke industry in terms of asset base, revenue, product range, production volumes, integrated supply chain and market share, Benefit in operational synergies, greater efficiency in cash management  and Greater integration and financial strength for the amalgamated company. A court convened meeting of shareholders and creditors is scheduled on January 28 to approve the proposal.

Bharat NRE Coke Ltd. (BNCL) was promoted by Gujarat NRE in 2003. From FY04 to FY09, the latter owned 59.86% in BNCL. In FY09, it sold roughly 30 per cent stake to promoter group at book value of Rs 10.90 crore, valuing the company at Rs 36.33 crore. BNCL is currently an associate company of GNCL, by virtue of GNCL holding close to 30%. BNCL owns a metallurgical coke producing facility, in Dharwad, that is under operational lease with GNCL. 

However, under the scheme of arrangement, for every one share of BNCL, two shares of GNCL will be issued. Under the scheme, BNCL is valued at Rs 153.55 crore, implying 4.2 times rise in valuation.  “In FY09 GNCL sold a 30% stake in BNCL to promoter group at book value. The promoters and other companies of Gujarat NRE group stand to gain Rs 35.16 crore by buying and selling a 30 per cent stake in four years. IIAS believes that that the company should have adopted same valuation as used in FY09. By adopting a different methodology, promoter group have benefitted at the cost of minority shareholders,” the advisory said in a note to investors. 

IIAs also advised investors to consider asking the management details of the incremental tangible benefits GNCL will gain from the amalgamation as the Dharwad facility is already under operational lease by GNCL. It also asked investors to question the rationale for 30% stake sale in FY09 and then buying back 70% in FY13 at higher valuation.