Insolvency: Electrosteel shareholders get raw deal, to end up with peanuts

At current prices, worth of 1,000 shares is Rs 1,030, but resolution plan price will fetch just Rs 191

Shareholders of Electrosteel Steels, which has been acquired by the London-listed Vedanta group in an insolvency auction, are set to end up with peanuts.

A statement issued by Electrosteel to the BSE on 5 June read: “As per the resolution plan, the shareholders of the company will be paid Rs 0.19 per equity share they hold as on date (pre-capital reduction price).”

Not surprisingly then, the shares of Electrosteel have been hitting lower circuit in the past two days. Not that the share price is anything to write home about. But since the price offered is way lower than the current price, there would be further fall in the stock. The company’s share price, which scaled a 52-week high of Rs 7.20 in November last year, was down 5 per cent each on Wednesday and Thursday, and last closed at Rs 1.03 on the BSE.

Since the liquidation value as determined by the resolution professional is not sufficient to cover the debt of financial creditors, the liquidation value of the company in the hands of equity shareholders is nil. But according to the resolution plan, the shareholders would be paid 19 paise per equity share they hold. The liquidation value of the company was Rs 28.99 billion while the debt was around Rs 130 billion.

Electrosteel’s filing with the BSE mentioned the money payable to financial creditors worth Rs 74 billion would be converted into 7.4 billion equity shares of Rs 10 each. Existing shareholders hold 2.41 billion shares of Rs 10 each. According to the restructuring plan, effective from June 4, these 9.81 billion shares of existing shareholders and financial creditors will see a reduction in their face value from Rs 10 to Rs 0.20 per share, totaling Rs 1.96 billion. Immediately, the 9.81 billion shares of Rs 0.20 each will be consolidated further and converted into equity shares with a face value of Rs 10 each. So, every 50 shares of face value of Rs 0.20 each will get one new share of Rs 10 each.

To put in simpler words, an Electrosteel Steels' shareholder currently holding 1,000 shares, worth Rs 1,030 as per Thursday’s closing price, will get 20 shares in the new entity with face value of Rs 10 each.

However, it doesn’t end there. Vedanta Star will be delisting Electrosteel Steels, and existing shareholders (including financial creditors) will be given Rs 9.54 for each of the new shares they are allotted (post capital restructuring). If the pre-capital restructuring value is taken, the per-share price is just 19 paise. This will be worth Rs 190.80, which translates into a fall of over 81 per cent in the value of their current holdings.

Market analysts said the resolution plan was approved by the National Company Law Tribunal (NCLT) and hence, there should not be any contention. However, retail investors would not be able to participate in the upside, as they are being paid off for the shares they hold.

Vedanta, which has deposited Rs 53.20 billion in an escrow account, will be allotted 1.77 billion shares of Rs 10 each (post capital restructuring), giving it a 90 per cent stake in the company. After the delisting and buyback process is over, it would have 100 per cent ownership in Electrosteel. The money in the escrow account will be used to repay the financial creditors.