Legal wrangles haunt DCM Shriram's warrants issue

Sources say the share allotment violates the Companies Act.

The warrants issue by DCM Shriram Industries (DSIL) has run into another controversy with HB Stockholdings challenging the allotment at the Company Law Board (CLB).

The first tranche of 700,000 shares were allotted in December and this increased the promoters' stake in the company from 32.54 to 35.54 per cent. Of the 700,000 shares, 690,000 were issued to Versa Trading.

Harish Bhasin-led HB Stockholdings has claimed that Versa Trading (formerly DCM Shriram Leasing and Finance) is a subsidiary company of DSIL (DSIL holds 49.98 per cent stake) and as such cannot be allotted shares.

The allotment violates certain provisions of the Companies Act, sources close to the development told Business Standard. CLB is likely to hear the issue later this week. The management of DSIL, however, maintained that the allotment is within the allowed provisions.

The board of DSIL had decided to issue 700,000 warrants (convertible into 21,00,000 shares) to promoters and promoters' group to raise working capital requirement and increase the promoters' stake in the company.

DSIL plans to keep Bhasin's takeover bid at bay by raising the promoters' stake from 32.54 per cent to 42 per cent could run into a problem with this latest development.

"Versa Trading is alleged to have made full payment of Rs 18.63 crore for the warrants. It is unclear as to why DSIL allotted shares to Versa Trading, when its loan of Rs 7.8 crore was still outstanding. If the purpose of warrant issue was to raise capital, DSIL should have recovered the loan from Versa Trading", HB has claimed. The 2006-07 annual report of DSIL refers to this amount as "provision for doubtful advances".

HB's stake in the company has moved up from 12.87 per cent to 23 per cent since it made an open offer in November to buy 22.88 per cent shares of DSIL.

While the open offer is yet to get SEBI clearance, HB has been able to increase its stake with open market purchases.