Proxy advisory Institutional Investors Advisory Services (IIAS) has asked investors to vote against a merger proposal by met coke producer Gujarat NRE Coke Ltd with one of its unlisted associate companies. Gujarat NRE is seeking shareholder approval for a scheme of amalgamation with Bharat NRE Coke Ltd (BNCL). A court-convened meeting of shareholders and creditors is scheduled to be held on January 28 to approve the scheme.
Foreign institutional investors, including HSBC Global, Citigroup Global Markets and Master Trusts Bank of Japan, hold 16.9 per cent in the company, whereas promoters, led by chairman and managing director Arun Kumar Jagatramka, hold 50.7 per cent.
BNCL was promoted by Gujarat NRE in 2003. BNCL owns a metallurgical coke producing facility in Dharwad, Karnataka, that is under operational lease with the listed entity. From FY04 to FY09, the latter owned 59.86 per cent in BNCL. In FY09, it sold roughly 30 per cent stake to the 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 Gujarat NRE, by virtue of it holding close to 30 per cent.
Under the scheme of arrangement, for every one share of BNCL, two shares of Gujarat NRE will be issued. But Gujarat NRE itself will not get any shares for its stake in the former. Thus, BNCL is valued at Rs 153.55 crore, implying 4.2 times rise in valuation.
“In FY09, Gujarat NRE sold a 30 per cent stake in BNCL to the promoter group at book value. The promoters and other companies of Gujarat NRE group (promoter group) stand to gain Rs 35.16 crore by buying and selling a 30 per cent stake in four years. IIAS believes the company should have adopted same valuation as used in FY09. By adopting a different methodology, the promoter group has benefited at the cost of minority shareholders,” the advisory said in a note to investors.
In an email response, a company spokesperson said: “At the outset, we would like to inform you that the valuation report for the merger has been done by an independent merchant banker and the management does not have any role in swap ratio, etc. Further, the valuation is considered fair and reasonable based on recent industry valuation and as such favourable to the investors of Gujarat NRE.”
IIAS also advised investors to consider asking the management details of the incremental tangible benefits Gujarat NRE will gain from the amalgamation as the Dharwad facility is already under operational lease by the firm. It also asked investors to question the rationale for 30 per cent stake sale in FY09 and then buying back 70 per cent in FY13 at a higher valuation.
By including the shares to be issued pursuant to this proposed amalgamation, the total promoter shareholding will rise to 54.72 per cent, an aggregate of 8.66 per cent increase in the current financial year. According to IIAS, the proposed amalgamation also aids the promoter group to increase its stake in GNCL without triggering an open offer, as shares acquired pursuant to the scheme of amalgamation are exempt from making an open offer under Sebi Takeover Code 2011.
