Promoters find it useful, but ordinary investors don’t benefit much.
Slump sales, a popular route for promoters to transfer a business as a going concern by leveraging stake, has not helped shareholders create wealth.
In 2011 till date, 23 slump sales valued at Rs 812 crore have been announced. In 2010, a total of 13 companies had completed slump sales. A slump sale describes the selling of a business undertaking as a going concern on an as-is basis for a lump sum consideration, without values being assigned to individual assets and liabilities. It’s becoming a popular route for companies, but not so for shareholders.
Anil Singhvi, advisor to institutional investors, said: “Take Kanoria Chemicals, where they have sold a large part of their undertaking. This cash is going back to the company; it’s not coming to the shareholders. If I am a shareholder of Kanoria, what am I getting out of this transaction? Nothing. The company has got a huge pile of cash and I do not even know what the company is going to do. I had the same question for Mr Piramal when he sold a large part of Piramal Healthcare. It has been a year and the share hasn’t moved an inch.”
“Slump sales are preferred because more and more companies are finding it difficult to withstand the forces of competition. They also have realised that it is difficult to right-size companies in an uncertainty-dominated scenario, tempting them to sell their business or some units and realise values,” said Ajay Garg, managing director, Equirus Capital Pvt Ltd.
Such sales are more visible in certain sectors. Such as pharmaceuticals, as investors abroad are ready to pay high values to tap our billion-size market. On the other hand, there are hardly any deals happening in cement, which is more dominated by local factors.”
Rekha Bagry, executive director, PricewaterhouseCoopers India, said: “Many times, foreign investors are not interested in listed business and unlisted focused business fetches greater valuation, creating a need to carve out specific businesses.” Citing the Piramal-Abbott deal, he says: “There are some advantages, especially when business has high intangible value assets (like brands) not reflected on the assets side of the balance sheet.” As many as 11 companies have proposed slump sales in the past three months, but their market value after the announcement, barring a few, have remained unchanged, indicating investors’ negative reaction. Wockhardt gained nine per cent since August 3, after the company said it would sell its nutritional business to Danone for Rs 180-200 crore. Bombay Burmah, on the other hand, remained steady after proposing to sell the BCL springs division for Rs 180 crore.
| UNILATERAL BENEFITS | |||||
| Name | Slump sale date | Amount (Rs crore) | Price # | Current price | % change |
| Piramal Healthcare | May 21, ’10 | 17,454.24 | 502.35 | 368.75 | -26.60 |
| Orchid Chemicals | Jan 5, ‘10 | 1,865.00 | 186.60 | 184.25 | -1.26 |
| Kanoria Chemicals | Apr 29, ‘11 | 830.00 | 43.90 | 32.79 | -25.31 |
| JB Chemicals | Jun 6, ‘11 | 738.00 | 122.45 | 76.45 | -37.57 |
| Sezal Glass | May 31, ‘11 | 686.00 | 4.30 | 2.50 | -41.86 |
| Wockhardt | Aug 16, ‘11 | 640.00 | 399.20 | 441.85 | 10.68 |
| Eon Electric | Aug 9, ‘10 | 530.00 | 137.44 | 44.35 | -67.73 |
| Smartlink Network | Mar 31, ‘11 | 503.00 | 67.55 | 46.45 | -31.24 |
| S Kumars Nationwide | Feb 11, ‘11 | 450.00 | 62.60 | 38.85 | -37.94 |
| Carol Info Services | Sep 2, ‘11 | 320.00 | 219.20 | 147.05 | -32.92 |
| # As on slump sale date Data Compiled by BS Research Bureau | |||||
P I Industries, which sold its polymer compounding business to Rhodia SA in September this year, has been the biggest value creator for its investors. After the slump sale, the stock was up 133 per cent since the announcement in January. Electrotherm (India) gained 46 per cent in a month after the company put on sale the ductile iron pipes division for Rs 300-350 crore. The division accounted for sales of Rs 421 crore and profit before tax of Rs 28 crore and board indicated sale of the DIP division was in the best interest of shareholders.
In May 2010, Piramal Healthcare through a slump sale transferred to Abbott its domestic formulations business, that contributed 55 per cent of total revenue. Abbott paid $3.72 billion or more than 10 times yearly sales. However, the stock price has declined by 28 per cent since then. After the slump sale, the company spent Rs 2,500 crore to buy back 20 per cent of the shares through a tender offer, at Rs 600 per share.
Complains Hinesh Doshi, vice-president, Investors' Grievances Forum: “A slump sale doesn’t involve any regulatory approval except for shareholder approval, not difficult in India going by the way annual general meetings are conducted. With that, only the promoters decide the entire process. The entire cash received lies in the company, under their control.”
If the undertaking or division has been held by the transferee for more than 36 months, any profit or gain from the slump sale effected in the previous year shall be chargeable as long-term capital gains and shall be deemed to be the income of the previous year in which the transfer took place.
