Sterlite Ind: Scheming scheme? - Views on News from Equitymaster

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Sterlite Ind: Scheming scheme?

Jun 17, 2002

Sterlite Industries (India) Ltd. scrip has not been trading on the bourses over the past month. The scrip was suspended from trading on BSE and NSE on May 10 and May 13 respectively. The action was requested by the company, as record date for scheme of arrangement for re-purchase and subsequent cancellation of shares was set for May 20 '02. Investors' seem to be suspicious of the novel offer, which has not taken the conventional buyback route and is split into a cash and debt component. As per reports, Investors' Grievances Forum has filed a complaint with market regulator. Further, SEBI has referred the arrangement to Department of Company Affairs (DCA), as methodology adopted is governed under by the Company Act. As per section 391-394 of the Company Act, Power to compromise or make arrangements with creditors and members, which governs the said scheme, the court order sanctioning the arrangement will take effect only when a certified copy is filed with the Registrar of Companies. This suggests that the DCA is aware of the scheme of arrangement.

As per the scheme of arrangement, SIIL has made an offer to the shareholders', as on record date, to relinquish their shareholding in full for a consideration of Rs 150 per share paid partly in cash and debt. Under the scheme, SIIL, for each share, has offered Rs 100 in cash and 5, 10% secured non-convertible debentures (NCDs) of face value 10 payable in the fourth, fifth and sixth year in the ratio of 35%, 35% & 30% respectively. There is a call option, which the company can exercise after 18 months. To provide immediate liquidity to NCD holders, the company has made an arrangement with HDFC Bank. Along with the offer to shareholders, HDFC Bank has made an invitation to offer for purchase the 5 debentures at Rs 46.4. All offers close on June 21. Shareholders not desirous of relinquishing their shares are required to return the option form fully filled and signed alongwith the cheque on or before the above mentioned date. Shareholders' failing to comply with either of the facilities offered will be deemed to have accepted the offer.

Non-convertible debenture Offer
  Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Interest 5.0 5.0 5.0 5.0 3.3 1.5
Priniciple op. bal 50.0 50.0 50.0 50.0 32.5 15.0
Principle re-paid - - - 17.5 17.5 15.0
Principle cl. Bal 50.0 50.0 50.0 32.5 15.0 -
Cash flow 5.0 5.0 5.0 22.5 20.8 16.5

We have profiled the cash flows from the non-convertible debentures. Assuming the investors' opportunity cost is 10%, the present value of cash flows, excluding tax, is Rs 50. The offer from HDFC Bank could be lower to ensure an adequate post-tax return for the Bank. For the individual, the post-tax return at the highest tax bracket is 7%. At that rate, assuming no change in opportunity cost, the individual is better off taking the HDFC Bank offer.

Under the scheme, the company plans to re-purchase upto 28 m shares constituting 50% of shares outstanding. Stake of promoters & persons acting in concert (referred to as promoters), as on last balance sheet date, stood at 38.4%. As per reports, the promoters have increased their stake by an estimated 4.5% through creeping acquisition. The current holding of promoters is estimated at 42.9%. In case the scheme is successful, promoter holding in SIIL will increase to 92.9%. Consequently, the company will de-list from the bourses.

It seems, SIIL has conducted itself as per the provisions of the law. Can one question the spirit of their actions; that of not offering adequate opportunity for shareholder representation? Section 391-394 requires that members, representing 75% or more of the shareholding present at the meeting, support the motion for the same to be binding. This suggests a vote by ballot. Considering poor shareholder activism in the country, a low turnout at the court convened February 16 shareholder meeting at Aurangabad, the promoters, with little support, could have gathered the requisite numbers. The questions that arise are, is providing for poor shareholder activism the responsibility of the company? On the other hand, could there have been an arrangement for ballot by post?

The scheme was designed by the company -- but then again approved by the shareholders -- one can question why no provision was made for part surrender of shares. That said, nothing is lost, the success of the scheme depends on the volition of shareholders. In case shareholders believe in prospects of the company -- SIIL is the largest domestic non-ferrous player -- they have the choice to continue remaining shareholders. Reports suggest the offer price is not fair. The price offered for re-purchase is reported to be at a premium of 43% to average of last 6-months closing. If the stock is undervalued should the company or the market be blamed?

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