According to a person familiar with the development, the capital market regulator has expressed its concerns on the quantum of convertible debt being issued after the merger, and is of the view that the deal could not be in the best interests of minority shareholders of the listed parent entity as it would lead to dilution of equity. FVRL has convertible debt of R685 crore, out of which R285 crore has already been bought back by the holding company.
Since after merger the convertible debt of FVRL will be replaced by Future Retail, it will lead to dilution of equity in the parent firm once the debenture holders convert them into shares. Sebi feels this will hurt the minority shareholders of Future Retail.
The merger proposal is pending with Sebi as the debt component of nearly R700 crore in the proposed deal structure has not gone down well with the regulator. While the company has clarified on the matter, the regulator is yet to give its nod, said a person privy to the development.
In October last year, the board of Future Retail (formerly Pantaloons Retail India) decided that it would merge FVRL with Future Retail in a bid to cut down on costs and streamline operations. Kishore Biyanis FVRL operates 159 Big Bazaar stores, 28 Food Bazaar stores and several KBs Fairprice convenience chain of stores.
While sources add that the market watchdog has indicated that the deal cannot be permitted in the current structure, company officials say that the necessary clarifications have been submitted to Sebi and the deal is not detrimental to the interests of minority shareholders. An email query sent to Sebi on Friday remained unanswered till the time of going to the press.
"Sebi has been seeking certain clarifications against the convertible instruments to be issued pursuant to the merger. The necessary clarifications have now been given to Sebi through stock exchanges. As the wholly-owned operating entity is merging into the listed entity, it would give better transparency in operational reporting to the shareholders. Further, since there is no dilution of equity the deal is not against the interest of minority of shareholders, a Future Retail spokesperson told FE in an emailed response.
Future Group has been restructuring itself for the past two years to cut debt and align its businesses. Earlier this year, the company sold its Pantaloons format to Aditya Birla Group, apart from divesting its non-core businesses like insurance. Last year, it also de-merged its fashion businesses into a separate company called Future Lifestyle Fashion, thereby creating verticals for facilitating FDI in multi-brand retail.
Meanwhile, the scheme was reconsidered by the board again in March this year where it was decided that no shares would be issued to shareholders of FVRL, and that holders of compulsorily convertible debentures (CCDs) in FVRL would get CCDs or optionally convertible debentures in Future Retail and their conversion into equity shares of Future Retail will happen in FY15 and FY16.
FVRLs parent company, Future Retail, comprises the eZone chain of electronics store and home furnishing chain HomeTown. Future Retail had reported a total income of Rs 362 crore for the July-September quarter, while the companys net loss stood at Rs 10 crore.
These numbers are, however, not comparable to the previous year. In March, the company had merged the operations of eZone and HomeTown as it sought to turn the businesses around. After a year to make them profitable, the company will seek strategic investors for the businesses.
FVRL reported a profit of Rs 2 crore during the July-September quarter, while its revenue stood at Rs 1,954 crore. These numbers are not comparable to last year due to the companys restructuring. FVRLs same-store sales growth stood at 8% during the September quarter, while sales growth in the April-June quarter was 10.4%.