Institutional Investors Advisory Services (IIAS), a Mumbai-based proxy advisory firm, has recommended shareholders to vote against the proposed merger of Gujarat NRE Coke and Bharat NRE Coke, citing poor governance which would affect the interests of minority shareholders.
IIAS has questioned the management’s rationale for selling 30% stake in Bharat NRE in FY09 and then buying back 70% in FY13 at a higher valuation. Further, it has also questioned the incremental tangible benefits that would accrue to Gujarat NRE Coke from the amalgamation, as the Dharwad facility is already under operational lease by the company, IIAS stated in its recommendation report.
As per the report, the proposed amalgamation would aid the promoter group to increase its stake in Gujarat NRE Coke without triggering an open offer, as shares acquired pursuant to scheme of amalgamation are exempt from making an open offer under SEBI Takeover Code 2011.
Based on the scheme of amalgamation, for each share of Bharat NRE Coke, two shares of Gujarat NRE Coke will be issued. Gujarat NRE Coke currently owns close to 30% in the subsidiary firm. The promoter shareholding has already increased by 4.62% to 50.68% as of November 23, 2012, from 46.06% in March 31, 2012, primarily on account of conversion of 45 million preferential warrants at R21.08 per share on November 23, 2012.
By including shares to be issued pursuant to this proposed amalgamation, the promoter shareholding will increase to 54.72%, an aggregate of 8.66% increase in the current financial year.
IIAS also red flags the inconsistent use of valuation methodology. Based on the current swap ratio, Bharat NRE Coke was now valued at around R154 crore, implying a rise of 4.2 times in valuation.
In FY09, Bharat NRE Coke became an associate company by virtue of its holdings falling to 30%, which was sold to the promoter group. As per FY09 financial statements, nearly 30% stake was sold at R109 million. The implied valuation of Bharat NRE Coke in FY09 was R363.2 million. The book value of its investment in Bharat NRE Coke as on March 31, 2009, for remaining 30% was R108.3 million.
The report said Bharat NRE Coke should have been valued at book value. By using a different valuation methodology, promoters of Gujarat NRE Coke have gained at the cost of minority shareholders. “By buying and selling 30% stake acquired in FY09 from Gujarat NRE Coke, the promoter group stands to make R35.16 crore (30%