Open forever

Mandatory open offer: Removal of time limit is welcome

SEBI is reportedly mulling over a proposal to make it mandatory for promoters, having 90 per cent or more of a company’s share capital, to provide an exit route to the remaining shareholders. The proposal’s peculiar feature could be an endless open offer to buy out stake of other remaining shareholders till the entire stake is acquired by the promoters.

Under the current Sebi takeover regulations, if an open offer results into the public shareholding dipping to 10 per cent or below of the voting capital of the company, the acquirer has got two options. The first option for him is to buy out the outstanding public holding at the same offer price within a certain period, which may result into de-listing of the target company. Otherwise, the second option is that he has to give an undertaking to disinvest his stake through an offer for sale or through a fresh issue of capital to the public, so as to satisfy the listing requirements.

Small shareholders very often fail to respond to the mandatory open offer made by promoters. Such shareholders then get stuck with the shares of the company as it is delisted owing to the fall in public shareholding to 10 per cent or below. These shareholders are then left at the mercy of the promoters to sell their holding in the company. Therefore, the suggestion to keep the mandatory offer open forever till the promoters’ stake reaches 100 per cent is a welcome move.

However, it may not be an easy task for the promoters to comply with this suggestion. An open offer involves a lot of legal hassles such as compliance with the regulations framed by Sebi and stock exchanges as well as reporting the results to them. An endless open offer will require reporting on a continuous basis to the authorities, which will increase the work burden of the promoters and the authorities.

Similarly, there could be some problem as to the price at which shares have to be purchased after the mandatory open offer. Occurrence of an extraordinary event may severely affect the performance of a company. In such a case, it may not be fair to force the promoters to buy shares from the remaining shareholders at the last open offer price. In such instances, the offer price may have to be scaled down, keeping in mind the then prevailing situation.

Eveready Industries

Eveready Industries (EIL) is finally reported to have struck a deal with ICICI wherein its Rs 300-crore term loan will be converted into a foreign exchange loan at an interest rate of libor plus 2.3 per cent. Another Rs 300 crore loan has been renegotiated to bring down the average interest rate to 12.5 per cent (14 per cent). The financial restructuring deal was hanging fire for quite some time now as the company has been desperately trying to wriggle out of debt overhang. Its debt burden stood at a staggering Rs 849.3 crore as on March 2001, while total income was Rs 1,017 crore.

EIL’s unrelated forays have only resulted into destruction of shareholder value as is evident from the drastic fall in its ROCE and RONW. While the former declined to one-third of what it was in 1995, the latter came down to one-seventh. Dry cell batteries contributed only 50 per cent of the total turnover in 2000-01 even as the company enjoys a lion’s share of 41 per cent in the dry-cell segment.
Bulk tea is the other major item contributing to the turnover. However, over capacity and the resultant drop in domestic and global prices of tea prompted a U-turn in EIL’s strategy of acquiring tea estates. Why till last year, the company was bullish on tea industry and was on an acquisition spree of tea estates.

Although sales grew seven per cent during the first-quarter of the current fiscal, the same dived 15 per cent to Rs 254 crore. This may be attributed to the drought conditions in the North-East. A lacklustre rural demand exacerbated the problems by adversely affecting the dry-cell division’s growth. The launch of alkaline ‘Max’ batteries and a packaged tea endeavor are yet to reflect on the topline. An ever rising interest cost of Rs 31 crore (Rs 22 crore) precipitated a 50 per cent drop in bottomline to Rs 20.5 crore. EIL is still doing the balancing act of striking operational synergies in product portfolio as divergent and unrelated as batteries and tea. No wonder then that investors are not willing to touch the scrip with even a bargepole.

Prashant Kothari & Sachchidanand Shukla