InGovern against plan to merge Piramal with holding company

Written by fe Bureau | Mumbai | Updated: Feb 28 2013, 08:49am hrs
Proxy advisory firm InGovern has voted against the recommendation for a composite scheme of arrangement and amalgamation between PHL Holdings (PHPL) and Piramal Enterprises (PEL). It has cited inadequate disclosures on promoter group entities and related party transactions between these promoter group entities made prior to this scheme to effect this merger.

The advisory firm has also said that the objective for this amalgamation can be achieved through an inter-se transfer or a scheme of amalgamation at the promoter group level and does not suggest any specific business logic for PEL shareholders.

The scheme of amalgamation proposes to merge PHPL with PEL. PHPL is a company forming part of the promoter group of PEL and holds 84,092,879 equity shares in PEL, constituting 48.73% of PELs share capital. This seems to be a straight forward merger of a holding company with its listed subsidiary, where shareholders of PHPL will directly get shares in the listed entity, PEL. However, the company, in its notice to its shareholders, has not made sufficient public disclosures on PHPL or its step down subsidiaries, according to InGovern.

A deeper scrutiny of PHPL reveals that it had entered into related party transactions with its step down subsidiaries in the past three years (which have now been merged with PHPL in October 2012), which raises concerns with regards to the current scheme of amalgamation between PHPL and PEL, stated the InGovern report.

InGovern looked at filings made by PHPL and its step down subsidiaries for the past three years, in addition to the public filings and stock exchange filings made by PEL during this period. The company has clarified that PHL Holdings will not have any debt in the books of PHPL as on the appointed date and that there will be no adverse impact on the financials of PEL due to the merger.

The company should clarify to its shareholders the rationale for these past transactions and their potential effect due to these related party transactions on PEL shareholders if the current merger goes through. The company should also publicly disclose the financial documents for PHPL ending September 30 and December 31 as well as all scheme-related documents for greater public scrutiny, observed InGovern in its report.

The rationale for the current scheme as mentioned in the notice to the shareholders states that the promoters of PEL desire to streamline and realign their current shareholding in PEL and eliminate multi-layered shareholding structure. However, InGovern pointed out that this rationale does not seem to suggest any specific business logic since the same objective could have been achieved through an inter-se transfer.

In another listed group company, Piramal Life Sciences, PHPL recently transferred its shareholding to Sri Krishna Trust, the holding company of PHPL, through an inter-se transfer. We cannot see why the same couldnt be achieved in PEL through this route. If not, the promoters could have merged their group entities and streamlined their multi-layered shareholding structure in PEL, stated the InGovern report. We urge the company to provide more clarification on the business rationale for such a transaction.