Corporate Governance Alert – Escorts Restructuring

 

Download the full report: Escorts Restructuring – InGovern CG Alert

 

Escorts Limited (EL) is seeking shareholders approval through a CCM dated 20th May 2012, for the Scheme of Arrangement and Amalgamation of Escorts Construction Equipment Limited (ECEL); and Escotrac Finance and Investments Private Limited (Escotrac); and Escorts Finance Investments and Leasing Private Limited (EFILL) with Escorts Limited and their respective shareholders and creditors.

 

 

Escorts Limited

Index

S&P CNX 500

Market Price/share

Rs. 68.60

Market Cap.

Rs. 724 cr

Total Issued Shares

10.56 cr

Free Float

72.33%

52 week high price

Rs. 149.00

52 week low price

Rs. 62.85

(As on March 31st 2012; cr: crores)

 

  • The promoters of Escorts seem to be controlling the company through a convoluted shareholding structure. If you simplify the shareholding structure as of March 31, 2011, the promoters owned beneficial interest of 8.34% (prior to buying shares in April through market transactions).
  • The amalgamation of ECEL should result in treasury shares. ESCOTRAC’s (12.83%) and EFILL’s (6.50%) holdings in Escorts are just convoluted holdings and when amalgamated shouldn’t result in any increase in promoter shareholding.
  • The complex proposal placed in front of shareholders seems to be to increase the promoters’ shareholding and is detrimental to the interests of minority shareholders.
  • Such amalgamations should be a matter for concern by institutional shareholders and regulators. Value of minority shareholders is destroyed overnight and promoters justify it by saying that it simplifies shareholding structure and enhances wealth of all shareholders.
  • We recommend investors vote AGAINST the proposal.

 

Escorts Limited – Leading Institutional Shareholders

Sl. No

Name of the shareholder (as on Mar 31, 2012)

Number of shares

% shareholding

1

Life Insurance Corporation Of India

3111628

2.95

2

Reliancae Capital Trustee Company Ltd

8474268

8.02

3

Barclays Capital Mauritius Limited

1473000

1.39

4

Fid Funds (Mauritius) Limited

4705886

4.46

5

Credit Suisee ( Singapore) Ltd

1329421

1.26

6

Macquarie Bank Ltd

2288000

2.17

7

Sundaram Mutual Fund

3570937

3.38

8

Dimensional Emerging Markets Value Fund

1272669

1.2

9

Rajan Nanda (Trustee Of Escorts Benefit Trust ) Holding Shares Pursuant To The Order Of High Court Delhi

1381050

1.31

10

O K Balraj (Trustee Of Esos- 2006)

3313612

3.14

Total

30920471

29.28

 

Transaction Highlights

Escorts Limited’s restructuring is a complex inter-group transaction that the company is seeking shareholders approval for. The company did not make any announcement for this CCM, nor was any notice calling shareholders meeting put up on the company website or NSE / BSE. The company had only submitted to the exchange an Outcome of Board Meeting held on Feb 14, 2012, wherein the Board approved this scheme of arrangement. The highlights of the transaction:

a)      Escorts Construction Equipment Limited (ECEL), Escotrac Finance and Investments Private Limited (ESCOTRAC) and Escorts Finance Investments and Leasing Private Limited (EFILL) will merge with Escorts Limited (EL).

b)      ECEL is a wholly owned subsidiary of EL. Equity shares of ECEL held by Escorts, shall not get cancelled but will be transferred to and vested in Escorts Benefit & Welfare Trust, which shall be settled by Escorts upon the approval of the Scheme.

c)      According to the company, EFILL and Estrotrac are joint ventures of EL. EL holds 49.81% in both the companies. Also, EFILL and Estrotrac hold 49.81% in each other. So, in total, directly or indirectly, EL holds 99.62% in both the companies.

d)     Also, EFILL and Estrotrac, holds, 6.50% and 12.83% respectively in EL and 26.70% and 31.68% respectively in Escorts Finance Limited.

e)      Also, EL holds 9.49% in Escorts Finance Limited before this scheme of arrangement; hence post the amalgamation of EFILL and Estrotrac, EL will effectively hold 67.87% in Escorts Finance Limited (EFL). All shares held by EFILL and Estrotrac in EL and Escorts Finance will be transferred to Board of Trustees of the EFILL Benefit Trust and the Escotrac Benefit Trust. Upon the amalgamation, both these trusts will merge into the Escorts Benefit & Welfare Trust.

f)       Pursuant to this scheme, the following is the share swap ratio:

i.            4 equity shares of Rs. 10 each of EL for every 27 equity shares of Rs. 10 each of ECEL. This will be issued to the Escorts Benefit & Welfare Trust as ECEL is a wholly owned subsidiary of EL.

ii.           4 equity shares of Rs. 10 each of EL for every 27 equity shares of Rs. 10 each of Escotrac.

iii.          4 equity shares of Rs. 10 each of EL for every 39 equity shares of Rs. 10 each of EFILL.

g)      Post this amalgamation, the authorised share capital of EL will stand increased by Rs. 439 crores to an authorised share capital of Rs. 1289 crores divided into 40.10 crore equity shares of Rs. 10 each and 88.08 crore unclassified shares of Rs. 10/- each.

 

InGovern Analysis

a)      A complicated cross ownership structure is put up so that promoters maintain control.

b)      As at 31st March 2012, the promoters held 27.67% stake in Escorts Limited. Considering the holding of 19.33%, i.e., the total of 12.83% and 6.5% respectively held by Escotrac and EFILL in EL which in-turn directly / indirectly holds 99.62% of Escotrac and EFILL, the promoters net holding is just 8.34% in EL as the rest is held indirectly by EL itself. Hence in a clear structure, the promoters would have owned only 8.34% in EL. Escotrac and EFILL are considered as joint ventures by EL, but are actually subsidiaries that are funded by EL. So, EL indirectly owns 19.33% of its own shares.

c)      It is only through a convoluted structure and cross-holdings and unclear valuation, the promoter holding is increasing from 27.67% to 37.68% due to the above amalgamation of a wholly owned subsidiary and the two joint ventures (which are actually subsidiaries!).

d)     No disclosure of the valuations or rationale used to arrive at the swap ratios.

e)      Creation of treasury shares through trusts leads to lack of transparency and dilution of minority interest.

f)       The above transaction leads to a 13.84% dilution for existing non-promoter shareholders.

g)      In April 2012, the promoters bought 4.2 million shares or 4% stake held by Reliance Asset Management Co. in the company for Rs. 320 million through open market purchases.

h)     Considering the above, InGovern recommends institutional investors to vote AGAINST this proposal.

 

For detailed Vote Recommendation Report, write to info@ingovern.com