May 09, 2012 03:40 PM IST | Source: CNBC-TV18

Has Escorts' merger plan hit a roadblock, courtesy IIAS?

It's the battle of wills as Escorts goes head to head with IIAS. Escorts' reorganisation plan, involving three of its associate subsidiaries. is being termed as a breach of corporate governance.

It’s the battle of wills as Escorts goes head to head with Institutional Investor Advisory Services (IIAS). Escorts’ reorganisation plan, involving three of its associate subsidiaries - ESCOTRAC, EFILL and ECEL with itself through the Escorts Benefit & Welfare Trust, is being termed a ‘breach of corporate governance’.

The minority investor advisory firm argued that this merger was just a ploy by the promoters to increase their stake and voting rights in the company. If the proposal is approved by shareholders on May 20, it will give the promoter Nanda family voting rights in excess of 40%. The family’s direct shareholding in the company is currently at 12.43%.

Amit Tandon, founder and managing director of IIAS tells CNBC-TV18 that the merger is detrimental to the interests of minority investors and that they should vote against it.

However, G B Mathur, group head - Legal and Secretariat, Escorts Limited defends the company’s proposal saying there would be no change in the promoter shareholding post the merger of the firms with the parent company.

Escorts says it sees long-term advantages with this union and claims that its intention behind the merger will help the company become an engineering conglomerate.

In an interview with CNBC-TV18, Amit Tandon, Founder & MD of Institutional Investor Advisory Services India (IIAS) and G B Mathur, Group Head - Legal and Secretariat of Escorts Limited discusses issues related to the merger.

Below is the edited transcript of the interview with CNBC-TV18. Also watch the accompanying video.

Q: Since you have raised some serious issues about this merger, what is making you uncomfortable? What are your principle reservations?

Tandon: We don’t agree with the rationale of the merger itself. I think, our read is that the only rationale for the merger appears to be for the promoters to shore up their voting in the company.

On a more fundamental basis, our issue is the fact that you have got associate companies and subsidiaries. The associate companies also by all intents are subsidiaries of the company because the company effectively controls about 97-98% of it either directly or indirectly.

If you suddenly take shares from these companies, merge it with the parent, issue shares in Escorts and then claim that these are treasury stocks, which are being transferred to a trust. This is something which we have a strong objection to. This is why we have requested that institutional investors should go and vote against the merger proposal.

Q: Let me ask you to respond to that with specific reference to explaining to viewers and investors, what exactly is the direct shareholding for Escorts at this point? And what is the commensurate voting right or voting control that you hold over the company?

Mathur: One doubt I want to clear right at this stage is that there is no change in the promoter voting block. The block as of today, would remain where it is because the shareholdings by promoters are won directly. The other is through another group company which is a part of the promoter block and we have shown it as it is in the various disclosures made to the stock exchanges.

The only thing changing is that the company holding is now getting into a trust. To say that the reason of this merger is to improve the promoter block etc. is absolutely a false allegation.

There are synergies, the board of directors has studied the whole proposal at length. They have applied their mind and they have found that this merger would be in the interest of this organization, shareholders and everyone else because the shape of Escorts is going to change when ECL gets merged into Escorts.

It will become an engineering conglomerate. It will not only be a single product company, there will be a lot of synergies, economies, forming a seamless organization with one culture. That is very important for achieving aggressive growth on which Escorts is moving these days.

Q: Post the merger of these three companies, what exactly does the direct shareholding of Escorts promoters become and what are your voting rights or voting control in the company post merger of these three companies. Give us those two figures?

Mathur: It remains the same. There is no change to whatever we have disclosed to the stock exchanges so far.

The treasury stock that is going to be created upon this merger doesn’t belong to the promoter. That is an absolute fallacy.

That block would remain for usage at any point. It is like a war chest that we have created in case the company has got any acquisition opportunities. These treasury stocks will then be used for that purpose. The owners will have no control on it because the trust would be managed by independent trustees.


Q: The principle rationale from the company’s point of view is that there is no direct change in the promoter holding. Shares have been put into a trust, the trust is being controlled by independent directors and not by the members of the promoter family. Therefore, there should be no question of promoters raising their stake, your response to that?

Tandon: At the moment, we don’t know who the trustee would be but, if we go back and look at some of the other trusts, we have OK Balraj who is the trustee and the CFO of Escorts. If push comes through, we know where they are going to be voting.

The other thing which kind of appalls me is the fact that you have got a 100% subsidiary, you merge the 100% subsidiary with the parent company and the right thing would have been to extinguish the shares which you have decided to give. But, here you are saying that we are merging the subsidiary with the parent and a 100% subsidiary, not a 50% or 25% subsidiary.

If you merge it with a parent, issue them 8% shares and then you transfer them to a trust, you probably have Mr OK Balraj or someone equivalent who comes in as a trustee and votes on the shares. We pretty well know in these instances where the voting is.

Our strong view is on treasury stocks. Our view is, the stock should be extinguished on the merger. The second is that you should not be allowed to vote on treasury stocks. These belong to all the shareholders.

You cannot say that I own 20% of a plant and machinery and therefore, I own 20%. We are against voting on treasury stocks. Both these issues are relevant from our perspective.

Q: Could you respond to them? Why are the shares not being extinguished and would any of the people like the CFO, people close to the promoter group be trustees in the Treasury Shares Trust you are creating?

Mathur: The first allegation that OK Balraj is part of the trust. That trust is an employee stock option trust, so there is absolutely no comparison. Second, the trustees will be independent directors of the company and they will be people of very high repute. They are the people who would never get influenced by the promoters to do whatever the promoters want to do.

Third question is why it should not have been cancelled and why they are being put in a trust. This is not the first time that Escorts is doing it. This has happened many times. To quote a few names Reliance has done it, Mahindra has done it when they merged Punjab Tractors and UB Group has also done it.

This is not for the first time that we have invented something and we are not going to do something which is not within the course of law. The approvals have already been granted by stock exchanges. They have seen and read the scheme through and there is total justification to whatever we are doing.

I have already stated, we want to create a warchest. Therefore, at any point in time when the company needs funds, instead of going here and there and doing rights issues etc, it is a much better option that the group is creating. I don’t see any reason why there is furore about it. This is not the first time it’s happening in the country.

Q: Two more clarifications - what the Nanda family’s voting rights stands at in this Welfare Trust that you are setting up and second, on whether or not it is true that the Nanda family has been buying from various domestic mutual funds by way of creeping acquisition in the open market?

Mathur: Creeping acquisition is allowed under the takeover code. I think all the promoters would like to strengthen their position in the voting block. So, they have acquired at the market price from Reliance Mutual Fund at 4% equity. As far as this trust is concerned, let me repeat, Nanda family has got absolutely no clue of this trust, they are not a part of this trust.

Q: What, according to you, might have been a more elegant way of doing it? I believe, you have recommended for the shareholders not to vote in favour of this. What is the sense you get in terms of what minority shareholders feel about that?

Tandon: The first is, if you were to look at the filings with the stock exchange, the promoters now post the acquisition of shares from 4% creeping acquisitions which they did about 2-3 weeks back. Their holding is about 12.4%.

But, if you then go back and look at their filings, it is quite interesting. You look at their filings with the Bombay Stock Exchange in 2002-2003-2004 or even as late as 2007, the two associate companies and while they treat them as associate, our view is that they are subsidiaries. Therefore, we have some concerns on the disclosure but leave that.

They were actually showing the associate companies as persons acting in concert. Then in 2009 and 2010 and 2011, suddenly they started showing them as part of the promoter group and consequently controlled by the promoter. That is one of the issues we have with the disclosure.

As far as we are concerned, I think the company has got a reasonably fair size. It doesn’t have much debt. Therefore, the shares could have been extinguished quite easily, wherein the promoter shareholding of course would have gone up marginally.

But, I think they were feeling a bit threatened with their holding. If the shares were extinguished, it would have moved up from about 12.5-15% but, at the end of the day that is the right way of doing it. He did mention companies like Mahindra or ICICI and Reliance. But, all those cases were of listed entities, where as a consequence of the merger, the treasury stock was created.

I am yet to come across an instance where a 100% subsidiary is being merged with the parent and then suddenly the stock is being created out of that. This is poof, it is out of nowhere. That is what we are objecting to. If it is so, let the shares be extinguished, the money belongs to the shareholders, shareholders would be better off with a leaner and a smaller equity structure, more dividend, more EPS rather than what the company has proposed at this stage.

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