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Apr 18, 2017 03:41 PM IST | Source: CNBC-TV18

Is it right of Indiabulls Real to announce restructuring soon after buyback?

One thing is very sure that nobody will be buying this theory that only after the buyback was completed suddenly an idea triggered in the minds of the company that let us go for restructuring, said JN Gupta, former ED, Sebi and MD Stakeholders Empowerment Services.

Indiabulls Real Estate bought back 3.4 crore shares from December 16, 2016 to April 10, 2017 and spent a total of Rs 272 crore at an average buyback price of Rs 80 per share.

The maximum price at which the equity shares were bought back is Rs 90 per share and the minimum is Rs 67 per share. The promoters did not participate in the buyback.

However, the big question is have the minority shareholders got a raw deal?

To discuss this CNBC-TV18 spoke to JN Gupta, Former ED, Sebi and Managing Director at Stakeholders Empowerment Services.

JN Gupta
JN Gupta

    Below is the verbatim transcript of the interview.

    Nigel: First things first, not just for Indiabulls Real Estate, but on the whole, when a buyback does conclude, should there not be a cooling off period post that? Is there a cooling off period first of all and should there not be one?

    A: The law is not clear on this. The law only prohibits that there should not be any further issue of capital for a period of one year after the buyback closes. And second buyback also cannot commence within a period of six months or something like this.

    But, we must understand that the law cannot envisage each and every situation. We have to go by the aspect of the law. Now when the law prohibits that no further issue of capital happens, technically speaking, the company can always say that if any merger or demerger takes place that equity issue can happen because it is with the permission of the High Court or National Company Law Tribunal (NCLT) as the case may be.

    But again what happens, when you deal in a buy and sell transaction, it is always said that it is a transaction between a willing buyer and a willing seller. But in the stock market situation, it is not the case.

    In the stock market, it is very clear that the party who is buying this way the company has to be very clear about the disclosures. Now is it a case of a company that they till April 14, did not know and did not plan any merger or restructuring - it cannot be accepted because it is not possible that suddenly Sunday night, they got a dream and they said okay, let us do this restructuring.

    So, it very clear that it was there in the mind. Therefore if it was there in the mind, it should have been disclosed to the shareholders because when shareholder would have taken, in the stock market you say that it is an informed decision that is required to be taken by the shareholder. The entire theme of regulation is that the companies ought to inform shareholder about the details, so that shareholders can take an informed decision. In this particular case, the information is missing.

    Now, what is the outcome?

    Indiabulls, if you see their board structure, they have got three former Supreme Court judges on the board of Indiabulls Housing and maybe two former Supreme Court judges on the board of Indiabulls Real Estate as well. So, probably as per the legal system is concerned and the legal guidance is concerned, they would have sought legal guidance and maybe there is not an iota of doubt that legally what they are doing is correct.

    But, our belief is that the legality is one aspect, the governance and good governance begins only when the boundary of legal requirement ends.

    So, here it is a case where in my opinion, it is not a good governance, shareholders have not been given full permission and in sense of a device or edifice, they have been led to give. More importantly, if you remember in a buyback set that promoters are not going to participate in the buyback transaction. So, that is a very clear indication that the promoters never wanted to dilute their equity in this. And that is where, unfortunately, the shareholders do not understand all these nitty-gritty of the transaction and they are led to garden path.

    Reema: Yes, in fact the promoter holding would have gone up because they did not tender in the buyback.

    A: It has gone up by 3 percent.

    Reema: So, they stand to benefit at the stock being at Rs 144 whereas the minority shareholders tendered it at an average price of Rs 80. So, since that level, the stock has moved up 80 percent. So, that is the extent to which the shareholders have been at a disadvantage. But from here on, is there any recourse for the minority shareholders because as you said, legally, they are within the boundaries that has been set by the law. So, is there any recourse for the minority shareholders?

    A: I would say that there is nothing which is cast in iron in any situation. Now the shareholders who have done this, it may not be a case that the transaction would be reversed, but they can always appeal to SEBI and the stock exchanges, saying that the information there was not complete. Now it will be the job of regulators to see how they can determine whether the information was complete or not.

    But one thing is very sure that nobody will be buying this theory that only after the buyback was completed suddenly an idea triggered in the minds of the company that let us go for restructuring.

    It is not a sequential event that mind will start working only after this event happens and my mind will be energised. I do not agree with that logic.

    Nigel: Today it is only about Indiabulls Real Estate, but do you not think we should have a law in place where in fact, for future cases like these, minority shareholders, they are really protected. That is the big question.

    A: The issue is very clear. As it is, everybody complains that SEBI has made so many laws, life is difficult, compliance is difficult, but nobody comes to blame the issuers of companies that it is because of your act that SEBI or any other regulator is forced to make so many laws.

    And secondly, whenever a law-maker makes a law, he cannot envisage each and every possible situation that will be coming in the future. The idea is a law is to be respected for its spirit, not for the content alone because you cannot envisage millions of situations that I can devise to defraud investors. So, the idea is that you have to, and I would say, with due respect to Honourable judges on the board, they should also have seen this - whether it is fair or unfair, whether the disclosures were proper or not proper.
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