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.
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.
Escorts stock price
On November 27, 2015, Escorts closed at Rs 164.95, down Rs 2.25, or 1.35 percent. The 52-week high of the share was Rs 189.00 and the 52-week low was Rs 101.60.
The company's trailing 12-month (TTM) EPS was at Rs 8.23 per share as per the quarter ended September 2015. The stock's price-to-earnings (P/E) ratio was 20.04. The latest book value of the company is Rs 143.86 per share. At current value, the price-to-book value of the company is 1.15.
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