Holcim-Ambuja-ACC Deal: Win Win!
By: Menaka Doshi, CNBC-TV18
Holcim-Ambuja deal: Win Win
As you will recall and as discussed in a previous blog here there are 2 parts to the deal.
Part One - First Ambuja spends Rs 3500 crore to buy a 24 percent stake in Holcim India via an agreement - no shareholder approval required.
Part Two - Holcim India is then merged with Ambuja via a scheme, in which Ambuja issues 58.4 crore shares to Holcim India’s parent - Holcim. Since Holcim India owns 50 percent in ACC, the merger scheme would make Ambuja the controlling shareholder of ACC. A scheme must be approved by shareholders and new SEBI regulations require schemes to get approval from a majority of the minority.
This two legged transaction had some investors worried. Proxy advisory firm IIAS wrote in its report
“If the transaction is directly placed for shareholders’ approval at step two, the entire cash of Rs 35 billion will have been transferred to Holcim without taking shareholders’ approval (it is within Holcim’s rights to do so). Consequently, the minority shareholders will have no option but to vote FOR the resolution on issue of shares since the entire cash would have already been transferred to Holcim. The minority shareholders should seek confirmation from the company that it will take approval for both steps of the transaction.”
Let’s say if minority shareholders (the majority of the minority) were to vote against the Scheme, then there could arise a situation in which Ambuja spends all its cash buying 24 percent of Holcim India but is unable to fulfill the second leg of the transaction that gives it control over ACC.
IIAS concerns now have a response from SEBI. In a letter to the stock exchanges (NSE & BSE have both accorded a ‘no-objection’ to the draft Scheme submitted by Ambuja) SEBI has done 2 important things to level the playing field for minority shareholders.
1. SEBI has observed that ‘the agreement and the draft Scheme of Arrangement are interdependent transactions and not independent transactions…’
2. SEBI has commented that ‘Para 7 of Circular dated May 21, 2013 shall also be complied with separately for the said agreement dated July 31, 2013 and the draft Scheme of Arrangement.’
Para 7 of the May 21, 2013 circular ‘the Scheme shall be acted upon only if the votes cast by the public shareholders in favor of the proposal are more than the number of votes cast by the public shareholders against it…’ ie: Approval by majority of minority.
In short SEBI seems to be saying that both parts of the deal are contingent on each other and that the purchase of 24 percent of Holcim India for Rs 3500 crore cannot be acted upon unless the scheme is approved. And that minority shareholders will get to vote on both parts of the transaction. And in both votes, the majority of the minority will prevail.
To be fair, the Ambuja management had, at the time of announcing the deal, said that it will give shareholders a chance to vote on the ‘entire’ transaction. But given the negative response to the purported restructuring, there was fear that maybe shareholders would get to vote only on the scheme. Which would be a no-option option as the cash would have fled the company already.
Now all that worrying been put to rest - minority shareholders get to vote on the cash outflow and the ACC inflow! Majority of minority rules in both votes! Level playing field for investors!
This is good news for all minority investors and governance activists!
This regulatory development may give Holcim sleepless nights. Maybe it will even attempt to challenge SEBI’s new guidelines on shareholder approval for a Scheme Of Arrangement? After all SEBI’s requirement of ‘majority of minority’ goes beyond the minimum thresholds laid down in the Companies Act, 1956. That will make for an interesting twist!
But the other regulatory development should soothe Holcim’s nerves. One of the obstacles this restructuring faced was an RBI guideline on foreign investment. As reported by Business Standard, a July 4th, 2013 circular by RBI disallowed a foreign owned/controlled Indian operating company from using internal accruals to make downstream investments. Only investment companies were allowed to do so - condition incongruent with the FDI Policy - but notified by RBI nonetheless. The July circular reads…
'For the purpose of downstream investment, the Indian companies making the downstream investments would have to bring in requisite funds from abroad and not use funds borrowed in the domestic market. This would, however, not preclude downstream operating companies, from raising debt in the domestic market. Downstream investments through internal accruals are permissible by an Indian company engaged only in activity of investing in the capital of another Indian company/ies, subject to the provisions above and as also elaborated below:’
This restriction would have hurt Ambuja’s ability to pay Rs 3500 crore in cash (internal accruals) for acquiring 24 percent of Holcim India.
But last week RBI changed its mind. Aligning its guidelines with FDI policy, the regulator has amended the offensive clause to say 'For the purpose of downstream investment, the Indian companies making the downstream investments would have to bring in requisite funds from abroad and not use funds borrowed in the domestic market. This would, however, not preclude downstream operating companies, from raising debt in the domestic market. Downstream investments through internal accruals are permissible by an Indian company, subject to the provisions of clause 6(i) and as also elaborated below:’
This is good news for Holcim!