Questioned by proxy advisory firm, JSPL defers EGM for related party power deal

In a report to subscribers, proxy advisory firm Stakeholders Empowerment Services (SES) has questioned the valuation of the deal, particularly in absence of a valuation report, the lack of transparency in the sale process, and financial restructuring in JPL after the process of its divestment had already started.

“There is something amiss here as the Board (even the audit committee) could not be selling gold for silver,” SES said in its report.

Moneycontrol has reviewed a copy of the SES report, in which the company has also responded.

According to the proxy advisor, the valuation of JPL would be more than Rs 20,000 crore. It cited several examples as benchmarks. For instance, earlier JPL had proposed to sell a 1,000-MW plant in 2019 to JSW Energy for an enterprise value (EV) of Rs 6500 crore, which comes to Rs 6.5 per MW. Applying this yardstick, 3,400 MW worth of power assets would be around Rs 22,100 crore, SES said.

Similarly, for the sale of captive power plants of JPL in Angul, Odisha, and Raigarh, Chhattisgarh, the EV derived was Rs 19,494 crore, it said. This transaction was proposed even before the JPL-JSW Energy deal in 2019. Both deals did not happen.

In its response to the SES note, JSPL, has termed the valuation comparison “misleading.”

“The thermal power industry has drastically changed over the years and valuations it may have garnered a few years back would be irrelevant in the current time period. Comparison with similar recent transactions of similarly placed assets would depict a valuation range similar to or lesser than the current transaction,” it said.

“Further, PPAs (Power purchase agreements) of lesser than 30 percent of JPL’s total capacity, rising ESG concerns for thermal plants and the intense competition it faces from the renewable power sector are factors which the report has failed to consider. We are of the view that a further delay will only make it more challenging for the company to divest these assets,” it said.

Financial restructuring

Apart from the deal valuation SES also raised concerns on JPL issuing preferential equity to JSPL at 5 percent after it started the divestment process. During FY2020-21, JPL had allotted these non-cumulative redeemable preference shares (RPS) to JSPL for Rs 6,803 crore. These preference shares fetch a dividend of 5 percent.

On the other hand, JSPL had received deposits and taken capital advances from JSPL (for a total of Rs 4,386 crore). As part of the transaction, JSPL asked shareholder approval to convert these into a loan at 9.7 percent interest.

According to SES, these terms are unfair. It said that the yearly loss to JSPL on account of the differential is Rs 85 crore and that JSPL is out of pocket by Rs 2,417 crore (the difference between the loan and the preference share amount).

It also questioned the timing of the preference share issue when the divestment of JPL was already in the works. SES feels this would make the company unattractive for other bidders, it said.

“If JPL was not a related party, would JSPL block Rs 7,000 crore in a 20-year sub-par RPS when it aims to reduce debt? SES is of the view that the entire structuring was orchestrated to ensure Naveen Jindal is the winner with the least price tag,” it said in the note.

The proxy advisory questioned the very need for these preference shares and said any bidder would have offered cash for the same amount.

In its response to SES, JSPL said comparing the dividend rate on redeemable preference shares issued as a bonus with the interest rate on inter-corporate deposits would be “comparing apples to oranges.”

“It is necessary to note that the RPS were issued as bonus shares and were not independently subscribed to by the Company (JSPL) as a separate transaction where it could have negotiated the terms against the investment it was making,” said JSPL. It also pointed out that if dividend on these preference shares were unpaid for at least two years, it will get majority voting rights under company law. JSPL also added that the option of buying these preference shares was offered to all interested buyers of JPL.

Debt reduction

One of the objectives of the sale, according to JSPL, was debt reduction, and another was to improve its ESG (environmental, social and corporate governance) score.

If debt reduction were case, why did JSPL not redeem its preference shares, pay off the advances and deposits taken from JPL, and reduce its debt by Rs 2417 crore, asked SES.

The proxy advisor also suggested that demerging JPL from JSPL is a better option.

For one, it would allow ESG sensitive investors to exit at a market discovered price. Two, debt reduction objective would also be met, at least, partially. Three, the valuation and transparency concerns would disappear.

SES questioned JSPL about not disclosing the details of 33 other bidders for JPL and their bid amounts. It also raised concerns about the lack of a valuation report.

On its part JSPL said that a valuation report was not mandatory under company law.

The deal “has raised a few eyebrows,” said Sonam Chandwani, Partner, KS Legal. “Despite the stringent provisions regulating transactions of such nature, selling of 96.7 percent for a price as low as Rs 3,015 crore which clearly harms the interest of the shareholders does seem fishy. Deferring an extraordinary meeting certainly does not set the tone right and is absolutely preposterous”.