Grievance relating to delisting of Asian Paints’ founders’ company reaches PMO

Shareholders believe Elcid's share is worth much more than the floor price being offered, because of Elcid's holding in Asian Paints.(Photo by SHVETS production/Pexels)

On March 20, 2022, the market was abuzz with a company’s delisting offer. The promoters of Elcid Investments were offering Rs 1,61,023 when the share was trading at Rs 17!

Elcid Investments is largely owned by the Arvind Vakil family, one of the four who founded Asian Paints.

Some would say the shareholders hit a jackpot with the delisting offer. 

Yet, a minority shareholder is accusing the company and the promoter group of deceit. In a letter to Sebi, the minority shareholder Dhiraj Mittal accuses Elcid Investments and promoters of “engaging in acts that are deceptive and manipulative and apparently oppressive to the non-promoter shareholders”.  The complaint has also reached the grievance cell of the Prime Minister’s Office.

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This isn’t the first time the company is facing trouble with a delisting. The first time Elcid tried to exit the market was in 2013, the year Sebi mandated that listed companies needed at least 25% public shareholding. Since promoters didn’t want to reduce their holding, they offered to buy out public shareholders for Rs 11,455 a piece. It was a huge premium over the trading piece then of Rs 3. The offer was rejected. 

So, why isn’t the offer price never enough, despite the huge premium over the trading price?

Hidden value

Shareholders believe the share is worth much, much more. They are basing their calculation on Elcid’s underlying assets, among which the most priced is its holding in Asian Paints. Elcid owns nearly 4.3% of the blue-chip company. 

Taking the latest delisting attempt. The floor price has been set at Rs 1,61,023, which is a massive increase over the current trading price of Rs 17. Yet, the minority shareholder Mittal has presented a calculation that places the value of a share at a whopping Rs 6,36,405. 

Mittal’s calculation, done through chartered accountants Agarwal Khemani and Associates, is based on Elcid’s holdings in Asian Paints. Elcid and its two fully owned subsidiaries–Murahar Investments and Trading, and Suptaswar Investments & Trading–earn only through returns on their investments. According to Mittal’s accountants, nearly all of Elcid’s net worth–which is Rs 10,165.22 cr, based on the consolidated balance sheet from March 31–comes from the value of its holdings in the paint company, which is 4.06 crore shares worth Rs 10,305 crore. 

Each Elcid share has a claim over 203.07 Asian Paints’ share. Multiply this 203.7 by Asian Paints’ trading price of Rs 3,022 (April 19) and value of each share of Elcid goes up to Rs 6,13,776. Add the book value of Elcid Investment per share–which is Rs 14, 819–since the company has other holdings as well and the total intrinsic value of each Elcid share goes up to Rs 6,28,595.42.

Elcid’s manager to the delisting offer JM Financial has countered this method of calculation. They had appointed chartered accountants SSPA & Co to make a fair valuation of the company. 

SSPA’s valuation of Elcid was based on valuations of comparable listed holding companies. JM Financial’s representative, in an email response to Mittal, said, “a price/ book value multiple of 0.2518 times was applied to the book value of the Target Company as on September 30, 2021”.

Listed holding companies usually trade at significant discounts to the underlying value of the investments (such as Asian Paints), as JM Financial has pointed out. This is because holding companies usually do not liquidate their investment and realise the value of assets, and therefore these assets remain dormant without any trigger for unlocking value.

JM Financial’s representative refused to answer questions related to the delisting, and SSPA did not want to participate in the story. 

Off-market curve ball

The delisting process could have given minority shareholders a chance to realise the fair value of the share through the reverse book building process, but Mittal fears that is unlikely to be the case. In a reverse book-building process mandated by Sebi, the delisting company sets a base price (called the floor price) and shareholders place bids to offer their shares at the same or any price higher.

The final buy-back price offered will be the price at which the shares tendered take the holding of the promoter or acquirer to 90% of the paid-up capital, since this is the thresh-hold for delisting. The promoter can choose to accept this price or not go ahead with the delisting. 

Mittal is concerned that an off-market transaction that took place on March 16, 2022–which was a few days before the delisting announcement–will skew the delisting in the promoters’ favour. This is because the transaction moved a significant amount of shares to Vakil family’s close associates, the Dani family.

Asian Paints was founded decades ago in 1945 by Vakil, Suryakant Dani, Champaklal Choksey and Chimanlal Choksi. 

On March 16, 2022, Delhi-based Hydra Trading Private Limited bought 9.04% stake in Elcid from Rajan Shah of 3A Capital Services. Hydra is owned by Dani and lists Vita Jalaj Dani as one of its directors. Vita is the wife of Jalaj Ashwin Dani, the grandson of Suryakant Dani. Mittal said, “They are just warehousing the shares (to influence the reverse book building process).” Counting in this 9.04%, the Vakil, Choksi and Dani family hold 87.32%. So, Elcid needs to acquire only 2.68% from public shareholders to get ahead with delisting.

Questions sent to Elcid’s promoters and Sebi remain unanswered.

3A Capital Services’ Shah had been an aggrieved shareholder a few years back. He, along with other minority shareholders, in 2018 had approached the Bombay High Court with the issues related to Elcid Investments. Their concern was that the stock was not realising its full value because there was hardly any trading in the stock. There were plenty of willing buyers for Elcid’s shares but there weren’t any sellers because the price that was being quoted at the exchanges were in lower single digits, when shareholders believed that it should be quoting at much higher prices because of its intrinsic value. The intrinsic value that came from its Asian Paints’ holding, much like Mittal’s chartered accountant has calculated. 

Shah and the other petitioners brought to light the fact that there were other off-market transactions taking place significantly higher than the last market price, but not representing the intrinsic value of the stock. An independent director of Elcid, Mahesh Dalal, his wife and daughter had bought 500 shares over six transactions for Rs 20,000-22,000 on February 8, 2018, when the share was trading close to Rs 5 at the stock exchanges. Two years later, on February 20, 2020, Ketan Chatrabhuj Kapadia bought 100 shares for Rs 35,000 when the stock was trading at the exchanges for approximately Rs 8.25. The shareholders wanted Sebi to intervene and set a fair price-discovery mechanism. 

This February, four years after Shah and others approached the High Court, Sebi responded to their complaint. The regulator said that shareholders not being satisfied with the traded price cannot be treated as a complaint. 

The Hydra deal may have come as a relief to Shah. Questions sent to him, including on the price paid for his holding, remain unanswered.

Sell or lose?

As of March 18, the Vakil family holds 74.9% and the Choksi family holds 3.3%. After the recent transaction, the families of founders of Asian Paints together own 87.24%. Mittal fears that public shareholders will be forced to accept the price asked by the promoters’ aides and a very small percentage of other public shareholders to make it to the cut-off 90%, because if they don’t, then they are left with poor choices. 

One, the shareholders could choose to sell the shares in the one-year window available after the delisting process closes. However, this means a higher capital-gains tax of 20% versus the 10% that is levied during the delisting. Two, they can hold on to the shares and have to deal with a company that has considerably less regulator oversight. “Without regulatory oversight and without mandatory disclosures, the promoters could do anything with the company’s assets and we may not even know,” he said. 

Shriram Subramanian, founder and MD of InGovern Research Services, said that this isn’t a problem restricted to one company alone. “Thousands of such cases are waiting to be unravelled. The two problems that this case brings to the forefront is of the difficulty in realising value in holding companies, and of minority shareholders being shortchanged in a delisting process. The current framework of Sebi and MCA (the Ministry of Corporate Affairs) isn’t enough to deal with these. We need a larger policy intervention here,” he said.

InGovern is a leading corporate governance research and shareholder advisory firm.

Under the present circumstances, either Elcid’s shareholders can band together and approach Sebi for redressal or they can hold onto their shares without tendering them during delisting and wait for an opportunity to unlock its value, he said. 

To unlock its value, the shareholders could wait for investors who buy delisted stocks. These investors usually have the capital to fight the promoters in court and wait years for a favourable outcome. Or the shareholders could wait for the promoters of the holding company to sell the underlying asset–however far into the future that may be–and claim their share.