Borrowings & Guarantees: Lessons From Apollo Tyres
Debt: Easy to acquire, tough to retire
July 11, 2013 / 18:02 IST
Debt: Easy to acquire, tough to retire
10 July 2013, Mumbai: Apollo Tyres announced a big bang acquisition of Cooper Tyres last month on which it will spend US$ 2.5 bn (Rs 15000 cr). This is without seeking approval from ‘minority’ shareholders. The market price of Apollo Tyres shares have fallen ~ 31% since the deal was announced i.e. from Rs 92 (12 June 2013) to Rs 63.15 (9 July 2013). As per sections 391-394 of the Companies Act, 1956, shareholder consent (through court convened meetings) is required if there is a major restructuring or change in the capital structure of the company. Since Apollo Tyres acquisition of Cooper Tyres is an all-cash transaction, the said provisions do not apply to this case. Given the deal structure, shareholders may not have been able to pre-empt this transaction, but asking for disclosures at all stages, including the time of approving the increase in borrowing limit (in April 2012), would have given clarity regarding the company’s thinking. Section 293(1) (d) of the Companies Act, 1956 requires companies to seek shareholder approval if the total debt exceeds the aggregate of its paid- up capital and free reserves. Apollo’s debt as on 31 March 2012 (just before the borrowing limit was increased from Rs.35 bn to Rs.50 bn) was Rs.22.5 bn. The total networth was Rs.20.5 bn. Had Apollo provided a detailed rationale for the increase in debt limit, including its proposed acquisition plans, shareholders could have taken a more informed decision and maybe even blocked the resolution if they felt a potential deal was unfair to them. In a special report “Borrowings and guarantees: Lessons from Apollo Tyres” proxy advisory firm IiAS has studied disclosures that accompany increased borrowing and the impact these borrowings have had on the share price performance of companies. Further IiAS expects companies to clearly disclose the rationale and need for additional borrowings and corporate guarantees. The level of disclosure should be more granular for leveraged companies and those seeking to raise the existing limits by more than 25% over and above the stipulated thresholds:- Shareholder approval for additional borrowings should only be valid for a year and companies should come to shareholders for further approval after this period. The same should be followed in case of corporate guarantees. This is in line with equity issuances, where the shareholder approval is valid for one year.
- Project-level details should be provided on areas where the borrowed funds are proposed to be deployed. Companies give this information at the time of their IPO. Raising debt should not be different and this information should be disclosed.
- Breakup of long-term and short-term borrowings for the proposed amount should be clearly stated, along with the proportion of foreign currency debt.
- Information should be given on the latest debt level/corporate guarantees as a percentage of existing borrowing limits.
The full report is attached here. 
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