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THEIR FAILINGS, OUR LEARNINGS

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GAMES PEOPLE PLAY

Context:

When complex inter-corporate relations exist in a group, irregular transactions are more easily facilitated. Is this a text-book case of skilfully ignoring the interests of minority stakeholders?

  • An unlisted public company “A” was a significant shareholder in two other unlisted public companies owned by the same Group. One of these companies, “B” was a media and publishing company, and the other, “C” was into real estate.
  • “A” owned 24.41% in each of the other companies.
  • “A” was an investment holding company, and its revenue came from distributing publications of “B” in some major cities of India.
  • “A” was listed on Calcutta Stock Exchange (CSE) in March, 2015.
  • For many years, 22 minority shareholders of “A” had been filing complaints before SEBI and on the SCORES platform (SEBI’s complaints redressal system). While the complaints filed with SEBI are still pending (on the date this case is published), those on SCORES were disposed of without deciding or settling the issue raised in the complaint.
  • The case was regarding incorrect disclosures on promoter shareholding by “B”. In addition to “A” which held 24.41% shares of “B”, there were 2 more promoter owned companies that held 9.29% and 13.3% each in “B”. The shareholders also contended that the minimum public shareholding of 25% by a listed company was not followed by the 3 companies.
  • They further contended that the promoters “exercise total control over these three companies and are the ultimate beneficial owners of the company and have wrongly classified themselves as public shareholders of these companies which facts are so glaring, but for the reasons best known, SEBI has turned a blind eye and has disposed of the complaints in a cursory manner”.
  • Since CSE was derecognised, the shares were transferred to the Dissemination Board of NSE in February, 2019. As per relevant regulations, the Board of the company in such a situation could undertake a buyback, to provide an exit to public shareholders.
  • In June, 2019, the Board of “A” approved buyback of 21,791 shares of the company, at a price of INR 11,229 per share. This was as per the valuation done by an independent valuer appointed by NSE. Some media reports indicated that the price should have been approx. INR 2,31,186 per share.
  • The Board at that time had 5 Directors, with 2 IDs and 3 Non-IDs.
  • In June, 2019, the company issued a special resolution through postal ballot seeking shareholders’ approval.
  • While this process was on, 2 shareholders with 0.0007% shareholding in “A”, filed a petition in Delhi High Court. They wanted the postal ballot notice declaration to be termed void. Until the passing of the final order, the Delhi High Court directed the company to not declare the results of the postal ballot.
  • In the petition, it was alleged that
    1. The core business of “B” was highly profitable.
    2. “C” owned several land parcels, buildings, flats and properties in prime locations in most key cities and states in India. These were acquired at very low cost, and their market price was in excess of thousands of crores.
    3. “A” held 24.41% of both these companies.
    4. The valuation report did not reveal the fair value of the shares of the company, and in some places admitted to lack of information and documents. In spite of observing that the company held investments in certain operating as well as certain non- operating companies, besides holding investments in mutual funds, shares, corporate deposits, the report had failed to demonstrate the fair value of the shares of the Company.
    5. Further, even though the company was a major shareholder of “B” and “C”, the report stated that the company did not have access to detailed information about these companies.
  • In response to this, the valuer stated that it had no access to the complete information about the investments. For “B” and “C”, it had considered the consolidated audited accounts, reported for FY 2017-18, which was the latest audited accounts at the time of preparation of the report, as provided to it by the company. The valuation had been done on the basis of the financials alone, since no discussions had taken place with the managements of “B” and “C”.
  • The valuer further mentioned that in the case of “B”, value was derived by segregating its value of operations, and the value of non-operating/ surplus assets, and those had been considered and added separately, after appropriate adjustments.
  • As per media reports, in end June, 2019, a group of minority shareholders of the company had sent multiple complaints to SEBI against the proposed buyback, which grossly undervalued the stock. Investors had asked SEBI to stall the buyback process, investigate the matter and appoint an independent valuer.
  • As per media reports, the complaint filed with SEBI mentioned the following:
    1. The company was trying to artificially depress its share price.
    2. The valuer seemed to have used incorrect data, faulty logic and inappropriate discounting in the valuation report to reverse work the valuation back to the company’s approximate book value only. SEBI had prescribed the use of fair value method to calculate share price, which had not been followed.
  • The company responded to these allegations by stating that it had followed all the guidelines laid down by the concerned Regulators, and denied the allegations.
  • In August, 2019, the Delhi High Court dismissed the petition.
  • Also, the shareholders approved the buyback. The buyback offer was initiated in September, 2019 and it closed in October, 2019, at INR 11,229 per equity share.
  • In November 2019, SAT rapped SEBI for poor handling of investor complaints on SCORES and termed the ‘platform as a mere eyewash’.
  • In its submission, the CSE had told the SAT bench that “this issue was submitted to SEBI, which prima facie showed that the three companies had violated the SEBI LODR Regulations, 2015, which provides for requirement of maintaining minimum public shareholding of 25% by a listed company, and the company wrongly had shown it as public shareholders.”
  • SEBI approached the Supreme Court against the order passed by SAT.
  • On January 30, 2020, while refusing to go in to merits of a case, the Supreme Court directed SEBI to deal with complaints of investors of “A” positively and objectively within four months in accordance with law.

Points to Ponder –

  • Should the opaque arrangements have not alerted the retail investors?
  • Can the grievance redressal mechanism move faster?