Kesoram Industries refutes allegation of short-changing public shareholders

Basant Kumar Birla-promoted Kesoram Industries on Thursday refuted all allegations of "short-changing" public shareholders and listed the steps taken by the management to save the company from becoming sick or potentially sick over the past few years. 

Minority shareholder Janardan Kothari had made the allegations at the company's annual general meeting. Subsequently, stock exchanges had sought a clarification based on reports.  

In a seven-page response, the company said that allegations that the promoters had made a profit at the expense of its public shareholders were unfounded, when, in reality, the promoter group had continuously infused funds into the company and otherwise sought to provide all necessary support. 

In the past five years, the promoter group infused over Rs 6.65 billion into the company to save it, Kesoram said. 

Losses suffered by the company (before exceptional items) from financial years 2012-13 to 2017-18 aggregated to about Rs 32 billion, which had affected the liquidity, debt-equity ratio and the net worth of the company and hence certain steps were taken. 

First, the company undertook a rights issue in June 2013. Pursuant to which, it raised over Rs 4.16 billion. The issue, however, was not fully subscribed by the public shareholders. The promoters, besides their own contribution, took up the entire unsubscribed portion of the rights issue and invested in excess of Rs 2.60 billion.

Subsequent to the rights issue, over Rs 4 billion was brought into the company by the promoter group through preferential allotments in 2016 and 2018.

"Despite the rights issue in 2013 and in view of difficult operating conditions, the company was faced with the prospect of becoming a 'potentially sick company' as on March 31, 2016. This would have required a reference to the Board of Industrial and Financial Reconstruction (BIFR)," the company's statement to the stock exchanges said.

Experts pointed out that it would not have been possible for a sick company to get additional funding from banks. 

To prevent the company from being declared as a "potentially sick company", it was compelled to monetise assets, reduce its debt and increase its 

equity, Kesoram explained.

Accordingly, two transactions were undertaken -- the sale of Laksar tyre undertaking and the sale of Hindustan Heavy Chemicals (HHC) and Spun Pipes.  

With effect from March 31, 2015, Kesoram transferred the tyre manufacturing facility at Laksar Uttarakhand to Cavendish Industries Limited, a subsidiary, as a going concern on a slump sale basis. 

The company entered into an agreement with the J K Tyre group in October 2015 to sell the entire share capital of Cavendish for a consideration in excess of Rs 20 billion, which was completed in April 2016. The proceeds of the sale were used to repay the lenders of the company, including public sector banks such as the State Bank of India, Bank of Baroda and Punjab National Bank. 

The HHC and Spun Pipes Undertakings were sold to Camden, as a going concern on a slump sale basis, with effect from March 31, 2016, for an aggregate consideration of Rs 4 billion. Manav, a promoter of Kesoram, agreed to provide security to the loan obtained by Camden from a bank.  

Camden was supported by Manav by providing the security, in the absence of which Camden would have found it difficult to obtain financing to acquire the HHC and Spun Pipes Undertakings, Kesoram said. 

Kothari had alleged closely-linked transactions among Kesoram Industries, Kesoram Textile Mills, Manav Investments and Camden Industries. 

However, Kesoram said, "We reiterate that Camden is not a 'related party' of the company in terms of provisions of the Companies Act, 2013, and the Sebi (Listing Obligation and Disclosure Requirements) Regulations, 2015."

Kesoram also disposed of its listed investment portfolio. The portfolio of listed company investments was sold on March 22, 2016, to Camden for approximately Rs 4.30 billion.

"It does not need emphasis that without disposal of these two undertakings and the listed company investment portfolio of the company at that material point in time, it would have been impossible for the company to avoid a BIFR reference," Kesoram said.

As at the end of February 2016, Kesoram's debt burden amounted to Rs 53 billion, which was reduced to Rs 26 billion as at the end of April 2016. Approximately Rs 27 billion was repaid to lenders pursuant to the funds realised from the transactions.

Camden acquired HHC and Spun Pipes Undertakings in March 2016 with the intent to commence manufacturing at these locations. However, it came under the influence of intense lobbying by local political groups demanding employment. Camden, therefore, approached Kesoram to consider repurchasing HHC and Spun Pipes Undertakings, which was done at an arm's length price.

Kesoram also clarified that as the investment in Century Textiles had always been considered strategic and disposing of that investment in March 2016 had been on account of circumstances beyond its control, Cygnet Industries Limited, a wholly-owned subsidiary, decided to reacquire a portion of the listed company investment portfolio, including the shares of Century Textiles.  

However, in June 2018, in the face of the company again facing a liquidity crisis, owing largely to the cement business not performing as per expectations, the liquidation of a substantial portion of listed investments, including the shares of Century Textiles, by Cygnet became inevitable.

What Kesoram's management did to save the company from BIFR

• Rights issue in 2013, in which promoters took up entire unsubscribed portion besides their own contribution

• Rs 4 billion (Rs 400 crore) brought in through preferential allotment

• Sold Cavendish for a consideration in excess of Rs 20 billion (Rs 2,000 crore)

• HHC and Spun Pipes Undertakings sold to Camden for an aggregate consideration of Rs 4 billion (Rs 400 crore)

• Portfolio of listed company investment sold to Camden for approximately Rs 4.3 billion (Rs 430 crore)