Proxy firm SES slams Jindal Stainless rejig move

SES raises several concerns about the motive of the scheme and recommended shareholders to vote against the move; company says studying the report

A scheme of arrangement proposed by Jindal Stainless (JSL) to spin off its business units into three separate corporate entities has irked proxy firm Stakeholders' Empowerment Services (SES). In its report last week, SES has raised several concerns about the scheme and has recommended shareholders to vote against the move. It has also advised shareholders to seek more information from the company.

"The Proxy advisory firm report quoted by you is being reviewed in detail by the company at the moment. We will revert with suitable replies once the review of the report is complete," the company spokesperson said in an email response on Wednesday. Subsequent requests by Business Standard did not elicit any response. The proxy firm said it had shared its report with the company ten days earlier (on May 5).

JSL proposes this restructuring to develop focused business verticals. The resolution seeks "Approval of the composite Scheme of Arrangement among Jindal Stainless Ltd. (Transferor Company) and Jindal Stainless (Hisar) Ltd. (Resulting Company/Transferee Company 1) , and Jindal United Steel Ltd. (Transferee Company 2), and Jindal Coke Ltd (Transferee Company 3), and their respective shareholders and creditors," through a postal ballot. The ballot closes today.

"The composite Scheme of Arrangement would be in the best interests of the shareholders, creditors, employees and other stakeholders of all the four concerned companies, as it would result in enhancement of shareholder value, operational efficiencies and greater focus and would enable the management of each of the aforesaid companies to vigorously pursue revenue growth and expansion opportunities," the company has said in its notice to shareholders.

SES, however, said the scheme lacks transparency. "The shareholders are unaware of the turnover and profitability of the business being transferred out of JSL. What will be the impact of the Scheme on the turnover, profit and competitive strength of remaining business is not known. Very little information regarding this is shared with the investors," it said in a proxy advisory report dated May 5.

Promoters of Hisar-based Jindal Stainless include Rattan Jindal and several Jindal family entities. Institutional investors such as Citigroup Global, Reliance Capital Trustee, Hypnos Fund, Elm Park Fund and India Max investments hold minority stakes in the company. The company has been reporting losses for the past couple of years and has a market cap of Rs 860 crore. On Friday, its shares were trading with minor gains at Rs 38 a piece

The transferee companies which were formed in 2013 and 2014, are currently non- operational, and have a paid-up share capital of '5 lakhs each. In accordance with the Scheme, as consideration for transfer of the businesses, the transferee companies will collectively pay lump sum amount (in cash or by issue of securities) of approximately Rs 5,505.31 Crores to JSL. The company states that these Transferee Companies are in discussion with various banks for availing loans and generating funds for payment to JSL in terms of the Scheme

The proxy firm wondered how the new entities with little track record find lenders. "It is not clear as to from where and how would the three businesses being hived off to three Transferee Companies raise funds to the tune of Rs 5,215 Cr. The projected Debt/ Equity ratio of the companies is JSHL-4.69, JUSL-8.19, JCL-3.19. Which lending organisation will lend to companies with such high debt equity ratio is not clear, especially since they are new borrowers, and there will be no compulsion to lend. Shareholders expect a little more clarity on the same. "

Failure to secure loan and repay to JSL will be non-fulfilment of the terms of the Scheme. "After demerger is over and if funds are not paid there is no way the process can be undone, therefore upon failure, company will have to seek shareholders' approval again and shareholders will have no option but to accept fait-accompli," SES said adding the scheme should be made conditional upon the 'Resultant Companies obtaining finance' and a time frame must be specified.

The entire exercise is to bring various business verticals into separate companies.While stated objective is to separate business verticals, in reality it is not achieved as JSHL will have stainless steel as a product and JUSL propose to make stainless steel, according to the firm.

SES was of the opinion that entire exercise is aimed to clean the balance sheet of JSL, improve Debt Equity ratio of JSL and park liabilities in other companies. By this process, the Company is essentially transferring assets at a value higher than the book value and transferring the differential to P&L Account. "Had the Company revalued its assets at the same value at which it is transferring under Scheme without transferring to separate entity, the differential would go to revaluation reserve rather than P&L account. Revaluation reserve is treated differently by lenders as compared to general reserve and would have also entailed higher depreciation charges, thus affecting profits. The same are being parked in different companies. Therefore in opinion of SES, it is accounting gimmick without any real gain except reallocating assets and liabilities," the firm said.