Room for more disclosure in KKR-Dalmia deals: Proxy firm

Recommends vote against proposal citing lack of transparency in valuations, company says it has complied with all regulations

The twin deals between private equity major KKR and cement maker Dalmia Bharat (DBL) have come under scrutiny for alleged lack of adequate disclosure, especially on valuation, to shareholders.  

Three resolutions, which will enable the deals in which KKR is exiting its investment in DBL subsidiary Dalmia Cement Bharat (DCBL) and picking up a stake in the parent, are coming up for shareholder approval in an extraordinary general meeting (EGM) on Thursday.

Proxy advisory firm Stakeholders’ Empowerment Services (SES) has asked shareholders to vote against all these resolutions, citing lack of transparency.

DBL is proposing to acquire 15 per cent stake of KKR Mauritius Cements Investments in DCBL in a cash-cum-share deal. Valuing this stake at Rs 1,218.75  crore, DBL will pay Rs 600 crore in cash and issue 7.5 million equity shares at Rs 825 each totaling Rs 618.75 crore. Dalmia Bharat shares, trading close to Rs 800 before the announcement, have fallen below Rs 700 since. On Tuesday, the counter lost 4.3 per cent to close at Rs 687.5 on the BSE.

The proxy firm questioned the rationale for the company to enter these transactions and also the valuations. “SES does not understand the objective of the transaction. What benefit is the company deriving by making DCBL a 100 per cent subsidiary from an 85 per cent subsidiary? The company has not explained to shareholders,” it said in a report.  

SES was of the opinion that by this “supposedly innocuous” scheme, the company was providing an exit to KKR without listing DCBL and without specifically telling its shareholders. “The exit provided to KKR is cloaked in the stated objective of making DCBL a 100 per cent subsidiary.” It is not uncommon for private equity funds to include exit clauses in investment agreements. It is possible that KKR and DBCL had such an agreement. However, shareholders are in the dark whether the proposed transactions are the result of such clauses dating back to 2010, when KKR bought the stake.

In response to an email seeking comments, the DBL spokesperson said the transaction was “a negotiated purchase of DCBL shares by DBL”.  

The private equity fund said in an emailed statement. “KKR is invested in DBL, indeed is its largest institutional investor, and looks forward to supporting Dalmia Cement’s growth organically and inorganically under its simplified ownership structure.” It referred further queries “to DBL and any public filings”.

Curiously, the deals put the parent’s value lower than that of the subsidiary. KKR’s 15 per cent stake in DCBL is worth Rs 1,218.75 crore, according to the deal. This values the subsidiary at Rs 8,125 crore.  In the second leg, KKR receives 8.45 per cent of DBL at Rs 618.75 crore, valuing it at Rs 7,322 crore.

SES wants shareholders in the EGM to ask the company to explain this.

“At Rs 1,218 crore value for a 15 per cent stake it appears that the exit is being provided at an 18 per cent compound rate of interest, which amounts to roughly 18 per cent IRR, which is normal in PE investments and is not a cause of concern for shareholders. The real cause of concern is non-disclosure of the contours of the deal,” SES said.

Explaining the pricing of DBL shares, the company spokesperson added that “the current preferential allotment of shares is based on and in compliance with the preferential issuance norms issued by SEBI. The floor price is Rs 816 per share as the current issue is priced at Rs 825. The same has been explained in the documents sent to all shareholders.”

On the complaint that the valuation reports have not been put up on the company’s website, the spokesperson said, “The regulatory framework does not require placing the valuation reports of unlisted shares in the public domain. However the same are available for inspection by shareholders at the registered office of the company as required under law.”

SES said it was of the view that as a good governance practice, instead of placing documents at the registered office, the company should place them on its website for easy availability by shareholders.  

Further, SES said the resolution to amend articles referred to an agreement between KKR and the company, the details of which had not been disclosed.

Explaining the move to amend the articles of the company, which is seen as an effort to insert an exit clause for the current investment, the spokesperson said, “KKR continues as an investor in DBL. There is no agreement that guarantees any return whatsoever to KKR. Rather the proposed amendment to the articles only ensures that in case KKR earns a return beyond a certain threshold, the excess will be made available to the company, thereby benefiting all shareholders.”

DBL reiterated that all necessary compliances were duly completed. “Due disclosures, including the rationale of the transaction, have been explained in the shareholder documents and the presentations uploaded on our corporate website,” it said.