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Crompton Greaves’ proposed demerger of its consumer products business and claim of creating more value for all shareholders has come under criticism from experts who feel that it is a negative for minority shareholders and promotes promoter control of the firm.
Last week, Crompton Greaves — a multinational company that is a part of the Avantha Group — announced the demerger of its consumer products business. It claimed that the move would create value to all existing share holders and enable the management to focus and expand its distinct business segments.
However, a few broking houses and proxy advisory firms have criticised the proposed demerger structure describing it as a negative for minority share holders and have said it enhances the promoter control over the consumer product company.
The company has, however, said the overwhelming response to the demerger plan is positive and has rejected the criticism.
Crompton Greaves has three core business areas — power, industrial systems and consumer products.
Under the demerger plan, which was approved by the board last week, a new consumer products company, Crompton Consumer Products Limited, will be formed by next March end. This company will issue three new shares for every four held by investors in the parent company.
Separately, Crompton Greaves will hold 25 percent shares in the consumer products company.
Gautam Thapar, the owner of Avantha Holdings, has 40.84 per cent of Crompton Greaves and the total shareholding of promoters in the company is 42.67 per cent.
Thus, the Avantha Group will own about 32 per cent in the consumer products company and the balance shares will be held by other investors.
In their note to investors, analysts from Sharekhan wrote: “We believe such a structure would be unfavourable to minority shareholders as with Crompton Greaves holding 25 per cent stake in the new entity would not fully unlock value for minority share holders; rather effectively it will translate into higher indirect stake to the promoters in Crompton Consumer Products Limited.”
ICICI Securities said in its research note a cleaner structure with no cross-holding would have been preferable.
Edelweiss Securities has said Crompton Greaves is still to give out details on key issues like royalty payments which will be payable to the parent company.
According to Amit Tandon of Institutional Investor Advisory Services (IiAS): “While the demerger is expected to unlock value we are concerned that the structure will increase promoter control over the consumer products company. IiAS believes that the company could have considered listing consumer products company without allocating stake to the parent company — this would have ensured that the voting rights are uniformly distributed across all classes of shareholders (in the ratio of their shareholding in Crompton Greaves), and not allowed the promoters to increase their control over voting rights in the consumer products company.”
In an email response, an Avantha Group spokesperson said: “Crompton Greaves has nurtured the consumer business for 50 plus years and the best is yet to come. The demerger puts in the hands of the CG shareholders a substantial chunk of a consumer company. It also transfers brands which are similar in names. Thus there is an enormous unlocking of value. The predominantly positive feedback is a justification of the sensible and optimum demerger.”
Sources close to the company also said the question of indirect control does not arise because the structure of the transaction has been devised in such a way that no special benefit or favour accrues to any shareholder or group of shareholders including the promoter group.
“This structure, as devised by the company board, has been evaluated by the company in consultation with the advisors and the considered view is that the structure as affirmed by the board is the most efficient from tax and regulatory points of view,” a source.
The demerger creates a platform for the independent and aggressive growth of the consumer business which is at an inflection point and is poised for the next level of growth.
It provides participation of shareholders on consumer products business and thus creates an avenue for additional liquidity, sources added.
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