Pharma firm Alembic and Triveni Engineering are among companies awaiting regulatory approvals to conclude transactions which will eventually dilute the stake of non-promoter shareholders. Consider Alembic where promoters hold 63.48% while 36.52% equity is with the public.

For demerging its 100% subsidiary, Alembic Pharma (APL), the company announced issuance of shares to Alembic shareholders in the ratio of 1:1. Once the demerger takes place, the promoters’ direct holding in APL will be 44.96%; Alembic’s stake in APL will stand at 29.18%, and the public will hold 25.86% in APL.

Since the promoters will continue to hold a majority stake in the parent firm, they can influence key decisions relating to APL by virtue of their direct holding in APL as well through their stake in Alembic. On the other hand, non-promoter shareholders will face a decline in their combined holding in APL from 36.52% to less than 26%.

“These structures, though legal, don’t meet with the highest standards of corporate governance and are a court-blessed poison pill against hostile acquisitions,” says Sandeep Parekh, founder, FINSEC Law Advisors. According to him, so long as shareholders, including institutional shareholders, don’t oppose these changes in shareholder meetings, such restructurings are likely to continue.

Take the case of Triveni Engineering & Industries (TEIL), which announced a demerger of its whollyowned subsidiary, Triveni Turbine (TTL). Promoters hold 67.99% in TEIL while 32.01% is with the public. After the demerger, public shareholders will have around 25% control in the demerged entity (Triveni Turbine) while promoters will directly hold 53.15%. But the latter group will end up with a greater control through their holding in TEIL.

Here too, the promoters will have a predominant say in any future decisions relating to the demerged entity. TEIL has proposed another layer of transaction to overcome a regulatory hurdle. The company has converted a slice of its holding in TTL into preference shares to avoid the combined holding of TEIL and TEIL promoters in the demerged entity exceeding 75%.

Since listing requirement calls for promoters to hold less than 75%, security market experts think that the preference share transaction was aimed at averting possible complications that can arise when the demerged entity is listed. Both companies have already received court approval for the proposed demergers. The proposals have caught the attention of Bombay Shareholder’s Association, a Sebi-registered investor body.

Says Ashok Bakliwal, president of the association: “Many companies are engaged in all sorts of financial engineering, structuring and valuation of shares. Promoters are trying to raise control without resorting to expensive buyback, preferential shares and takeovers.”

When contacted, a Triveni Engineering (TIEL) official said it is awaiting Sebi nod for listing, but the regulator has not raised any query on the matter so far. A TTL spokesperson said that stock exchanges have given an in-principle approval for listing of TTL shares. Alembic did not respond to ET’s email query. An email to Sebi remained unanswered. Such demerger exercise did not go down well with some shareholders.

Aspi Bhesania, a Bajaj Auto shareholder, had earlier written to Sebi, drawing its attention to the company’s decision to demerge business in a way where the parent continues to hold shares in the demerged entity. In conventional demergers, shareholders get shares in a certain ratio in the demerged company, but the ownership pattern remains identical.

“Some demergers are dilutive in nature. A clean demerger would result in both firms having identical equity capital and shareholding pattern,” adds Mr Bakliwal. But according to Pavan Kumar Vijay, MD at consultancy firm Corporate Professionals, at the end of the day what matters is whether minority shareholders gain once the value is unlocked through listing.
“Schemes of arrangement require various regulatory approvals. If shareholders find anything wrong, they have to prove that the sole intent of the scheme is not in the interest of the minority or point out other issues such as tax avoidance etc,” he said.

According to Hinesh Doshi, VP, Investors’ Grievances Forum, promoters should not be allowed to vote a demerger proposal. Besides, a valuation report should be circulated to shareholders, he said. Some feel that the issue of shares should be done on a proportionate basis.

“While demerger is not specifically defined under the Companies Act, 1956, provisions 391-394 provide that a company may enter into a compromise, arrangement or reconstruction or amalgamation with its members or creditors. Under Income-tax Act, ‘demerger’ is defined as transfer of one or more undertaking with certain conditions to be complied for the demerger to be tax neutral. It includes that issue of shares should be done on a proportionate basis. The company issuing shares pursuant to the demerger will have to obtain the approval of SEs for listing/ trading of its shares over the exchanges,” says Rajesh Thakkar, Partner, MZS & Associates.