SHARE CONSOLIDATION CAPITAL FORMATION
From small beginnings, several companies evolve into large corporations. In that process, the value of holdings of shareholders expand to a few million rupees.
The Bombay Presidency that included parts of the present Gujarat and Maharashtra, had a long tradition of investments in shares by wide cross-sections of the public. I remember my interview with James Raj who headed UTI in the initial formative years in the 1970s. Raj mentioned that investments in companies predominantly came from Gujarat and Maharashtra and the south accounted for less than six per cent of UTI’s funds.
First-generation entrepreneurs used to refer to the exertions made by them, to mobilise capital of a few hundred rupees from investors spread across villages and small towns. The real thrust came post-independence. The incentives provided by the government for indigenous manufacture attracted new-gen entrepreneurs who switched from trading to manufacturing. The Easun family, for instance, which was engaged in distributing Royal Enfield motorcycles imported from the UK, set up facilities for progressive manufacture of these.
There was also the opportunity to acquire companies owned by the British who were returning to their motherland. Plantation companies and the Simpson Group of Companies are a few instances of this.
DEVELOPMENT BANKS INDEED!
Governments, both at the Centre and the state, also helped the ease of doing business. Tamil Nadu set up as early as 1948 the Madras Industrial Investment Corporation (MIIC, now TIIC), the first state finance corporation in the country which provided not just working capital loans but also liberally contributed to the equity capital to a large number of new companies. This was a boon to first-gen start-ups with modest resources of a few lakh rupees.
The Centre set up development banks – ICICI, IDBI and IFCI – which again provided loans over the medium and long term. These helped entrepreneur families with resources of their own to conceive projects with investments of a couple of crores of rupees. The evolution of TVS as a large manufacturer of engineering products, is based on this mode. The first of these units, Wheels India, for instance, involved an investment of Rs 200 lakh. The family companies of TVS & Sons, Southern Roadways and Sundaram Industries, pitched in Rs 25 lakh. An equal amount was invested by the British collaborator, Dunlop. Financial institutions extended a term loan of Rs 150 lakh. The project took shape in a remarkably short time at Padi. Today, Wheels India is one of the largest steel wheel manufacturers in the world catering to OEMs of cars/UVs, commercial vehicles, tractors, construction vehicles and earthmovers… The total income of the company for the year ended 31 March 2021 was Rs 2416 crore.
Similar was the pattern of development of other manufacturing units of TVS at Padi.
We have other ingenious methods of resource mobilisation. The Sakthi Group innovated one such: when it expanded into Karnataka to set up. Sri Chamundeswari Sugars Ltd, it needed Rs 75 lakh. Sakthi Sugars, at that time, crushed 5 lakh tonnes of cane. The genius of N Mahalingam, assisted by finance wizard S N Pai, paid Rs 15 extra per tonne on the 5 lakh tonnes procured and issued the shares to the cane growers. No SEBI then!
S Anantharamakrishnan focused on acquiring companies from the British, who were leaving India. The most prominent of these, Simpson & Co, started business 181 years ago. In its long years of evolution, especially in the earlier years, share were sold to several investors. The group ploughed back profits and expanded the capital base in stages and, like most other family-owned businesses, limited shareholding, largely to the promoter family. This pattern can be seen across most family businesses. The few attempts made by companies like the Seshasayee Group for wider shareholding resulted in the loss of control by the promoters (eg. Mettur Chemicals). Such a risk conditioned promoters to acquire even the small number of holdings of the minority shareholders. This explains the recent litigations on the rights of minority shareholders with small holdings. Read on for analysis by finance expert V Ranganathan.
Share consolidation and exit route for small shareholders
The National Company Law Tribunal [NCLT] has asked Simpson & Co to set-up a trust to address the concerns of dissenting shareholders. The dissenters are unhappy over the price offered by the company for fractional shares arising out of share consolidation. Simpson has offered a price of Rs 14,680/share of the face value of Rs 10 each. The valuation exercise followed a decision to consolidate 250 shares of Rs 10 each into a single share of Rs 2500 a piece.
The company has 185 shareholders. Minority shareholders number 167 and hold 0.39 per cent. The rest is controlled by promoters consisting of Amalgamation Private Ltd, 16 others and an insurance company.
When the proposal of share consolidation came up at a special general body meeting on November 2019, 47 shareholders holding 10,492 shares voted against. But it was carried forward as the majority voted in favour. Some dissenting shareholders did not agree with the offer price for fractional share. The company insisted that the valuation exercise itself was done to provide a window to encash the fractional entitlement arising out of share consolidation. The company pointed out that the offer price was much higher than the Rs 10,500 a share for the buy-back offer it made in 2018.
The dissenters alleged that the promoters will be much benefitted when considering the assets of the company and value of its subsidiary firms. They also felt that offer price for fractional shares was very low. The company reported an income of Rs 1650 crore in 2018 – 19 and a profit after tax of Rs 176 crore.
The tribunal ruled in favour of dissenting shareholders. “They are certainly free to enjoy their constitutional rights of holding these shares after consolidition by selling these shares for a better price than offered by the applicant company if there are buyers,” the tribunal said.
The NCLT relied on judgements that provided for a trust-kind solution for fractional shares in share consolidation instances. The individual holding fractional shares is at liberty to sell his/her shares at any price to anyone. The new buyer’s name will be included in the trust and the individual fractional shareholders will have no direct connection with the company.
Share consolidation is a way to provide easy exit an option for small shareholders in closely held unlisted companies. But this kind of share consolidation is both good and bad and depends on how one views it. – V Ranganathan and SV
