A Scheme or Subterfuge?!!
Will the Independent Directors measure up to their role?
The settlement that involved the different branches of the TVS family consummated recently with the National company law tribunal passing the relevant orders. Since the parties to the settlement were the private (un listed) companies of the TVS group, little beyond the news releases issued by the different sides of the family exist in public domain. Hence, it is quite possible that some inaccuracy in understanding or appreciation of the impact may pervade this article, which is inevitable though completely unintended.
The settlement was purportedly to get the shareholdings of the large conglomerate re organised to rest with the relevant branches of the four sub families involved. For convenience sake these are identified as the families of Shri T S Rajam (deceased) Shri T S Krishna(deceased) Shri T S Srinivasan(deceased) and Shri TS Santhanam(deceased). The off-springs of the respective branches head the relevant parts of the group and there perhaps exist a further sub group where the children of the above four may have worked out their respective domains.
Historically, the shareholdings of the various operating companies in the TVS group largely rested with the three holding companies, viz., TVS and Sons, Sundaram Industries and Southern Roadways. Based on publicly available information the three abovesaid companies have coalesced into a single entity as step 1.
Quite likely as a sequential step the shares of all the companies consolidated in this process was further split into the independent holding companies representing the different families, a minimum of four or could be more depending upon the number of sub groups, a detail that public is not privy to.
It is not clear how the segregation was achieved but it is reasonable to speculate that a split off like a demerger would have been the route for this purpose. A news release as per the link below refers to different appointed dates for the restructuring. Going by certain past cases, it is likely the restructuring was a composite one with an initial consolidation of the three former holding companies and a later split, family-wise. https://www.thehindu.com/business/Industry/tvs-group-firms-settle-cross-holding-of-shares/article38379430.ece
As a consequence, one of the new family holding company that emerged appears to be TVS Holdings Pvt Ltd, relevant to the family controlling Sundaram Clayton Ltd and its satellite and subsidiary companies.
Going by the market data this cluster has the highest value as compared to any other cluster pertaining to the other families. TVS Motor alone has a market cap of approx. Rs 31000cr (as on 8th Feb) and Sundaram Clayton holds approx. 53%. As a comparison the second most valuable company in the group, Sundaram Fastners’ market cap is Rs 17600cr(approx.).
So, the family getting control of the TVS Motor and Sundaram Clayton cluster is most likely to be paying a cash value to the other families. These steps would be outside any publicly available document as this would be a private arrangement among the family members.
What fuels the above speculation is the fact that Sundaram Clayton during the second quarter of 2021-22, had booked a sum of Rs 1494 cr as exceptional profits. However, there was little in terms of disclosure by the company as to the reason for selling a block of 5.14% in TVS Motor that resulted in this profit. Presumably, it was to keep dry powder to complete the cash settlement as and when the final Tribunal order was received approving the corporate side of the re organisation.
However, the amount is trapped in Sundaram Clayton (SCL) a listed entity with 25% public shareholding, while the cash will be needed at the promoters level to pay and settle.
Hence, forthwith on receipt of the formal order, the board of directors of the company in the meeting held on 9th February 2022 have come up with a very novel and complex scheme which is the reason for this article.
SCL is an operating company with its core business in castings and automobile parts and incidentally holds the valuable stake of 53% in TVS Motor. The details as available about the decision of the BoD in the link below is examined here under for its implications.
While apparently the announcement seeks to create an excitement that surplus cash is proposed to shared with all shareholders, there are other components to the proposal that tickle one’ curiosity. To set the record straight, the surplus under consideration is essentially the amount of approx Rs 1500cr realised on the sale of TVS Motor shares in the second quarter of the current year which was hardly explained beyond a note that the amount was exceptional in nature. https://www.moneylife.in/article/corporates-in-cross-roads-of-candour-in-communication/64713.html)
However, the manner of distribution proposed is not a simple special dividend or a pro rata buy-back of shares but involves the issue of Non-convertible redeemable preference shares(NCRPS) as bonus shares. These shares will have a two-year tenure and would be redeemed in Feb 2024.
It is quite strange to ferret out such an outmoded idea that a few companies have adopted in the past either as preference share or debenture as a bonus issue to commemorate special occasions. A company that has cash on hand and wishing to dispose it off has no need for such a convoluted way to distribute it.
A possible reason could be that some clever tax advice may have triggered this, opining that a buy back or a dividend would attract a higher rate of tax but the disposal of a listed security like a preference share may suffer a slightly lower tax. It is most unlikely that any of the recipients of the preference share would wish to hold till maturity as it may get a minuscule return, and instead liquidate in the market at a discount and get cash in hand. In effect, the discount may equal or exceed the tax difference and leave none richer in the process!
But the tax man may not be pleased and smell a suspicious scheme to avoid tax and go after the poor shareholders who may be spread far and wide to collect taxes.
But the subject doesn’t end here, The announcement also talks of a merger of some private companies and most intriguingly the demerger of the entire operating business of SCL!
This is stranger than the route considered to return the excess cash to the investors. The merger of TVS Holdings Ltd and VS Investments Pvt Ltd being the promoter holding companies is understandable as these are perhaps the two new entities formed as part of the family re organisation and hold the capital of SCL. The promoters may legitimately wish to simplify the holding structure to avoid a step holding involving multiple tiers.
However, if the two amalgamating companies that received the shares in the demerger become subject to any adverse tax proceedings which the tax department may initiate regarding the entire exercise, viewing it to be non-tax neutral, the public shareholders with their 25% holding would get entangled in such tax demands.
The other bigger question is, why demerge the entire operating business of SCL; what would residual SCL hold? While, the author may be accused of jumping the gun and not awaiting the finer details, it is not unreasonable to conclude that the design seems to be to ring fence the 53% holding in TVS Motor in the residual entity, essentially making it an investment company with 75% promoter holding and 25% public holding.
\This has been the situation in many cases across the country where historically operating cum shareholding companies were demerged and new shell entities that merely hold shares in a down-stream entit(ies) were formed.
A question may legitimately be raised as to why this is objectionable? Market data shows that such holding companies suffer a big discount in valuation and the case of how the Bajaj family effectively used that route to augment its holding in its operating companies is already explained in the article given in the link. The Racing Pulsar !! - by Ranganathan V (substack.com)
Clearly, the public shareholders will over time be forced to exit at sub optimal valuation and the promoters will have the luxury of time to consolidate their holding indirectly in TVS Motor.
And this very group has the distinction of using this mode in an earlier restructuring that involved certain other group companies’ shares(designated as non-automotive business) which was effected on 7th July 2011. Though the resulting company Sundaram Investments Ltd was unlisted there were some public shareholders who stayed put and finally by resorting to a hitherto untested procedure under section 236 of the Companies Act 2013 all the public shareholders were squeezed out sometime in 2021 or so.
The group explains its abbreviation as Trust,Value and Service.
It is best the misconceived reorganisation is revisited and the independent directors come out with a detailed explanation for the reasons for considering this proposal.
Will the IDs give comfort to the shareholders that in the event the IT department deems the RNCPS as a sham under anti avoidance dispensation and treat it as dividend, that the consequences will be indemnified?
Are the IDs convinced that with a predominant proportion of the non-promoter shareholders being mutual funds who have no tax liability on dividends, that this form of distribution is in the best interest of minority shareholders?
Will the IDs suggest that the residual SCL holding the shares of TVS Motor should merge into the latter so that the shareholders of SCL will directly own TVS Motor than through a layered structure?
This is a test case for the IDs, and the unsolved riddle whether good governance in promoter owned companies is yet an oxymoron!
Note
The article was written at the invitation of moneylife.in.
https://www.moneylife.in/article/is-dubious-to-be-spelt-t-v-s-ambiguity-rules-revamp/66361.html