Wipro Enterprise To Wield The Axe On Minority!
The Final Step to Privatize a Former Listed Business!
Wipro Enterprises (P) Ltd came into being under an unconventional method, if not a questionable one. Its minority shareholders numbering to 150 are protesting the latest move of the company to squeeze them out by a capital reduction process under sec 66 of the Companies Act 2013.
Wipro Limited, better known for its IT business was pre 2012 a conglomerate and separated its non-IT business comprising consumer care , lighting, infrastructure engineering and other non-IT business segments in a hitherto unheralded fashion in about 2012/13.
A typical demerger/spin off would result in the second entity carrying on the demerged business but with a near identical shareholding pattern to the original company, and invariably listed in the stock exchanges if the original entity was so listed.
Wipro claimed that it constituted a special committee of its board of directors to oversee the planning and execution of the demerger plan. The special committee comprised the independent directors, N. Vaghul, Bill Owens and M. K. Sharma.
The said committee recommended a scheme which stood implemented with April1,2012 as its appointed date.
Instead of opting for a simple structure that would have enabled all the shareholders of Wipro Ltd at that juncture to obtain shares in the consumer business entity with a due listing in the stock exchanges which was automatic subject to basic disclosures, the company found a way to snatch away the demerged business into an unlisted entity that would ultimately be fully privatized!
This was achieved by giving multiple exit options to the Wipro shareholders as under-
(i) receive one equity share with face value of Rs.10 in Wipro Enterprises Limited for every five equity shares with face value of Rs.2 each in Wipro Limited that they hold; or
(ii) receive one 7% Redeemable Preference Share in Wipro Enterprises Limited, with face value of Rs.50, for every five equity shares of Wipro Limited that they hold; or
(iii) exchange the equity shares of Wipro Enterprises Limited and receive as consideration equity shares of Wipro Limited held by the Promoter. The exchange ratio will be 1 equity share in Wipro Limited for every 1.65 equity shares in Wipro Enterprises Limited.
Each Redeemable Preference Share shall have a maturity of 12 months and shall be redeemed at a value of Rs.235.20
In effect the unstated objective was to make the new entity as privately held as possible though that would take a few more steps to reach!
During that time, the promoters’ holding in Wipro Ltd was in excess of the permissible level and were under a compulsion to dilute to 75%, the maximum permissible limit.
Thus, the idea of giving away their shares in Wipro Ltd to the potential allottees in Wipro Enterprises (new co) had an ulterior objective!
When the demerger was implemented, the promoters could partially reduce their stake to the extent of 2.23% by this process of exchange!
Many institutional shareholders in Wipro Ltd like the PSU insurers appear to have opted for the preference share route as they would have anticipated potential audit issues of opting for an unlisted share or even an exchange of Wipro shares. With a quick redemption proposed for the preference shares, the cash in hand, would have been easy to get audit acceptance though clearly a suboptimal choice.
Those shareholders in Wipro Ltd with a good understanding of the long-term value potential of the consumer goods business stayed put despite the unlisted status of the entity.
No sooner was the preference shares issued under the demerger scheme redeemed, Wipro Enterprise fired its first salvo by announcing a capital reduction of the minority, offering Rs 367 per share.
This exercise carried out sometime in 2015 met with resistance from a set of shareholders who did not wish to part company. The company being unsure of a forced squeeze out, seemed to have exited only those passive ones who did not put up a fight. In this process, about 1.5% of the shares were extinguished each at a value of Rs367/- costing the company a total of Rs318cr.
But in the process the total number of members dropped below 200 thereby allowing the entity to be converted into a private company. This was promptly achieved, a major milestone for a formerly listed venture to get this status in hardly about 24-30 months and with hardly any significant cash spend!
The latest move being adversely viewed by the remaining shareholders numbering 150 is the plan to evacuate them at a value of Rs1654 per share. The total budget for this exercise is around Rs1244cr.
The proposal would have been voted upon on 10th August(yesterday) at the AGM and with 98.5% shares held by the promoters the outcome will hardly throw any surprises.
The shareholders objecting must have cast their vote against thereby retaining a loco standi to object when the case is taken by the NCLT to approve the capital reduction.
This is a lost cause for these 150 members as the corporate jurisprudence is entirely against their plea. The majority rules the company and can act at its will and even to claim oppression the minimum required shareholding is 10%.
At best the NCLT may be sympathetic to their plea for a value higher than what is offered. Even on this aspect the dice is loaded against the minority as valuation is considered a domain of experts. The company has obtained a valuation report from an international firm, Grant Thornton llp. It has got a fairness opinion from ICICI securities, a category I SEBI approved banker.
The shareholders may have a legitimate grievance given the current elevated valuations for companies with zero debt and significant cash in the bank, especially in branded b-to-c categories. However, the expert is bound to have slashed down the value for the lack of liquidity for the shares being locked in a private company!
The root cause for this anomalous situation is the way the committee of independent directors (N. Vaghul, Bill Owens and M. K. Sharma) constituted to separate the two businesses went about the exercise with little regard for developing a transparent market driven method to privatize the consumer business.
The whole exercise was driven by finding a method for the promoter to dilute the stake in Wipro Ltd below 75% by using the means of exchange of shares in a demerger, a completely unprecedented method.
The correct approach should have been to list the new co and then adopt the delisting price discovery route to privatize.
The alternative of preference shares was actually a Hobson ‘choice and mainly a bait for the government shareholders!
The next failure is that of the stock exchanges and SEBI to stop the plan. This design was clearly contrary to the rule book where when an entity is split, it is mandatory to list the new entity following the prescribed minimum formalities, essentially to help the minority shareholders. This was violated by the regulators.
The unfortunate third lapse was the lack of independent scrutiny by the tribunal that approved the implementation of the scheme. Since the promoter had a brute majority even if votes were cast against, it may have slipped under the radar and the company’ lawyers’ fire power would have drowned what little opposition to the case!
The only change since that time, is the rule introduced by SEBI that schemes need a separate approval of the minority shareholders.
While the rule of majority should not be normally disregarded, it is necessary to consider an amendment in the law that if within a period of say five to seven years post the capital reduction if any corporate action is put through with a significantly higher price discovery (say 50% more) then the old shareholders should be given an option to seek restoration at the old valuation with adjustment for the time lapsed.
Wipro, and Reliance Retail that has already sounded the bugle to evacuate the minority like squatters in a public place, should help awaken the law makers to reform the defective law.
It is also to be noted that the capital reduction method is sub optimal from the perspective of the tax law as the amount received may be treated as dividend and not as capital gain, doubling the agony of the shareholders!