Khoday @ Rs 66 ~ Delisting by Serving an over diluted Peg at just Rs 75 to Shareholders !? Value is much More because of Real Estate !?

Upfront Disclaimer : Neither My Family nor I have ever owned Khoday India Shares and don’t know of any who have or do, except perhaps RR ,a blog reader and pretty well informed and savvy investor too,  who conveyed in a private email his dismay and disgust on what Khoday is upto ~ he may be justified and has prompted me to go deeper and post this Blog as a result ~ it is not intended to offend anybody or entity and there is no bias or vested interest involved  and should therefore be read as an attempt to put forth the facts and arguments and perceptions so that Investors understand the Risks of Investing in such Companies like Khoday India   

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Khoday @ Rs 66 ~ Delisting by Serving an over diluted Peg at Rs 75 to Shareholders !?

Minority Shareholders believe that the Value is much more because of Real Estate Interests that are not being disclosed or have been moved away from the company at low values !?

Overview

Khoday was set up in 1965 as a Private Distillery by the Khoday Family .It went Public and got listed in 1986 on BSE,Bangalore and Madras Stock Exchanges.In 1992 the name was changed to the current name of Khoday India Ltd

It’s Registered and Operating Office is in Bangalore.K L Ramachandra is the Chairman and  K L Srihari is the current Vice Chairman & Managing Director .Both are Third Generation Khodays and their Sons & Fourth Generation are on the  Board too ~ Fifth GenNext is also being Groomed

Interestingly,apart from Nominal Sitting Fees ,no Khoday Family Executive or Non Executive Director has taken any Remuneration in FY 12 and none has been provided ! ~Come On ! they cannot be working for free !

It’s not paid any Dividend for the past five Years and performances have been pretty flat ~ Ironically Dividend too died  from the Financial Year  2007 when  the Khoday Head L Narayanasa Khoday too passed away ~In fact there were Losses in three consecutive FYs 08-11 and even in the 9m FY 13

It owns the well known Premium Brands of PeterScot and Red Knight in the Indian Made Foreign Liquor (IMFL) Whisky Segment .In FY 12 Liquor Sales were Rs 292 crs and yet Khoday made a Loss in this Segment !

However it’s Forays into Real Estate Development had perked up substantial Interest in the Company and had even raced the Share Price to a High of Rs 425 in August 2007 from a low of just Rs 37 in January of the same year !

There has been some infighting in the Khoday Family with  an estranged daughter in law and her two children claiming  their share in the Family Property ~ Court has made some observations

Annual Report FY 12 conceals more than it reveals 

The FY 12 Annual Reports conceals more than it reveals ~ there is a certain arrogance once senses in the Promoter Group who seem they could not care less for the way the Company is performing or Corporate Governance Issues and their clear violations of Non Disclosures and lack of Transparency in the Preparation and Presentation of the Accounts

This is a great disservice especially to the nearly 16000 Minority Shareholders and sadly the Regulator,the Exchanges and even the Company Law Board and Ministry of Corporate Affairs are turning a Blind Eye  ~ The Auditors,M/s Rangaraju & Associates have given a Clean Audit Report

Some of the Frowns that appear on Inadequate Disclosures or Explanations are as below

1. Availing of Exemption granted under General Circular 02/2011 of February 8,2011 issued by the Ministry of Corporate Affairs under Section 212 of the Companies Act 1956 and not attaching  the Annual Report  of wholly Owned Subsidiary Khoday Properties ~ However the Investment is a bare Rs One Lakh as Equity in this Company and truncated balance sheet disclosure show insignificant assets and liabilities
2. No Explanation as to the Nature of the Contract Segment Income of Rs 40.69 crs and the nearly all at Rs 39.94 crs Profit from this except mention that it was received from a Firm for making over the Risks and Rewards of a Project !
3. No Information on status of the Rs 61.48 Crs  Investment for a 75% partnership Interest in Laxmi Estates ~ the remaining 25% is held equally by four  Family HUFs ~ Such an Investment begs for it to be included in the Consolidation Accounts but Company apparently feels that only Investments of 51% +  in Companies needs to include such Companies in the Consolidation while Partnerships are exempt ~ if this is a legal loophole it needs to be plugged immediately   
4. No Explanation for the Write Off of Obsolete Raw Material of Rs 2.57 crs and Irrecoverable Advances of Rs 1.91 crs
5. No details of the winding up petition filed against the company and pending in the Karnataka High Court except mention that the company is of the opinion that the dues claimed by the petitioner are time barred and hence the petition is not maintainable
6. Legal & Professional Charges are running high every year ~ in FY 12 they were Rs 4.28 crs against Rs 3.98 crs in FY 11 ~ Why?

Share Capital

The Equity was Rs 14.51 crs of FV Rs 10  till FY 2004 after which Promoter Group was allotted shares at par of Rs 23.08 crs when they merged unlisted private company Khodayss Systems Ltd ~ The Equity went up to the current Rs 37.59 crs

This is the Current Shareholding of the Equity of Rs 37.59 crs of FV Rs 10

Shareholders	No of Shares	% of Equity
Promoter Group	33660195	89.54
Non Promoter Group	3931042	10.46

 

Controversial Scheme of  Arrangement between Company & Non Promoter Shareholders just  announced 

On April 26,2013  in the Evening the BSE put up this Notice without putting up any Scheme Documents as it  yet had to receive them

http://www.bseindia.com/corporates/anndet_new.aspx?newsid=57c30dee-05db-496b-8859-57973191c47b

“Khoday India Ltd has informed BSE that the Audit Committee of the Board of Directors of the Company at its meeting held on April 24, 2013, has recommended a Scheme of Arrangement between the Company and its Shareholders under Section 391 to 393 read with Sections 100 to 104 of the Companies Act, 1956”

On May 2,2013,Company send this Covering Letter  http://www.khodayindia.com/pdf/letter_to_bse.pdf  along with a CD to BSE for the attention of  Manager,Mr Jayesh Ashtekar . The CD held the Draft Scheme of Arrangement along with the Annexures F 1 & F 2 referred in Clause 4.3 in the Scheme. The Annexures are crucial as they are the Valuation Report dated March 28,2013 by Independent CA,M/s N C Rajgopalan & Co of Chennai which has valued Khoday Share at Rs 31.39 and a Fairness Opinion dated April 17,2013 by SEBI Registered Category 1 Merchant Banker,Corporate Professionals Capital Pvt Ltd,New Delhi

It’s over a week till date and BSE has not put up this Notice along with the Scheme and Important Annexures !

The Scheme is on the company website but without the all important Annexures at

http://www.khodayindia.com/pdf/scheme_of_arrangement.pdf

So what is the  Real Controversy !? 

The Scheme spells out the Cancellation of  3931042 Non Promoters Shares at Rs 75 by issuing a Cash Warrant for this amount  to the Minority Shareholders ~ The Company will discharge the Taxation for the Premium of Rs 65 under Sec 115 O of the Income Tax Act of 1961 while the Shareholder will have to take on any tax liability for the return of Face Value Capital of Rs 10 ~ The Rs 29.48 crs to be paid by the Company will come from it’s accumulated distributable Reserves .After the  Cancellation the Equity Share Capital will reduce to Rs 33.66 crs all held by the Promoters

While specific mention of Delisting is not there in the Scheme Document it does mention the relevant Sections  391 to 393  read with Sections  100 to 104 of the Companies Acts and in accordance with the procedures prescribed by SEBI Circular CIR/CFD/DIL/5/2013  of February 4,2013

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1359986006632.pdf

Clearly this Circular states that both the Stock Exchange  on receipt and the Company on sending to the Exchange must immediately put up on it’s website the Draft Scheme along with all the Documents specified like Valuation Report and Fairness Opinion 

BSE yet has to after over a week while Khoday has merely put up the Scheme without the accompanying Annexures mentioned in them 

Mischief or Oversight ! ?

The Controversy is that the Minority Shareholders feel that the Value of the Company is much more than Rs 75 that they are being compulsorily offered and have to accept as the shares stand cancelled ~ their argument is that there is huge Real Estate Development  taking place through Khoday’s Investment of Rs 61.48 crs in a 75% Partnership Interest in Laxmi Estates  ~ wonder if the Contract Income of Rs 40.69 Crs received from a Firm (name not mentioned) in FY 12 for making over Risks and Rewards for a Project relates to Real Estate Development and Laxmi Estates !  

The Minority Shareholders certainly may have a very strong point if one goes by just one Khoday and Prestige Estate tie up that was announced in 2012 for Prestige to develop a 40 acre plantation in Bangalore  ,part of a Glass factory land owned by Khodays ~ The land cost alone was Rs 12 crs an acre making the plot worth Rs 480 crs !

http://bangalorerealityspeculation.blogspot.in/2012/06/khoday-and-prestige-ink-mou-for-40-acre.html

Khodays  own or have an interest in  a lot of Agricultural ,Residential and Commercial Properties in and around Bangalore ~ the key question is that the listed company Khoday India has an interest in how many of these and to what extent and through which entity and investment? ~ These details are not forthcoming   

Clearly the Minority Shareholders feel deprived that the Khoday Family is unwilling to share some of the Real Estate Good Fortune with them by undervaluing Khoday India’s interest in them or moving out such interest to the Family at low Valuations ~ The Annual Report lists  Scores of Related Parties and this begs the question ~ Why? 

Thus it becomes vital to see on what basis the Valuation Report and the Fairness Opinion  has been prepared  for the Scheme of Arrangement that arrived at an exact value of Rs 31.39 per share     

The Scheme justifies Rs 75 Cancellation Price stating that it is 2.39 times the Value as arrived in the Independent Valuation Report and 1.40 times the 26 weeks high and Low Share Price Average from October 22,2013 (sic) to April 19, 2013 ! The October Date should have read 2012 ! ~ just shows how comically nonchalant Khoday Promoters and Management are in this exercise that they do not even proof read such an important legal document ! ~ of course they’ll say it was an inadvertent oversight !

For the Record the Audited Consolidated Book Value at March 31,2012 was Rs 28.90 with the Networth at Rs 108.65 crs with Reserves of Rs 71.06 Crs including Revaluation Reserve of Rs 12.19 crs ~ Long Term Debt was Rs 27.71 Crs with Short Term Borrowings of Cash Credit at Rs 70.91 Crs

9M FY 13 shows a Loss of Rs 16.77 crs  dropping the Book down to Rs 24.44 per share  as Networth drops to Rs 91 crs ~ so Rs 75 being paid to Shareholders may look like a Heavenly Exit Price had it not been for the Real Estate Valuation Angle

And are we to really believe that Khoday continues to do badly because 2/3rds the Shelf Price of IMFL is because of High Taxes and that it  was short of Cash to have even defaulted on payments of Just Rs 1.17 crs to Canara Bank and Dhanlakshmi Bank in FY 12 but has Rs 29.48 crs in accumulated Profits to pay off Minority Shareholders under this  Scheme of Arrangement despite a huge Rs 16.77 rs loss for the 9M FY 13 !

The Promoters and the Company make it appear in the Scheme that they are doing a huge favour to the Minority Shareholders by cancelling their shares at Rs 75 ~ stating that this was being done to mitigate the hardship suffered by public shareholders as they never got any dividend and the share price fluctuated in a low price range with low volumes making the investment an unattractive proposition !

A Scheming Ploy perhaps to get the Scheme approved by the Court and the Exchanges and SEBI ! ?

Perhaps Minority Shareholders never really existed for the Khodays !? ~and perhaps they were suckers to think that the Khodays would allow them to ride the Real Estate Story in Khoday India successfully !?  They’re spelling Khoday as Kho-Dey! now !  ~ soon to become “Kho-Diya!”

…and suckers that we are ,we continue to live in Hope that our Primary & Secondary Markets will regain credibility and sanctity and bring back the retail and small investors !

” Mera Karan Arjun Ayega !” ~ ” Mera Karan Arjun Ayega”