Nirma disallowed to withdraw offer for Shree Rama Multi-tech

Today’s edition of Business Standard carries in a regular column “Without Contempt” an article by Somasekhar Sundaresan….he highlights the dilemma of an Acquirer,one he discloses he has represented,…in that it on one hand it can be accused of violating the Insider Trading Regulations(In non Hostile takeovers),which prohibits communication or counselling of unpublished price-sensitive information and on the other hand can be stuck despite acute fraud (In Hostile situations)

Though Mr Sundaresan has chosen not to disclose which companies he is referring to as probably matter may go in appeal,anyone with a pulse on Indian Stock Markets would know he is alluding to the SAT order of June 5,2008 last month  http://www.sebi.gov.in/Index.jsp?contentDisp=SAT which upheld the SEBI Ruling that the Nirma Group could not withdraw the public announcement to buy out 20% of the shares of Shree Rama Multi-tech

The matter is really interesting…….In 2002, Nirma Group subscribed to 4894 secured optionally fully convertibles notes of Rs One Lakh each with a  nominal value of Rs 1.35 lakh each.These were issued by three group companies of Shree Rama Multi-tech.Furthermore 14288700 equity shares of Shree Rama Multi-tech too were pledged with the Nirma Group on this deal

When in 2005,there was a default on these notes,the Nirma Group chose to invoke the pledge and became owners of 24.25% of the Equity of Shree Rama Multi-tech. In keeping with the Takeover Code Regulations of SEBI they appointed a Merchant Banker who made the Public Announcement to acquire 20% of Equity shares of Shree Rama Multi-tech   and also filed with SEBI the Draft Letter Offer Document.

Then follows a great tale where Nirma tries to wriggle out of the Offer…first they file for revision of the offer to current market price which had fallen significantly…this being disallowed they file for withdrawal of the offer bases on special circumstances.These circumstances relate to Nirma discovering later that Rs 326.48 crs have been siphoned off by the Promoters of Shree Rama Multi-tech.Nirma was relying on Sec 27 (1) d of the Takeover Code which allowed the withdrawal of the offer under ” such circumstances as in the opinion of the Board merit withdrawal”

SEBI refused to accept that the circumstances were in fact “such” and pointed out that Nirma should have done their due diligence before invoking the pledge and should not have acquired the shares if the circumstances so warranted.

SAT upheld this ruling of SEBI commenting that “They are only trying to wriggle out of a bad bargain which is not permissible….”.Sec 27(1) d should be interpreted strictly in exception only and should draw “colour” from preceding sections 27 (1) b and c which allowed withdrawal of offer only if statutory approval(s) required have been refused or the sole acquirer, being a natural person, has died respectively

SAT also listed specific facts that Nirma was aware of which clearly indicated the financial weakness of Shree Rama Multitech …thus refusing to accept Nirma’s argument that they were not in a position to conduct a due diligence….. they went in with their eyes open and it was not as if they were innocent and were caught napping in an unexpected turn of events

Shree Rama Multi-tech closed today at Rs 6.30 (FV Rs 5) on the BSE with a volume of under 10000 shares

Interestingly Shree Rama Multi-tech shows Nirma’s shareholding in it under Public Shareholding as on June 30,2008

http://www.bseindia.com/shareholding/shareholdingPattern.asp?scripcd=532310&qtrid=58

Shree Rama Multi-tech has filed with the Gujarat High Court a new Scheme of Compromise and Arrangement with it’s lenders and shareholders under Sec 391 of the Comapnies Act

Anybody out there ?…is it worth a look ? It touched a high of Rs 16+ earlier this year in January….can one take a bet on Nirma losing any further appeal in the Supreme Court ?..in which case it’s holding would cross 40% 

Latest Update Sunday,May 12,2013 

After years  finally Supreme Court upheld SAT and Nirma will have to make the Open Offer to Shree Rama Multi-tech Shareholders to pick up 20% Equity at Rs 18.60

http://www.business-standard.com/article/companies/sc-dismisses-nirma-plea-in-shree-rama-open-offer-113050900201_1.html

Shree Rama consequently hit 20% upper circuit at Rs 5.74 on Thursday,May 9,2013 and another 10% on Friday,May 10,2013 at Rs 7.56 to give a market cap of Rs 44 crs

Nirma of course has delisted at Rs 260 in March 2012

However Dont get too excited and expect Shree Ram Multi-Tech to rise to Rs 18+ as only 20% of the Equity of Rs 31.76 crs (FV Rs 5) is the Offer Burden and so all shares will not be accepted  and post offer scenario the Share Price may drop below par of Rs 5 again

Shree Rama Multi-tech boasts of top Clientele but continues to make Operating Losses though in FY 13 it has recorded a Profit of over Rs 8 crs for the 9mFY 13  because of  Exceptional Item that relates to a settlement with a lender of less than 1/3 the amount (see below)

The accumulated Loss remains huge and Networth remains negative at @ Rs 90 crs with Long term Borrowings yet above Rs 200 crs

The company has filed fresh scheme of compromise and arrangement u/s 391 of The Companies Act, 1956 vide petition no.401 of 2008 in Gujarat High Court and the same is pending before the Hon’ble High Court

During the first quarter ended June 30,2012 in FY 13 the company has entered into settlement with one of the lenders and principle amount of Loans and Borrowing of Rs 72.63 crs was settled for Rs 22.57 crs. The resultant gains were credited to the P & L A/c by Rs 24.39 crores and to Capital Reserves by Rs 25.66 crs as per the end use of the Loans

Will be interesting to see if Shree Rama Multi-tech can be reborn again after  Scheme of Compromise and Arrangement is passed by the Court and further settlements take place with lenders to bring down Debt significantly ~ After all the Company  did notch Sales of Rs 72 crs in FY 12 and Rs 64 crs for the 9m FY 13