Mumbai: The controversial merger proposal under which Escorts Ltd wanted to combine three group companies with itself has been approved. It mustered the “requisite majority” from shareholders in a 20 May vote, the Nanda family-controlled company said in a statement to the stock exchanges on Tuesday.
While the company said— and has been saying—that the merger was a way to create a more “robust” company with stronger financials, activists espousing the cause of minority shareholders described it as a “disappointment” and “setback” to the process of sensitizing institutional investors to the way companies are run. Even though minority investor activism has been rising, most outcomes have ended up going the promoters’ way so far.
In a notice to BSE later in the day, Escorts announced that the “scheme (of arrangement) has been approved by the requisite majority of the equity shareholders and unsecured creditors”.
It did not specify the percentage of shareholders that supported the proposal and those that voted against it. Being a special resolution, the proposal needed at least 75% of the investors to agree to it.
Escort Ltd shares dropped 0.83% to Rs 66.05 on BSE. The benchmark Sensex rose 0.13% to close at 16,438.58 points. The announcement came after trading hours.
“If all goes well, I think the (merger) process should be completed by mid-to-end August. The (voting) report was directly submitted by the court appointed official to the high court and no copies of the report were forwarded to us,” G.B. Mathur, head, legal, at Escorts Group, said in a phone interview. “We don’t know who voted and who did not, or what was the pattern of the voting,” he said.
The headcount at the 20 May meeting was about 300-350 but he didn’t know how much stake—and voting control— those investors represented.
Escorts, in a 20 April notice to shareholders, had said it would merge Escorts Construction Equipment Ltd, Escotrac Finance and Investments Pvt. Ltd and Escorts Finance Investment and Leasing Pvt. Ltd with itself and put the proposal up for voting exactly a month later.
Two activist advisory firms— Bangalore-based InGovern and Mumbai-based Institutional Investor Advisory Services (IIAS)—had cried foul and advised institutional investors to vote against it as the merger effectively almost quadrupled the promoters’ voting control to 41% compared with their direct shareholding (around 12%). The merger is being routed through the newly created Escorts Benefit and Welfare Trust, which will hold the equity held by the three group firms.
“It is indeed disappointing that minority investors couldn’t muster enough support. The proposal of amalgamation was so blatant that it should have been defeated,” said Shriram Subramanian, managing director, InGovern Research Services. “Institutional investors, in particular mutual funds, should be concerned. If they are investing (in companies) and not fighting for their rights, then how are they keeping up their fiduciary responsibility?”
He added that it would be in the interest of the Indian capital markets to rein in proposals that hurt minority investors.
IIAS’ co-founder Amit Tandon called the outcome “disappointing”. “We can put our head down and look at the next case to sensitize investors. As markets get more and more institutionalized, these (governance) issues will matter more,” he said.
According to a fund manager who tracks Escorts, the move was expected with the kind of system the country has in place with regard to treasury stock.
“It is disappointing. What we can do is to complain afresh to the concerned agencies,” said the fund manager requesting anonymity. “I don’t know how many institutions have actually taken part in voting and the sad part is institutions do not interact with each other on these issues.”
The company had earlier said that the merger will help the transition of Escorts from being viewed as a tractor maker to an engineering company and would add Rs 1,000 crore to the top line.
Mathur added that it would add Rs 45-50 crore to Ebitda (earnings before interest, tax, depreciation and amortization).
Recent instances of shareholder activism haven’t ended happily. For instance, minority shareholders unsuccessfully resisted Akzo Nobel India Ltd’s proposal to merge three unlisted firms with itself. And nothing has so far come of London-based hedge fund the Children’s Investment Fund’s protest about government-owned Coal India Ltd (in which it owns shares) being forced to sell coal at prices below market rates.
Subramanian pointed out that in Azko’s case, the voting pattern was announced.
Amrit Raj in New Delhi contributed to this story.