Bangalore / Mumbai: Vijay Kantilal Sheth, vice-chairman and managing director of Great Offshore Ltd, an offshore oilfield services firm, has became the first promoter in India to lose control over his company because of the shares he had pledged for loans.
Bharati Shipyard Ltd, India’s second biggest private shipbuilder, on Thursday said it has acquired shares pledged by Sheth at Rs315 each, taking its stake in Great Offshore to 14.89% and bringing down Sheth’s holding in his company to less than 1%.
Changing hands:Bharati Shipyard Ltd’s facility in Mumbai.
The proportion of shares acquired is just under the 15% that makes an open offer for purchase of additional shares mandatory according to Indian law.
It wasn’t immediately clear whether there would be a change in management because of this change in so-called economic control or ownership.
Natural Power Ventures Pvt. Ltd and Dhanshree Properties Pvt. Ltd, subsidiaries of Bharati Shipyard, will hold the Great Offshore shares.
Analysts say this is the first instance in India where a company has acquired the shares pledged with it.
“We have decided to acquire the pledged shares and hold it as a strategic long-term investment,” said P.C. Kapoor, MD of Bharati Shipyard, said in a statement. “The investment would generate long-term benefits for the company and add strength to our position in the international market. The investment would make the company at par to a select league of global players having interests in all domains of offshore business.”
A spokesperson for Great Offshore declined to comment.
“Logically, this is first instance where pledged shares (are) being invoked. With this development, the erstwhile promoter will now only hold 0.84%. It is not clear that whether there would be a change in the management since the pledging deal is done on the basis of long-standing relationship between Bharati and Great Offshore,” an analyst tracking the firms said. “Moreover, (Vijay) Sheth is most competent person with wealth of experience in the offshore industry.” The analyst did not want to be identified.
At least three shipping experts, none of whom wanting to be identified, said that given the long-standing friendship between Sheth and Kapoor and his fellow promoter Vijay Kumar, the promoters of Bharati could well be safeguarding the shares till Sheth acquired the money to buy them back.
Shares of Bharati Shipyard rose 10% on the Bombay Stock Exchange (BSE) on Thursday to close at Rs96.35, while Great Offshore’s stock rose 2.06% to close at Rs295.45. BSE’s benchmark index, the Sensex, rose 1.37% on Thursday to close at 12,116.94 points.
Sheth had pledged shares in December with the two subsidiaries floated by Kapoor and Kumar to raise a personal loan of about Rs200 crore.
This helped a desperate Sheth ward off some lenders with whom he had pledged shares to raise funds to buy the holding at the time of Great Offshore’s de-merger from Great Eastern Shipping Co. Ltd in 2006, after a family split.
“We consider the investment in Great Offshore as a significant step towards the company’s (Bharati Shipyard) aspiration to have foothold in all spheres of the offshore industry,” Kapoor said in the statement. “The company has carved a niche for itself into construction of vessels and rigs required for the offshore industry and Great Offshore is into providing support vessels and services required by the offshore industry.”
Kapoor had told Mint during an interview in January that Bharati lent money to Sheth to ensure that its business interests were not adversely affected as a result of any possible change in the management of Great Offshore. Bharati is constructing a jack-up oil drilling rig, the first to be built in an Indian yard, and a multi-purpose offshore support vessel for Great Offshore costing about Rs1,200 crore.
Bharati’s decision to acquire the pledged shares comes a week after Great Offshore, which owns the rig, announced a delay in the construction of the rig at Bharati’s Dhabol facility. The rig was slated for completion by April.
The rig, costing $168 million (Rs832 crore), has been hired out by Great Offshore to state-owned oil exploration and production firm Oil and Natural Gas Corp. Ltd (ONGC) in a public auction in 2007 at a day rate of $146,000. It was scheduled to start working on a five- year contract with ONGC beginning 14 May. Bharati has also missed the original completion date of the offshore vessel. Bharati has so far built and delivered 16 offshore vessels of various types to Great Offshore.
In January, India’s capital markets regulator, Securities and Exchange Board of India (Sebi), made it compulsory for listed entities to disclose information on share pledges made by promoters, to improve disclosure and transparency.
Sebi acted after it was found that Satyam Computer Services Ltd’s founder B. Ramalinga Raju, who on 7 January confessed to a Rs7,136 crore accounting fraud, had pledged nearly all his stock in the firm with lenders to raise money.
On 6 April, Mint had reported that in 26 of 667 firms studied, promoters had pledged at least 50% of the equity and theoretically ran the risk of losing control. In some cases, lenders had threatened to liquidate the shares, offered as collaterals, because of a slump in share values.
When share prices decline, lenders typically ask for more shares to be pledged as collateral and if the borrowers fail to do so, the lenders sell the pledged shares to recover money.
A similar incident occurred at the height of the subprime crisis, when troubled US investment bank Bear Stearns Cos liquidated a large chunk of its portfolio investments in India. Promoters of Orchid Chemicals and Pharmaceuticals Ltd bore the brunt of the sell-off, as they had borrowed funds from Indiabull Financial Services Ltd and Religare Enterprises Ltd to raise their stake in Orchid from 17% to 24%. The promoters of Ranbaxy Laboratories Ltd, through a subsidiary, used the opportunity to their benefit by mopping up shares that had halved in value because of Bears Stearns’ decision. Religare is also promoted by Ranbaxy.