Vijay Kantilal Sheth, the troubled founder and managing director of Great Offshore Ltd, India’s biggest integrated offshore oilfield services provider, and promoters of Bharati Shipyard Ltd P.C. Kapoor and Vijay Kumar have been good friends.
So, when Kapoor and Kumar lent about Rs200 crore of Bharati Shipyard’s money to Sheth, they were merely returning a favour done by him a few years ago that helped Bharati on its way to becoming India’s second biggest private sector shipbuilder. Sheth, who owns a 15.73% stake in Great Offshore, pledged 14.87% with two units of Bharati Shipyard to raise the loan since December.
Starting sometime in 1998, when Bharati was struggling, Sheth, then with Great Eastern Shipping Co. Ltd, the erstwhile parent of Great Offshore, persuaded the company to place orders for 16 offshore vessels over a period of time with the Indian yard rather than tried-and-tested foreign shipbuilders. Bharati rode on those orders to make a name for itself in the shipbuilding space.
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In 2007, Sheth gave Kapoor and Kumar more reason to cheer by placing an order with Bharati to build a jack-up oil drilling rig, the first to be built at an Indian yard, and a multi-purpose offshore supply vessel, estimated to be worth around Rs1,200 crore. In between, Sheth left the family fold of Great Eastern Shipping. Following a family split, Great Offshore was demerged from Great Eastern Shipping and became a separate company in 2006.
Sheth has been scampering to raise more money after lenders, with whom he had pledged shares to borrow funds to buy the holding in Great Offshore during the demerger, started putting pressure on him. With the stock price of Great Offshore plunging to below Rs300 from the allotment price of Rs850 in 2006, lenders had sought to sell the stock pledged with them to recover the loan if he isn’t able to meet the shortfall in price.
Banks and financial institutions were of no help to Sheth. He could not approach his cousins Bharat Sheth and Ravi Sheth of Great Eastern Shipping for help. Sheth realized the only ones he could fall back on were Kapoor and Kumar.
With the quantum of shares (14.87%) pledged by Sheth with Bharati coming tantalizingly close to the 15% limit set by stock market regulator Securities and Exchange Board of India for making an open offer to buy shares from the public, speculation has surfaced about a possible takeover of Great Offshore by Bharati. Bharati Shipyard, however, has said it had “no intentions to acquire/pledge more shares of Great Offshore or of making an open offer for acquisition of shares of Great Offshore”. The promoters of Bharati have not disclosed the terms and conditions of the loan. However, with corporate governance issues coming to the forefront in the wake of the Satyam Computer Services Ltd fiasco, it wouldn’t come as a surprise if someone were to question the way in which Sheth approached his shipbuilding contractor to raise money for a personal purpose.
And questions may be asked about the contractor lending money against a pledge of shares, whose value is much less than the amount advanced.
Typically, lenders demand shares worth two-three times the loan amount as collateral when lending against shares. This is done to ensure that in the event of share value eroding by half at any point in time, they can be sold to recover the loan amount. For instance, in this case, for a loan of Rs200 crore, lenders would have typically demanded shares worth at least Rs400 crore as collateral.
Sheth has already once experienced the danger involved in pledging shares to raise funds. Great Offshore’s shareholders have a right to know why this has been repeated, particularly when the promoter holding is low, exposing the company to a takeover bid.
This could explain why Sheth leaned on his long-time friends at Bharati to bail him out without him running the risk of losing control when the situation turns adverse.
Bharati Shipyard, a listed entity, has a lot of explaining to do to its shareholders. More importantly, why the company’s money was used to give a personal loan to Sheth at a time when the shipyard had lined up ambitious capacity expansion plans of its own.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday. Respond to this column at firstname.lastname@example.org