Before it delisted last November, Ruchi Soya’s market cap amounted to just 0.23% of Marico’s
At current prices, the acquirer’s stake is worth over ₹40,000 crore
It’s been about 100 days since Ruchi Soya Industries Ltd’s shares resumed trading after completing the resolution process under the bankruptcy law. Barring six trading sessions, the stock has risen by the maximum permissible limit each day. In all, the stock has risen by about 8,000% since trading resumed in January.
At this rate, it might overtake the market capitalization of Marico Ltd by the end of the week. Of course, the two companies aren’t strictly comparable, although a part of their portfolio includes marketing edible oils. But here is why the comparison is striking. Before trading in its shares was discontinued last November, Ruchi Soya’s market cap amounted to just 0.23% of Marico’s. There are other strange consequences of the sharp rise in the stock. The ₹4,350-crore acquisition by the Patanjali group was primarily debt-funded. At current prices, the acquirer’s stake is worth over ₹40,000 crore, higher than the value of some of the banks, such as Punjab National Bank, who extended the loans.
Of course, as was pointed out in many reports, the price rise is primarily owing to a sharp reduction in free float of the stock. As part of the restructuring, existing shareholders were nearly wiped out and handed one share for every 100 shares held. With an extremely low float of 0.97%, Ruchi Soya’s share price isn’t a very good reflection of its value.Indeed, in mid-January, just before trading in the shares resumed, the Ruchi Soya board approved a preferential issue of shares to a non-promoter entity at just ₹7 per share. In contrast, the shares now trade at ₹1,367 apiece. Needless to say, as the Patanjali group attempts to bring down its stake further, the share price will better reflect the true value. Current rules allow high promoter shareholding soon after a bankruptcy resolution process, with the stipulation that the non-promoter holding should be increased to 10% within 18 months, and 25% within a three-year period.
Securities and Exchange Board of India (Sebi) should sit up and take note because, in this instance, the extremely low float is leading to strange price movements. A relook at the policies and timeline for reducing high promoter stake, or taking the delisting route, could be considered for companies that go through bankruptcy proceedings. J.N. Gupta, a former Sebi executive director, said in such bankruptcy resolution cases, companies should also be asked to file an information memorandum, which is somewhat akin to a draft prospectus. The aim is to keep investors informed about the vast changes in capital and the business structure of such companies, as well as the plans of the new promoters and new management.
Of course, Ruchi Soya isn’t alone. Shares of Alok Industries Ltd have also behaved strangely post the resolution process. Sebi will do well to examine and frame policies for stocks coming out of the bankruptcy process.