Order against PI Industries Limited

SECURITIES AND EXCHANGE BOARD OF INDIA

ORDER

In the matter of proposed acquisition of shares of PI Industries Limited

1.0  Shri Salil Singhal (hereinafter referred to as the "Acquirer") along with Shri Arvind Singhal, Smt Saraswati Singhal, Shri P.P Singhal, Mrs Madhu Singhal, Shri Mayank Singhal, Mrs Bina Singhal, Mrs Binal Singhal, Shri Gaurang Singhal, Shri Sanjaya Singhal, Mrs Nandita Singhal, Shri Suket Singhal, Shri Ananya Singhal, Mrs Shakuntala Singhal, Mrs Manali Singhal, Wolkem India Ltd, Lucrative Leasing Finance & Investment Co. Ltd, Parteek Finance and Investment Co. Ltd, Binarvi Holding Pvt Ltd, Nansjay Investments Pvt Ltd, Samaya Investment and Trading Pvt Ltd ( hereinafter referred to as the "persons acting in concert") hold 74.77% shares (i.e, 26,49,567 equity shares) of PI Industries Limited (hereinafter referred to as the "Target company"). The Acquirer alongwith persons acting in concert proposes to acquire 18.34% shares(i.e, 6,50,009 equity shares) of the Target company through a shareholders agreement from the existing shareholders. As a result of the proposed acquisition , the Acquirer would be under an obligation to make a public offer to the public shareholders of the Target company in terms of sub regulation (1) of regulation 11 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as the "Regulations").

 
1.1 The shares of the Target company are listed at the The Stock Exchange Mumbai, Jaipur Stock Exchange Ltd, Madhya Pradesh Stock Exchange and The Delhi Stock Exchange Association Ltd.

2.0 The Acquirer made an application dated December 26, 2001( in the specified format) forwarded vide letter dated 10th January, 2002 to the Securities and Exchange Board of India (hereinafter referred to as "SEBI") under sub-regulation (2) of regulation 4 of the Regulations seeking exemption from making public announcement under regulation 11 read with regulation 12 of the Regulations and also from the compliance with the making of public announcement, appointment of merchant bankers and other formalities under the Regulations.

3.0 In the aforesaid application, the Acquirer submitted, inter-alia, the following:

3.1 The Acquirer along with persons acting in concert holds 26,49,567 equity shares (74.77% shares) of the Target company. The existing shareholders from whom the Acquirer along with persons acting in concert proposes, to acquire shares of the Target Company hold 6,50,009 equity shares i.e (18.34% shares). The balance equity shares i.e 2,44,178 (6.89% shares) are held by public shareholders in the Target Company.

 3.2 The acquisition of 6,50,009 shares (18.34% shares) of the Target company is to take place through a shareholder’s agreement from the existing shareholders.  3.3 The Acquirer be exempted from compliance with the making of public announcement, appointment of merchant banker and other formalities under the regulations and more specifically from making public announcement under regulation 11 read with regulation 12 of the Regulations.  The Acquirer has sought exemption on the following grounds :-

3.3.1 The shares of the Target company are thinly traded and the shareholders are concentrated in small area with small shareholding of 100 shares each in many cases.

3.3.2 There are 949 public shareholders of the Target company holding 6.89% shares.

3.3.3 The Acquirer proposes to make a written offer to buy out the entire public shareholding @ Rs.17/-. The aforesaid offer would be made individually to each of the public shareholders.

3.3.4 The consideration for the purchase of the shares would be paid within 15 days from the receipt of the documents.

3.3.5 The offer would be kept open for 12 months as against 6 months provided in respect of a formal offer to enable delisting.

 4.0 The said application was forwarded to the Takeover Panel on January 18, 2002 in terms of sub-regulation(4) of regulation 4 of the Regulations. The Takeover Panel vide its report dated 28.1.02 recommended, inter alia, as under :  "The Acquirers are promoters of the Target company and presently hold 74.77% of the paid-up share capital of the Target company. The Acquirers intend to acquire 18.34% of voting rights in the Target company through shareholders agreement. Subject to the Acquirers making an offer to purchase entire shareholding of all the remaining shareholders of the Target company individually by making a written offer to be sent through registered post with acknowledgement due at a price to be fixed in accordance with the Takeover Code but in any event not less than Rs. 17/- per share and complying with other conditions mentioned in the grounds of seeking exemption, grant of exemption as sought is recommended."
 4.1 As the Panel did not recommend grant of exemption in terms of the request made by the Acquirer, the Acquirer was granted an opportunity for personal hearing in terms of sub regulation (6) of regulation of the Regulations.  5.0 SEBI vide letter dated March 26, 2002 advised the Acquirer to appear for personal hearing before Chairman, SEBI on 15/4/02 and the Acquirer was also advised to furnish the following details :  

1.  
   1. whether the shares of Target Company are frequently or infrequently traded in terms of the Regulations, taking the date of the aforesaid application to SEBI as the reference date;
   2. justification for the proposed offer price of Rs.17/- per share in terms of sub regulation (6) of regulation 20 taking into consideration all the parameters laid down under sub regulations (2) or (3)of regulation 20 ;
   3. to confirm how the proposed offer price of Rs.17/- per share is in conformity with the provisions of the Regulations.
      1.  
         
          
          
       
6.0 The Acquirer replied to SEBI’s letter dated 26.3.02, vide its letter dated April 09, 2002 which is dealt with in the subsequent paras. 7.0 On April 12, 2002 the Acquirer was informed that the hearing scheduled for 15.4.02 was postponed and subsequently SEBI vide letter dated 7.5.02 informed the Acquirer that the same is rescheduled for 21.6.02. The Acquirer vide letter dated 6.6.02 requested for postponement of the hearing stating the reason of some overseas appointment. SEBI acceding to the request of the Acquirer postponed the hearing and informed the Acquirer vide letter dated 17.6.02 that the hearing was rescheduled for 25.7.02. The Acquirer was given hearing on 25/7/02 wherein he made his submissions. 8.0 The Acquirer has vide his letters dated 9/4/02, 24/7/02 ,29/7/02 and during the hearing has ,inter alia, made the following submissions :-

8.1.1. the shares of the Target company are not frequently traded in all the stock exchanges (in which the shares are listed) in terms of explanation 1 of regulation 23 of the Regulations;

8.1.2. the offer price of Rs. 17/- is in the terms of regulation 20 of the Regulations as the offer price represents the highest price paid by the Acquirers for the shares in the last 26 weeks prior to the date of making of application to SEBI on December 26, 2001. The requirement to make a public offer in the present case may arise consequent to the proposal of the existing promoters to enter into a shareholders’s agreement with a group of shareholders holding 18.34% shares of the Target company taking the holding of the Acquirer to over 90% of the Target company. The offer is not triggered by any acquisition and therefore the question of negotiated price does not arise. The average of the weekly highs and lows in the 26 weeks preceding the reference date i.e 26.12.01 is less than Rs. 17/- per share and therefore, the offer price is in terms of regulation 20 of the said regulations;

8.1.3. the fair price for the share has been determined by Acquirer and the Merchant Banker, who after detailed study of various aspects has concluded that Rs 17/- is a fair price for the proposed offer. The Share Valuation Report as prepared by the Merchant Banker was duly submitted and it has taken into account a variety of factors including the realizable book value. Like in any going concern, in the case of Target company also there is a clear distinction between "realizable book value" and "book value as per books". The valuation report deals with the issue of realizable book value, which is the determinant for arriving at a fair value rather than the book value as per books, which does not take into account several factors like the fall in the value of plant & machinery etc. The realizable book value has been determined as Rs. 22.01 per share by considering various parameters more particularly the value of plant and machinery, which can be realized. Therefore, the Acquirer proposes to give individual offers to the remaining shareholders at the value determined by the Merchant Banker;

8.1.4 the Target company is essentially in the business of pesticides. The future prospects of the industry are grim due to international consolidation by Merger and Amalgamation of the Multi National Companies and the impending impact of World Trade Organization. Industry perception is a key factor to determine the realizable market value of the equity shares;

8.1.5 the industry scenario and its prospects for purposes of shareholder value justifies the offer price. The Acquirer has stated that Pesticide Industry is perceived as a Sunset industry with little faith of the shareholders for reaping reasonable returns on the equity investments. The Indian Market in the present state coupled with absence of liquidity in the shares of Target company resulting from very low public holding does not provide the company any opportunity to raise the much needed equity funds from the capital market. These factors caused great risk to the company and its performance;

8.1.6. that the price to book value ratio of companies operating in the same industry is 0.4, whereas at the offer price of Rs 17/- this ratio would be 1.58 for the Target company. That the market price of even high profile companies in the industry has always remained very low as compared to their respective book values;

8.1.7 the sustainable future EPS has been indicated as Rs 3.66 after deducting adjustments for closure of metering division, agro climatic conditions, etc. and based on this and the industry P/E of 3.6 the value of shares of the Target company has been indicated as Rs 13.18;

8.1.8. in the facts and circumstances of the case, the best course would be to send individual offers to the remaining shareholders and that no prejudice would be caused to any person including the small investors on account of grant of exemption under regulation 4 of the Regulations. The number of public shareholders is less than 1000 and they are generally located in and around Rajasthan;

8.1.9. the Acquirer has agreed to advertise in the newspapers indicating the fact that offer letters have been posted to the public shareholders of the Target company and if any shareholder has not received it, he can approach the Acquirer to sell his holdings in Target company in terms of the offer , for the benefit of the public shareholders;

8.1.10. the Target company has not raised finance based on the valuation of fixed assets by the Merchant Banker. In fact Financial Institutions have financed only the new fixed assets as and when created in the past;

9.0 I have taken into consideration the application dated December 26, 2001 the recommendations of Takeover Panel ,the submissions made by the Acquirer through his letters and during the personal hearing held on 25/7/02 and the material available on record.

9.1 It is observed that the number of public shareholders in the Target company is quite large .There are 949 public shareholders ,who hold 6.89% shares / voting rights of the Target company. The Acquirer has stated that since the percentage of public shareholders is very small the exemption as sought may be granted. One of the facts which is relevant for grant of exemption from making open offer is the number of public shareholders and not only the percentage of public shareholding. In the instant case it is observed that public shareholding as a percentage may appear to be small but the number of shareholders i.e. 949 is a substantial number. In view of the aforesaid, the individual offer without following the transparent procedure under the Regulations, may not be in the interest of the 949 public shareholders.

The Regulations provide for public notice, which aids in wider dissemination of such an offer so that anyone holding shares or intending to transact in shares of the Target company would know of such an offer. Besides, in the Regulations there are other provisions in the interest of shareholders. The Regulations also cast obligations on the Acquirer and the Target company. The Regulations also contain provisions providing for action in case of non compliance of the same. In the instant case, the Acquirer proposes to send individual letters to the shareholders. Therefore, the procedure proposed by the Acquirer does not observe any of these provisions. Thus the procedure proposed by the Acquirer does not meet the letter and spirit of the Regulations . 9.2 I have noted the submission of the Acquirer that the shares of the Target company are not frequently traded in all the stock exchanges in which the shares of the Target company are listed, in terms of Explanation (1) of sub regulation (3) of regulation 20 of the Regulations and that the offer price of Rs. 17/- is in terms of regulation 20 as the offer price represents the highest price paid by the Acquirers for the shares in the last 26 weeks prior to the date of making of application to SEBI.

In this regard it will be pertinent to advert to sub regulations (3) & (6) of regulation 20 of the Regulations which pertains to determination of minimum offer price. The same reads as under :-

Sub regulation (3) " Where the shares of Target Company are infrequently traded, the offer price shall be determined by the issuer and the merchant banker taking into account the following factors –

2.  
   1. the negotiated price under the agreement referred to in sub regulation (1) of regulation 14;
   2. the highest price paid by the Acquirer or persons acting in concert with him for acquisitions including by way of allotment in a public or rights issue, if any, during the twenty six week period prior to the date of public announcement ;
   3. the price paid by the Acquirer under the preferential allotment made to him or to persons acting in concert with him at any time during the Twelve month period upto the date of closure of the offer and ;
   4. other parameters including return on networth, book value of the shares of the Target company, earning per share, price earning multiple, vis-à-vis, the industry average.
   
    
    
   (i) For the purpose of this clause, shares will be deemed to be infrequently traded if on the stock exchange, the annualized trading turnover in that share during the preceding six calendar month prior to the month in which the public announcement is made is less than two percent (by number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the said six months period may be taken.

   (ii) In the case of shares which have been listed within six months preceding the public announcement, the trading turnover may be annualized with reference to the actual number of days for which the share has been listed."

Explanation

 Sub regulation (6)
  "The letter of offer shall contain justification on the basis on which the price has been determined."
 9.3 From the reading of the aforesaid regulation it is clear that in case of infrequently traded shares the offer price has to be determined taking into account parameters like book value per share, return on networth, earning per share, price earning ratio vis-a-via Industry price earning ratio. Further, the procedure specified in the Regulations for making of offer requires said disclosures to be made in the public announcement and letter of offer including justification of offer price.  9.4 In the instant case it is observed that –  (i) the book value of the shares is Rs. 109.31 per share as on 31^st March 2002 and the proposed offer price is Rs. 17/-. The Acquirer has justified the offer price stating that the price to book value ratio of companies operating in the same industry is 0.4, whereas at the offer price of Rs 17/- this ratio would be 1.58 for the Target company.

(ii) the Acquirer has worked out the future EPS as Rs 3.66 after deducting adjustments for closure of metering division, agro climatic conditions, etc. and based on this and the industry P/E of 3.6 the value of shares of the Target company has been shown as Rs 13.18.

The Acquirer has also submitted a valuation report obtained from Keynote Corporate Services Ltd. to justify the offer price of Rs. 17/-. Perusal of the aforesaid valuation report reveals that:
 

1.  
   1. the realizable book value has been shown as determined to be Rs. 22/- considering the realizable value of plant and machinery and other factors ;
   2. the Target company has made profit in the financial years ended 1999 and 2000 ;
   3. the Target company has made profit again in the financial year ended 31.3.2002 as per the audited results.
    
   1. negotiations have been initiated with multinational companies to obtain some newer products for distribution through the Target company’s strong nationwide distribution system. As a result an agreement for marketing 3 new products has been signed. This business is expected to generate about Rs. 10 crores for this business.
   2. the Target company is now strongly focusing on the industrial chemicals field. It is now recognized as a reliable supplier and has been approached by several multinationals and is working on many molecules which augurs a very good future for this business;
   3. the prospects for the current year look good but the Target company needs to work with cautious optimism and continue to strongly focus on cost management to remain competitive ;
   4. the Target company’s Panoli unit in the State of Gujarat has now been awarded the prestigious ISO-9002 certification. This unit has also received the approval for the ISO-14001 certification.


On perusal of the Annual Report for the year 2000-2001 it is observed that it has, inter alia, been stated that:

9.5 It is observed that the Acquirer has submitted that future prospects of the pesticide industry are grim and that pesticide industry is perceived as a Sunset industry with little faith of the shareholders for reaping reasonable returns on the equity investments. The Acquirer has justified the offer price of Rs. 17/- by submitting the data with regard to deteriorating financial performance indicator of the Target company. Whereas from the valuation report submitted by the Acquirer it is observed that the Target company has made profit in the financial years ended 1999 and 2000 and from the audited financial results of the Target company for the financial year 2001 and 2002 as given below, it is observed that in the financial year 2002 the Target company has made a profit of Rs. 397.64 lacs and has already wiped off the losses made by the Target company in the financial year 2001, to the tune of Rs. 342.77 lacs. The Target company is now looking up. In view of the facts as emerging from the disclosures made by the Acquirer, the grim picture about the company as presented by the Acquirer does not seem to be correct.

9.6 In view of the aforesaid , I find that the offer price of Rs. 17 /- as proposed by the Acquirer is not justified in terms of sub regulation (6) read with sub regulation (3)of regulation 20 of the Regulations.

10. 0 Taking into consideration the above, the recommendations of the Takeover Panel and the fact that there are substantial number of public shareholders (i.e. 949) in the Target company holding 6.89% shares / voting rights of the Target company and the interest of the public shareholders of the Target company, the individual offer as proposed by the Acquirer and as recommended by the Panel may not be in the interest of the 949 public shareholders. Further the price of Rs. 17/- as proposed by the Acquirer is also not justified in terms in terms of sub regulation (6) read with sub regulation (3)of regulation 20 of the Regulations. Therefore, in exercise of the powers conferred upon me under sub section (3) of Section 4 of the Securities and Exchange Board of India Act 1992 read with sub regulation (6) of regulation 4 of the Regulations, I hereby reject the application of the Acquirer seeking exemption from complying with the provisions laid down in Chapter III of the Regulations with regard to the proposed open offer to be made to the public shareholders of the Target company for acquisition of 2,44,178 equity shares (6.89% shares).

 I also direct that in case the Acquirer proposes to proceed with the proposed acquisition of 6,50,009 shares (18.34% shares) from the existing shareholders, the same shall be done by the Acquirer in strict compliance with the Regulations.