Investment Advisory Service

Thursday, 24 July 2008

Macmillan India Promoters train guns at minority shareholders

In one of his letters to the shareholders of Berkshire Hathaway, Warren Buffett remarked “It has been far safer to steal large sums with a pen than small sums with a gun”. The promoters of Macmillan India Limited are on their way to substantiate that remark.

Recently, Macmillan India Limited, a company listed on the BSE and the NSE announced a scheme of arrangement and demerger. Under that scheme, the company has proposed to separate its businesses of book publishing and publishing services in two different companies. The book publishing division would stand demerged into a new company Macmillan Publishers India Limited (MPIL) and the publishing services business would continue to remain in Macmillan India Limited (MIL), which is the parent company. The scheme proposes that for every 1 share held by the shareholders in the parent company MIL, 1 share of the new company MPIL will be allotted to them.

So far, so good. Now comes the twist in the story. The new company MPIL will NOT be listed on any stock exchange! Moreover, the ONLY exit opportunity available to the minority shareholders is to sell their shares to the promoters.

I reproduce clause 18 from the scheme of arrangement:

“Since MPIL will not be a listed company, the members of MIL,......., shall have the following options:

a. they can retain the UNLISTED shares in MPIL issued and allotted to them; or

b. they can offer to sell their shares in MPIL to the Promoters at Rs 69 per share as decided by the Board based on the Valuation Report submitted by an independent valuer, Pricewaterhouse Coopers Private Limited

c. to facilitate the members it has been proposed that in the event a member does not exercise either of the options over during the period of 3 months, it shall be taken that such member wish to effect the transfer and assignment of the shares to the Promoters against the remittance of the price to the members concerned to be paid by the Promoters.”

I was shocked to read this clause. Inbuilt in this clause are three aspects which, taken together, are functionally equivalent to putting a gun on the minority shareholders' heads.
  1. The promoters are creating an unlisted company out of a listed company.
  2. The minority shareholders are being offered a fixed amount of Rs 69 per share.
  3. Negative consent is required from the shareholders.Those shareholders who do not wish to sell their shares to the promoters have to inform the company. In absence of any communication from the shareholders, it will be assumed that the shareholders wish to sell their shares to the promoters.

    SEBI Delisting Guidelines have been framed to protect the interests of the minority shareholders in case the promoter wishes to take the company private. Macmillan promoters have bypassed these guidelines and are demerging a profitable operating business into an unlisted company. If it becomes so simple to take the businesses private, it would become free for all. Later on, we might come across a scheme where the promoters of a listed company demerge almost all the operating assets into an unlisted company leaving only the shell company for the shareholders.

    Read what the promoters’ think of their book publishing business “With among the best product in the market and focus on the large and growing educational market, the publishing business grew significantly. Acquisition of Frank Bros (a leading local educational publisher) has put MIL in a leadership position in the national boards educational market” (source: promoters acknowledge that the book publishing business of Macmillan India is in a leadership position.

    The valuation of Rs 69 a share by the independent valuer reminds me of the famous joke on accountants. A potential employer asked the candidate “How much is two and two?” The candidate who was an accountant replied “How much do you want it to be?” I think the valuation reports are an eye wash and not even worth the paper they are printed on. If Rs 69 per share is the fair valuation for the book publishing business, will the promoters’ sell their shares at Rs 69 a share if there were somebody willing to buy them out? After all, this valuation of Rs 69 a share has been calculated by an INDEPENDENT VALUER.

    Why has the negative consent being put up in the scheme of arrangement where no response from the shareholder on the offer to sell the shares will be taken as acceptance of the offer? Many of these minority shareholders will not even receive the communication from the company and many of those who will, may not understand the consequences of their inaction.

    I think the promoters of Macmillan India Limited are stealing from the minority shareholders a highly profitable business of the company. The regulatory authorities should pull up their socks, discharge their fiduciary responsibilities and thwart the attempts of the promoters to short change the minority investors.

    Neither me and my family nor my employer hold any financial interest in this company.