It is good to see shareholders showing their might, especially against mighty companies, who sometimes fool themselves into thinking that they are invincible, beyond everyone’s reach. Such ‘vigilant’ shareholdership’ should grow, taking on the role of a watchdog.
Today, Jindal Steel and Power Ltd (JSPL) was to hold an Extraordinary General Meeting (EGM) but that has now been postponed and the new date is yet to be announced. The reason for postponement – the very purpose of the divestment deal came under serious scrutiny.
The company had put out a call for this EGM on 2nd May’21. The purpose:
1: The Board on 26th April, approved divestment, by way of sale of company’s entire equity shareholding in its material subsidiary, Jindal Power Limited, which is 96.42% to Worldone Private Limited for Rs.3015 crore, to be funded via mix of debt and equity.
2: Worldone is an investment holding company of the Jindal family, with Navin Jindal being the major shareholder.
3: The main reasons cited for divestment: (i) Deleverage the balance sheet; (ii) reduce carbon emissions; (iii) to refocus on its core business of steel; (iv) pare debt and increase capacity in Angul in Odisha from 6 MTPA to 12 MTPA and taking the company’s overall steel capacity in excess of 15 MTPA.
4: Apart from the cash consideration, there are certain outstanding inter-corporate deposits (ICDs) and capital advances, aggregating Rs.4,380 crore, which are proposed to be converted into a term loan as per the terms of the deal.
The company said that to make this sale process ‘transparent’ and get maximum value, it had initiated a sale process in Dec’20 and Grant Thornton Advisory was appointed to run this deal. They approached a total of 33 entities which included 14 Indian companies, 11 foreign companies and 8 financial investors. And yes, Grand Thornton also informed major shareholders of Jindal Power too about the sale. The response was muted and even those that it received, they were rejected as JSPL’s bid was the highest and thus declared a winner.
And this is where, apart from the purposes stated, that it gets fishy. Chennai-based shareholder advisory firm Ingovern did an assessment of the valuation of Jindal Power and said that the enterprise value was in the range of Rs.10,000 to Rs.12,000 crore and the promoter was taking it all at a discount of 70 to 75% and this they said, was the “highest.” And if the aim was to deleverage, shouldn’t they wait for a better deal? What’s the point of the money going from one pocket to the other, while it all remains stitched on the same pants?
Ingovern this asked JSPL shareholders to reject the divestment proposal and also reject the conversion of JPL’s inter-corporate deposits and capital advance to JSPL into loans and to treat the divestment proposal as a related party transaction. InGovern very clearly put the needle of suspicion on the intent of JSPL by asking, “All of the JPL’s plants are fully operational and the power industry is seeing an increase in demand for energy. JPL is about to become profitable. It has been reducing its losses over the years.”
Thus a more pertinent question arises – why is JSPL selling Jindal Power at all when it is doing well and that too at such a huge discount, especially in these pandemic times?
Another proxy-advisory firm IiAS points out in its report that JSPL’s justification for debt reduction does not hold much water as Jindal Power’s debt is sustainable, easily manageable by cash flows from the business itself.
This is not the first time that the promoters of JSPL are buying assets in such a divestment process. Last year, July’20, shareholders gave their approval to JSPL to sell its wholly owned subsidiary to Templar Investments Limited, a promoter entity. Here also, the company being sold was doing well and had sustainable debt.
Its good that shareholder activism woke up the second time around and put a hole in this “debt reduction” plans. As Mark Mobius rightly said, “Shareholder activism is not a privilege - it is a right and a responsibility. When we invest in a company, we own part of that company and we are partly responsible for how that company progresses. If we believe there is something going wrong with the company, then we, as shareholders, must become active and vocal.”
Hope we all stay more awake and vigilant as companies on a prowl like this.
For more insight, kindly read this too - https://www.sptulsian.com/f/mg/Jindal-Steel--Power-JSPL--Misleading-Press-Release