The kettle calls the pot black: Cyrus, Shapoorji fall flat

By Arun Kejriwal

Cyrus Mistry had appealed to NCLT against his ouster citing corporate governance issue and had taken the high moral ground on the same. One wonders where this same stand has gone when it comes to the issues involving recently listed Sterling and Wilson Solar Limited, which has gone back on its very objects of the issue for which the company went public.

Not sure whether Cyrus Mistry the ousted Chairman of Tata Sons has a moral right to do so considering what he and his family have done to minority shareholders in the case of Sterling and Wilson Solar Limited. One wonders whether Cyrus Mistry in the Tata case is the same as the shareholder/promoter of SW Solar.

It is akin to the famous Hindi adage where one must look at oneself before pointing an accusing finger at anyone else, as three fingers point to oneself. The incident of SW Solar needs to be understood in detail.

Sterling Wilson Solar Limited had tapped the capital markets with its offer for sale. The issue had opened in August 2019 and was for Rs 3,150 crore in a price band of Rs 775-780. The issue received a muted response and was closed on receiving the full allotment of QIB bids and 90 per cent of the overall issue.

In the Red Herring Prospectus on page 84, it is clearly mentioned that the objects of the issue include the Promoter Selling Shareholders utilising a portion of the Net Offer Proceeds, towards funding full repayment of the loans due to the Company going public (from the promoters), and Sterling and Wilson International Solar FZCO from SWPL and Sterling and Wilson International FZE (a subsidiary of SWPL) respectively within 90 days from the date of listing of the Equity Shares. This period expired on November 20, 2019 as the issue listed on 20th of August.

The board has approved an extension for the loans to be repaid in a phased manner till September 2020. This is a serious issue and objects of the issue cannot be changed without the consent of shareholders particularly the minority shareholders. Further the dissenting shareholders have to be given an option to exit the company at the price at which they had invested.

The management of the company and its promoters including Cyrus Mistry the gentleman who has been complaining of corporate governance has thought it fit and proper to ignore all convention. They did not even have the courtesy to write to the minority shareholders of the company who own 22.78 per cent of the shares, seeking their consent for extending the time to repay. To show their magnanimity they agreed to pay the company 50 basis points higher for the delayed amount. So, adding insult to injury they were offering crumbs to the company.

While the fact that the promoters have to pay the amount was mentioned as a risk, the understanding at the roadshow held in Mumbai was that this 90-day period is sacrosanct and without any ifs and buts. Now the catch. The promoters who own 12.38 crore shares in the company and all of which are locked in, have pledged 5.97 crore shares. These shares would have been pledged to the lender. We also understand that the business of SW Solar is a negative cash flow business. So effectively it meant that loans were taken by SW Solar only to further lend to the promoters.

Who is the promoter who these funds were lent to? It is the parent company of the Mistry family. They own 8.11 crore shares in the company of which 73.63 per cent or 5.97 crore shares are pledged. The offer for sale itself realised Rs 3,100 crore and this money was quickly used up by the promoters for other purposes, forgetting that Rs 2,850 crore needed to be repaid in 90 days. How quickly people forget ethics for which they have been shouting, posturing and also gone to court.

The track record of the Pallonji family as a listed entity is hardly there. They operate through many unlisted entities and have a handful of listed entities which do not throw much light on their leadership qualities or performance. Their name to fame was the fact that they held 18 per cent in Tata Sons and rode to glory on the back of Tata group companies' performance.

Mistry group's total investment till date in the equity shares of Tata Sons is about 69 crore. The value of this investment today, even by conservative estimates, would be at more than Rs 50,000 crore! The dividend of hundreds of crores Mistry group has received all these years is separate.

In addition, the business that Shapoorji Pallonji group companies have received from the Tata group in the past would run into thousands of crores. In fact, this was one of the 'conflict of interest' points that was flagged to Mr Mistry when he was the Tata Sons chairman and he had to finally, albeit reluctantly, instruct group companies to stop transacting with the SP group companies. Probably this was a sore point which Cyrus Mistry realised a little late that he lost more than gained by becoming Tata group chairman.

When a corporate going public changes the object of the issue and does not seek the proper consent or follow rules, one wonders what the redressal mechanism is or should be. Apparently, the merchant banker has no role and the watchdog SEBI does nothing either. Who should the poor hapless investor approach? Take the case of SW Solar post the announcement of delay in payment the share price just tanked. It fell from around Rs 520 to Rs 260, exactly half the ruling price and then recovered to around Rs 300. This is against the issue price of Rs 780.

The credit rating agencies downgraded the rating of the company and put it on 'RWN' which means Rating watch negative. With such a rating all lenders to the company would have become wary of lending and also increased the lending rate against old loans. I am sure that 50 basis point gratis given by the promoters would have been insufficient.

There is a clear lesson and some important takeaways from this entire episode. Firstly, people who live in glass houses must not throw stones at others. Secondly the promoters have taken the issue of not fulfilling the object of issue and diverting the funds to some other purpose too lightly. The regulator's silence in the issue which is now over 75 days old is deafening and worrisome.

One is really worried about the future of capital markets and investors protection. Finally, whether a class action suit needs to be filed against the promoters to get their money back or some other action needs to be taken. Investors have lost about Rs 480 or over 60 per cent of their initial investment amounting to approximately Rs 1,800 crore.

(Arun Kejriwal is the founder of Kejriwal Research and Investment Services. The views expressed are personal)

Source: IANS