Vedanta delisting: Proxy advisory firms demand independent directors must safeguard interest of minority shareholders

Vedanta Resources Ltd (VRL) last week announced a delisting offer at a Rs 87.5 per share against a much higher book value resulting in severe criticism from analysts.

Reuters
The total institutional holding in the company as on March 31, 2020, was 34%. Major domestic institutional shareholders include LIC and mutual fund funds such as ICICI Prudential, HDFC and SBI.
Mining tycoon Anil Agarwal’s proposal to delist Vedanta has sparked anxiety with leading proxy advisory firms demanding that independent directors of the company should safeguard the interest of minority shareholders and not let promoters to take undue pricing advantage.

Vedanta Resources Ltd (VRL) last week announced a delisting offer at a Rs 87.5 per share against a much higher book value resulting in severe criticism from analysts. Vedanta’s 52-week high was Rs 179.95, where as its value of stake in Hindustan Zinc itself comes to about Rs 131 per share. Bloomberg consensus estimate target by 18 brokerages suggest, the stock is valued atleast Rs 130 per share.

The recommendations of board, which will meet on Monday to discuss the delisting proposal of its promoter Agarwal, will be closely monistored by over 7 lakh retail investors and nearly 600 domestic and foreign institutions.


UK Sinha, one of the five independent directors on the firm’s board, in his earlier avatar as Sebi chairman was instrumental in making several investor friendly disclosures related changes in the delisting regulations, which inter-alia requires the company’s board of directors to make a statement as to whether the proposed delisting is in the interest of the shareholders or not.

The board will decide whether to approve or reject the delisting proposal as required under Sebi delisting regulations.

"The role of independent directors in this case will be a litmus test as one of the board members was ex-Sebi chief. They have to act as fiduciary rather than the stooge of promoters,” said Anil Singhvi, founder, Institutional Investor Advisory Services (IiAS). "We are also wondering about the timing of the delisting, which is being done at a time when everyone is grappling with a severe health crisis.”
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However, independent directors on board said their role is merely to supervise the entire process since the new Sebi rules empowers shareholders to take all decisions.

"We are clear about our roles in this regard. The due process of law is being followed. Some are looking at it from the point of retail investors. Almost 30-40% of the shareholders are institutions," a director said, seeking anonymity.

However, advisory firms said that independent directors must avoid taking cover from regulation. They cited example of Essar Energy, where independent directors rejected Essar Global Fund’s bid to delist, on the ground of it being “opportunistic.”

“Delisting guidelines protect the rights of minority shareholders when companies want to delist. It will be a shame if the board throws these regulations back at shareholders saying that as the price is going to be determined by reverse book-building, you decide the price,” said IiAS in its research note on May 15
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According to a securities lawyer, under Regulation 8 of delisting regulations the board has to certify that the delisting is in the interest of the shareholders while approving the proposal for delisting. The same also forms part of the public announcement subsequently as required under Regulation 10.

Former Sebi executive director JN Gupta, who is also MD of proxy advisory firm SES said, “The promoters are trying to take advantage of the present crisis, depressed prices and testing the wisdom of the harried investor who is wounded badly and nursing his losses of all asset classes except gold.”
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UK Sinha did not respond to an ET request for comment. Other independent directors of Vedanta incude former HUL vice chairman MK Sharma, former L&T MD K Venkatramanan, veteran bankers Lalita Gupte and Aman Mehta.

“They should take an independent view of the delisting process and though the eventual delisting price will be discovered through reverse book building process, there is a case for a substantial premium to the current traded price,” said Shriram Subramanian, managing director of InGovern.

The total institutional holding in the company as on March 31, 2020, was 34%. Major domestic institutional shareholders include LIC and mutual fund funds such as ICICI Prudential, HDFC and SBI.

Gupta of SES has suggested that the Vedanta board needs to debate on fairness of the price and look for other options like de-subsidising Hindustan Zinc and then make delisting offer for the company minus Hindustan Zinc or both.
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