Sunday, June 5, 2011

Jagatjit Industries - As weird as it gets!!

A few clarifications from my side, which will help you choose whether to read further or not!!

  • The basic idea for this weird case was pointed out to me by a friend of mine. I worked on it fully, but its really not my original discovery.
  • There is no money making opportunity here.
  • IT GETS REALLY REALLY CONFUSING! (and funny too!) Its a fine example of how funny situations can emerge by following the law to the letter!!
Ok, so now you know that there is no money to be made here. Still, if you wana read, here goes!

Jagatjit Industries' history is the stuff that Star TV serials are made of! We have the grand old founder, his three sons from two marriages who, of course, don't get along, we have a fight for control of the company, cases filed by two brothers against one with the CLB seeking justice, creative issues of financial instruments (equity) and of course, to top it all, we have a very very very veryyyyyyy weird open offer!! 
Spoiler: the open offer would result in a 380% acceptance ratio!!!

Sounds interesting? Lets check it out! 

The background

The shareholding of Jagatjit Industries goes like this:
Please click to enlarge





















Ok, some points for you:
  1. Jagatjit Industries had allotted 25 lakhs Differential Voting Rights shares to one of its promoters, in which, one share carried 20 voting rights. So, these 25 lakhs shares are equal to 5 crore shares (25 lakhs shares multiplied by 20), as far as voting rights are concerned.
  2. Now, due to this, the promoters had to make an open offer to shareholders, aggregating to 20% of the VOTING CAPITAL of the company.
  3. Now, because of the DVRs, the voting capital will be different than the actual capital, right? 
Here is how the open offer calculation goes..
The original open offer was made in April 2006, when the GDRs were not issued yet. Hence, the total capital for our calculation purpose is only 2.09 crores equity shares. (without considering GDR wala shares)
Let us calculate the open offer, based on 'voting rights' criteria:

Please click to enlarge

















So basically, the open offer has to be 20% of the voting capital of the company (which in this case, is different than the equity capital, since some shares carry more votes!!)

Therefore, the open offer will be for 20% of 6.85 crores equity shares, which is 1.37 crores equity shares. BUTTTTTTTT the public holding is only 35.8 lakhs equity shares!! So whom will the promoters make an open offer to??? Hilarious!!
Here is what the Jagatjit Industries' Company Secretary (CS) and SEBI ka conversation might have been like... :-)

CS: Sir, we have to make an open offer for 20% of the voting rights. So in our case, we have to make an open offer for 1.37 crores equity shares, right?
SEBI: Yessir, thats what the law says and thats what you will have to do!!!
CS: But Sirrrr, our public holding is only 35.8 lakhs shares. So, to whom will we make an open offer for 1.37 crores shares???
SEBI: Hey thats none of my concern. You have to do what the law says...
CS: But Sirrrrrrrrrr, if the open offer succeeds fully, ALL the public shareholders will tender and we will have to accept it fully.
SEBI: Yaaa, so??
CS: Sirrr, promoters will then hold 100% shares!!! Isn't that kinda like automatic delisting??
SEBI: Yaaa, so??
CS: But Sirrrr, delisting without reverse book-building??
SEBI: O teri!!! Is this whats happening???
CS: Yessss Sirrrr...thats what i have been trying to explain!!!
SEBI: Ok, give us some time to think about it and we will get back to you soon!!
CS: Ummm...well ok..

Well, SEBI did think about it for five years, which has resulted into this new open offer!! Now, the promoters will have to pay the shareholders interest for five years too!! Hence the open offer has been fixed at Rs.38 PLUS Rs.31 interest, thats Rs.69!!! Shares are quoting now at Rs.68.80. Remember, you can buy any quantity you want from the open market and tender it at Rs.69. IT WILL BE FULLY ACCEPTED!! The offer is open upto June 13, 2011.  In fact, an offer for 1.37 crores shares, when public holding is just 35.8 lakhs shares, means 380% acceptance ratio!! 

All in all, this is one hell of a weird, yet interesting situation which has arisen by following the law to the letter, which will also result in promoters holding 100% of the shares, enabling them to delist the company without going in for reverse book-building!! Can other companies get any ideas from this? ;-) Hope not!!

Hope you enjoyed this as much as I did!!

Cheers and happy investing!!!

P.S. There are some points relating to Jagatjit Industries that i have deliberately not mentioned since they were not relevant to the crux of the article..

8 comments:

Anonymous said...

t think u are slightly off the mark. the offer document of 2006 clearly says that the gdr holders who hold 2.52 crs shares can tender in the open offer which brings down the acceptance ratio to 48% & not 100% acceptance as you mention

Geet said...

Interesting post..
der r a few things in wich u'll hav to help me out understnd..!
but yeah, the situation tht u brought out btwn SEBI nd the CS ws ironical i guess..!! :)
cheers..

Neeraj Marathe said...

Dear Anonymous,
I would be highly indebted if you can paste the relevant portion from the offer document, which says that the offer is for the GDRs too..as far as i know, the offer does not extend to GDRs..
FYI, one of the brothers has gone on record with the CLB that the GDRs are owned by the other brother himself!!
Cheers,
Neeraj

Neeraj Marathe said...

Dear Geet,
Ya it was ironical..quite a funny situation has emerged..
and sure, we'll get all ur queries solved during classes..
cheers!
Neeraj

Anonymous said...

.4 The Share Capital of JIL as on trigger date comprised of unconverted GDRs representing 25210000 underlying
equity shares held by the Depository “The Bank of New York”. These GDRs continue to be unconverted on the
date of publication of this announcement. The matter of ownership of the unconverted GDRs is subjudice before
the Royal Court of Island of Jersey, U.K. The offer for purchase is being extended to the GDR holders also through
the Depository as per the terms and conditions of the GDR Issue.

Neeraj Marathe said...

Many thnx Anonymous..
I just had a talk with the CS..he confirmed that the offer wont extend to the GDRs..u can drop me a mail on research.neeraj@gmail.com if u wud like to take this offline too..
cheers!
Neeraj

Sandeep Dhawan said...

Pls update ur views on Jagatjit Industries

Sandeep Dhawan said...

Pls update your views on Jagatjit Ind