Falcon Tyres - Hats off, promoters!

Falcon Tyres is a BSE listed Pawan Ruia group company. (These are not the same as the Ruias of Essar, but they are just as deadly!)
The Pawan Ruia Group has two companies (among others), Falcon Tyres and Dunlop. Now, the Ruias have never really been very minority shareholder friendly. There is no need to debate that.

Recently, they did something really blatant in Dunlop. There was quite some hue and cry about it, which I am sure, will be forgotten soon.

However, what is more interesting, is what they are doing in Falcon Tyres. This is much more discreet than what they did in Dunlop :-)

Lets start from the beginning, for the simple reason that one should not start from the end..(Ya ok, bad joke)

Currently, the promoters hold 81.07% of Falcon Tyres. The promoters have also been generous enough to give large amount of interest-free unsecured loans to Falcon. As per the 2011 Annual Report, the amount of these loans was Rs.132 cr. Nice! Anybody willing to give me money, interest-free, please?

Now comes this announcement. Please do read it once. This announcement entails the following:
1) The loans given by the promoters seem to have been transferred to 'unrelated parties'.
2) These 'unrelated parties' are being allotted equity shares pursuant to conversion of the unsecured loans into equity shares, at a price calculated as per SEBI guidelines. This will lead lead to massive dilution.
3) Please note that the entire loan (which is now Rs.144 cr it seems) has been transferred by the promoter to three different parties. Allotment will take place to three parties. Not one, or two, but three parties.

This is what the shareholding before and after this allotment would look like..

So what should one make out of this entire event? Some things come to mind..

1) Why did the promoter transfer the loans to outside parties? Why didn't he allot shares to himself on conversion? Well, because that would lead to minimum public shareholding as well as open offer problems, since the promoters already hold 81%.
2) Are these 'outside parties' really 'outside' parties? Or is there some understanding between them and the promoters? Well, we will never know!
3) Why three outside parties? Well, because, with three parties, this massive dilution of shares can be divided among them, so that any one of them does not acquire more than 25%, thereby eliminating the necessity to do a compulsory open offer. This would not have been possible with just one or two parties. Smart!
4) So, anything else special about it? Well, of course! Please refer to the post allotment shareholding above. The promoters plus these three allottees would together hold 91.67% of the share capital. So basically, with this allotment, the promoter satisfies the 75% shareholding criteria (his shareholding is 81% presently, which comes down). He can relax about that. Plus, at any point of time, if he wishes to delist the company, all he has to do is talk with just these three parties. If they tender, his holding goes above 90% and he can delist! Now thats sooo convenient. No minority shareholders ka zhigzhig. What would be even more convenient is if these three parties have been allotted the shares with a tacit understanding that they will tender the shares at a later date for delisting. Super smart! But we will never know if that is the case.

This entire methodology is smartly designed in a way which gives maximum flexibility as well as control to the promoters. Their shareholding comes below 75%, so there is no problem on that front. Also, they can pretty well delist the company whenever they want, without being blackmailed by minority shareholders for giving a higher exit price. A disproportionately small group of shareholders would decide the fate of the entire minority shareholders. (Are the MNCs listening? This is a great alternative to being fair to shareholders!) :-)

Did you think this entire methodology is revolutionary? Its something new? Well, its not!!

Another company of another Ruia Group, India Securities, recently delisted from the Indian markets using this very same methodology, at a really low price.

Will Falcon tread down the same path? Well, we cant say it will happen, until it happens!

Cheers and happy investing!!



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