Goldstone Infratech Ltd. - Another open open-offer!!

The market is full of apparent opportunities, where the hidden risks are huge. A lot of times, the risks become clear only after we have incurred a loss in such opportunities!! (i.e. in hindsight)
Goldstone is another such apparent opportunity, where the risks need to be given due consideration. It is an opportunity which has arisen simply due to legal compulsions and is not backed by proper fundamentals and valuations.

Background

Goldstone Infratech Ltd (GIL) is a Secundarabad based company, manufacturing insulators of various types.  Absolutely no comments on the business/fundamentals of the company or the quality of management. (Enough said?!) Currently, the promoters of the company are fighting a case against SEBI in the Supreme Court. The subject matter of the case is an open offer made 4 years ago.


Facts of the case and time-line

A promoter company, Goldstone Exports Ltd (GEL) (renamed as Trinity Infraventures Ltd) used to hold 9.51% stake in the company.

January 25, 2007: GIL’s Board considered issue of 1.5 crore share warrants to GEL, convertible @ Rs.22/share. (Equity at that time consisted of 2.1 cr shares of Rs.4 each). This would take GEL’s stake to 47%, if converted.

February 24, 2007: GIL holds an EGM where shareholders approve the issue of warrants. GEL pays 10% of the amount for the warrants, which are convertible within 18 months.

October 28, 2008: GEL pays remaining amount to get the warrants converted into equity shares.

October 29, 2008: GIL’s Board allots the requisite 1.5 crore shares to GEL. Takeover Code (old) is triggered since GEL’s stake increases from 9.51% to 47%.

November 4, 2008: GEL makes public announcement and comes out with open offer for 20% shares @ Rs.23/share. Price is calculated as per takeover code.

November 17, 2008: GEL files draft letter of offer with SEBI through their merchant banker Saffron Capital Advisors.

SEBI se punga!

• While calculating the open offer price, GEL considered January 25, 2007 as the relevant date. This was the date on which the Board had authorised the issue of warrants, hence, open offer price as per GEL's calculation was Rs.23/-.
• SEBI objected to this, saying that the relevant date for open offer price calculation should be taken as October 29, 2008. This was the date on which the Board authorised the issue of shares. Open offer price as per SEBI calculation came to Rs.43/-.
• GEL felt aggrieved and filed an appeal against SEBI's contention with the Securities Appellate Tribunal. (SAT appeal no.9 of 2009). SAT upheld SEBI's contention in their decision.
• GEL continued to feel aggrieved and appealed to the Supreme Court against SAT's order. (Civil appeal no.7666 of 2009)
• The case went in a tareeq-pe-tareeq mode from then on, until recently. In the hearing which took place on August 13, 2012, the case has been listed for final disposal. Although that hearing has not yet happened, whenever it does happen, the final decision of the case will be very near.

The opportunity (?)

• If the result of the case is in the promoter's favour, open offer will come at Rs.23. 
• If it is in SEBI's favour, open offer will come at Rs.43 (plus interest). In the meanwhile, the stock price has slid to Rs. 10.5/-. 
• Promoters hold 50.75% and they have to make an open offer for 20% of the public holding of 49.25%. Interesting!

The risks

Event risk: There is virtually no event risk. The promoter has bought the shares and increased his stake, hence open offer has to happen. The promoters have also given a bank guarantee of Rs.7.5 cr. (Total equity capital of the company is 3.6 cr equity shares of Rs.4 FV).

Time risk: Now this is the most important and very material risk. The whole opportunity is hinged on a court case. We all know that court cases in India can live longer than characters of Saas Bhi Kabhi Bahu Thi. There is absolutely no logical call one can take on when will the case be decided. 1 year more? 2 years more? Dunno! However, in this case, at least an announcement for final hearing has come. So its like one can see the destination, but one still has no idea how far it is!

Shareholder risk: 2 pure financial investors hold about 10% of the company. Now if these big guys start selling for whatever reason, the price will take a massive hit. Since I am unable to value the company, that would result in a really uncomfortable position.


All-in-all, quite an interesting case, with a lot of interesting risks! Before taking any buy/sell call on the stock, please give proper thought to 2 things; your risk appetite and what kind of portfolio allocation should you give to this, if any! Do not rush to buy it. If you buy without much thought, later there will be similar rush to sell without much thought! And when you buy as well as sell without much thought, the end result is usually not very pretty! :-)


Cheers and happy investing!!!

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