Foseco and Buybacks- Comments by Satyakam Mishra

ookson Plc , the parent of metallurgical chemicals maker Foseco India, has shown a novel way to scores of global companies to escape minimum holding needs for listing on Indian stock exchanges . But that may still be interpreted as a securities law violation and insufficient compliance, say lawyers.

The world's biggest maker of ceramic linings for metal smelters has gifted a portion of its holdings in Foseco India to an undescribed 'Karibu Holdings', avoiding a potential offer to buy out minority holders, or selling to other investors that could have pressurised Foseco's stock price.

The London-listed Cookson had last year transferred 11.48% of Foseco India stake to Karibu Holdings UK, bringing its stake down to 75% to comply with Indian listing norms that is enforced gradually, it said in one of its result filings. It held 86.5% before the transfer. "It (minimum public holding) was introduced so that float can be maintained and the scope for price manipulation can be minimised,'' says Pavan Kumar Vijay, managing director, Corporate Professionals, a legal advisory firm.

"It also provides the modes for complying with the same, keeping in view the interest of minority shareholders and to ensure real public float. The transaction doesn't adhere to the Listing Agreement, Sebi Takeover Regulations, Sebi Insider Trading Regulations and also requires to be evaluated from the tax angle." Union finance minister Pranab Mukherjee, last year, mandated that the public holds at least 25% of any company that is listed on stock exchanges to ensure a 'non-manipulable' stock market.

Since there was some resistance on fears it may lead to value erosion, lobbyists managed to extend the time-frame for compliance by three years. For initial public offerings too, the 25% public holding norm should be complied within three years if the market value at the time of IPO is Rs 4,000 crore.

"The company is in compliance with the Listing Agreement and has made necessary filings," Cookson said in a terse statement. "It does not consider it appropriate to discuss private matters." Clause 40A of the listing agreement between companies and the stock exchange prohibits promoters from indirectly holding stake in the company to maintain minimum public shareholding.

It doesn't recognise the sale of shares through off-market transactions for meeting holding norms since it provides scope for transferring shares to a known party, depriving the right of the public shareholders. "The transaction requires a prior exchange approval and mere intimation to the exchange is not enough," said Darshan Upadhyay, associate partner, Economic Laws Practice.

"However, gift of shares is not prohibited by a person resident outside India (other than NRIs and OCBs) to other person resident outside India." Under a different rule, the Foreign Exchange Management Act, the transaction may be permissible, say lawyers.

"Overseas transfer, by way of gift of shares abroad, is permitted under FEMA," says Akil Hirani, managing partner, Majmudar & Company. "If it is done by way of gift, it doesn't attract capital gains tax. Since there is no change in control and there is no restriction under the listing agreement, there is no problem with such atransaction." This can be a boon for companies such as US tyre maker Goodyear, drug maker Astra-Zeneca and gas producer BOC who in the past failed to buy out minority holders.

Investors believe that these companies could take a similar route to avoid depressing prices. But investors, who have bought into these stocks expecting a huge premium, may be disappointed. "Karibu appears to be a front for Cookson and the word transfer suggests that the transaction is off-market to avoid the details like price etc," says Anil Jindal, director, Jindal Securities and a shareholder in Foseco.

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"In case of a delisting through reverse book-building, the pricing can be manipulated as promoters continue to hold significant chunk indirectly, defeating the whole purpose of reverse book-building. This also creates unreal float in the market."

Investors had declined to tender their shares in some of the offers of these companies. If others follow Cookson, the premium of some companies' shares may shrink. AstraZeneca is trading at a price to earning (PE) ratio of 60 compared with Pfizer whose current PE ratio is 20. Gillette is trading at a PE ratio of 57 compared with Emami's PE ratio of around 29. Industrial equipment maker Atlas Copco paid a hefty premium early this year to buy out minority holders, when some others failed.

Goodyear offered a 33% premium in February last year that investors declined. AstraZeneca's shares rose 20% after its board approved delisting plans. It has gone up 60% in the past one year on hopes of delisting. As per notes to accounts for the results in July last year, it just mentioned that the promoter, Cookson Group Plc, UK, had transferred 11.48% to Karibu of the UK.

"The transaction involves a transfer of a 11.48% stake, it attracts certain disclosures in terms of transaction details to the stock exchanges," says Rajesh Thakkar, partner, MZS & Associates. The company declined to comment on whether Karibu is an associate. 

Satyakam Mishra

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