The minority investor’s appeal
D. Dharanish of Vijayawada, a minority shareholder in IBREL, holding 20,100 shares, first appealed before the Securities and Exchange Board of India (Sebi), and later before the NCLT Chandigarh against the proposed merger.
However, the shares changed hands as Dharanish sold his entire shareholding in IBREL to another investor named Tejo Ratna Kongara, in December 2022 who is now taking forward the applications and litigations filed by Dharanish.
Dharanish first filed an application before the Sebi in September 2022 and later appealed before the NCLT Chandigarh.
The appeal majorly hovered around three points:
Why the details of the internal structuring of NAM Estates have not been disclosed to the shareholders of IBREL, which is a crucial set of information as the post-merger shareholding of the merged entity majorly depends on that restructuring.
The minority investor also questioned the due diligence followed by IBREL when it comes to valuation of the entities being merged and calculation of the swap-ratio of the merger.
The minority investor also highlighted that there is a major pending litigation pertaining to a land parcel leased by Embassy East Business Park, which was not disclosed in the information memorandum by IBREL.
The minority investor’s appeal states that the independent valuation reports, the scheme of merger, or any other document doesn’t disclose the assets and details of the activities carried out by these entities and the basis of the valuation on which the swap-ratio has been calculated.
Details of the 3rd Feb proceedings can be found here
Summary:
As expected cases related to Dharanish have been disposed of as he has sold the shares to Tejo.
Now Tejo is the new player, do not know how hard s/he is going to play
BSE case has also been disposed of as BSE is fine with the response
IT dept is still an active player.
The evaluator who came up with the swap ratio based on the valuation of assets & liabilities of the merging parties has been directed to be present in the next hearing and explain his position, taking into account the allegations of overvaluation made by IT dept
Please note, the above summary is based on my understanding of the Order details. I may have misunderstood the Legal language, so please correct me if you know better.
Thanks.
There is clear progress in the hearing of all the Applications filed in the Main case. It can be understood from the order dated 03.02.2023 that the application filed by Tejo is per se not maintainable and he needs to address on the preliminary issue of maintainability first. The BSE issue is cleared by the exchange filing and nothing further needs to be addressed. The only issue which needs to be addressed is the allegation of overvaluation which would be cleared on the next date of hearing by the Valuer. Therefore, in my view the final verdict can be expected in the next 1-2 hearings. Disc: Invested and biased
Listing the details from the proceedings of 03.02.2023.
While the current petitions nu Dhanekula Dharanish & Tejo Ratna Kongara has been found meritless so far, the cases are still pending and can drag the matters from here further.
Also a lot depends on the ability of the valuer to justify the 2020 valuation, otherwise it might potentially derail the whole merger.
Reference wrongly mentioned in MA No. 1/2023. IT department to file written response. 24.06.22 - IT department report citing overvaluation. Diary No. 293/6 dated 05.09.2022 - Does not clearly rebut the overvaluation Diary No. 293/7 dated 07.09.2022 - No response to the report filed. Mr. Mandar Vikas Gadkari (BDO Valuation Advisory LLP)- file affidavit for justyfying validation made on 18.08.2020 & present valuation case in court on 01.03.2023
Area sold dropped to 0.23 (msf) - lowest in last 7 quarters. ASP is steady at Rs 8333/sq ft.
2nd strong quarter of net collections (421 Cr) after the 387 Cr in Q2FY23, showing real cash is being accrued, helping towards the realization of surplus.
Land parcel sold at Sec 104, Project “One Indiabulls Gurugram” struck off. 18% drop in Pending costs, 25% drop in pending Surplus (compared to Q2FY23)
Outstanding debt dropped from 680 Cr in Q2FY23 to 370 Cr in Q3FY23.
Cash & equivalents of 950 Cr in hand - while pending costs for all Near completion projects is at 322 Cr.
Good traction from Sky Forest, Mumbai. Outstanding surplus from last 3 quarters
Q1FY23 - 949 Cr, Q2FY23 - 654 Cr and Q3FY23 - 467 Cr
Hi Guys
While this is something which is known, I believe one must go to NCLT website, and check how many cases or recovery are filed against Dhani Healthcare (100% subsidiary of Dhani Services). There seems to be something seriously wrong with current affairs in Indiabulls-Dhani group.
At a high level, appears that all the recent land sales transactions of IB Real estate in Gurgaon are well below market level. I was surprised to see that 40 acre of prime land on Dwarka E-way was sold to Elan group for c.580 Cr.
Hi, can you please share details/references to data/deals on why you feel the Elan transaction was undervalued? It might help us value their other similar assets. Thank you!
Had looked at the stock when it was around Rs. 130, and now re-visiting again at Rs. 60. Few observations which I have made:
Majority of the investment rationale weaved around 3 themes: Net Surplus, Change in management and planned commercial space of Embassy (43.2 mn sq. ft.)
Net Surplus: I am getting a feeling that this number was just a humbug. In merger presentation (pg 6), the Net surplus figure was thrown at Rs. 12,079 cr (launched + planned) and now when you look at Q3 presentation the number is Rs. 6,146 cr which is a reduction of 5,933 cr. Not everything was realized as debt has come off by only Rs. 2000 cr. So, was the number overstated back then? Correct me here if I am wrong.
There are no details on the net surplus of Embassy group which was reported at Rs. 6,513 cr. in the merger presentation, while one is sure that debt of Rs. 4,300 cr is coming on IB Real’s books. Net Surplus is agaisn realizable over 4-5 years, so in PV terms it might be lower than today’s value of debt.
Further, there are no updates on the planned commercial projects of Embassy Group (~41 mn sq ft) which as per their merger presentation (pg 5) was supposed to bring annual rent of Rs. 4,241 cr. Since then interest rates have gone up by 200-250 bps, and add to the delay in construction, so even this value would have taken a hit.
So there are a lot of moving pieces with no clear answer from the management which makes you question one of the key investment rationale post merger- that change in management would improve corporate governance.
Another observation: Back in 2021 IB Real had become a consensus trade, and it could be seen that retail shareholding jumped from 55% to 74%, which is a clear sign that stock was in a classic distribution phase. Moreover, every single shareholders holding more than 1% have sold off (except Embassy of course). Now this cannot be merely a coincidence.
The following information was discussed in the listing on 1/3/23. Based on this it seems that independent valuation was not done
CP(CAA) No. 14/Chd/Hry/2022
An affidavit in compliance of our order dated 03.02.2023 filed by diary
No. 00293/14 dated 27.02.2023 is taken on record. The deponent Mr Mander
Vikas Gadkari was specifically asked whether the valuation done by him was
after the independent verification of the assets reflected in the Books of the
amalgamating companies. Reference was made to para 14, page 8 of his
affidavit, wherein he stated that while determining the Fair Equity Swap Ratio,
they have considered 100 acres as the total area of the project for the valuation
on the basis of which the fair equity swap ratio was valued. To a pointed
question by this bench as to whether the total area of the Embassy Cornerstone
Tech Valley Project was independently verified with relevant records, Shri
Gadkari clarified that the valuation report has been furnished on the basis of
information submitted by the management. This was confirmed by the second
valuer Shri Niranjan Kumar.
Both the valuers, including Mr. Gadkari, are directed to specifically state
on the affidavit whether the assets of the company were independently verified
with reference to the relevant records, the valuation done by them on the basis
of which the Fair Equity Swap Ratio has been decided.
Updates from hearing on 23rd March 23.
FCA has been appointed to help the court to find out if the valuations for swap were correct or not as per DCF, report has to be submitted to court within 15 days by FCA.
Next hearing on 14th of April 23
It’s surprising that they are now need help to decide on swap ratio. Should have done this at least 6 to 8 months back.No problem to seek expert guidance, but the delay to arrive on this decision is surprising.
What if amicus curi find that swap ratio is not correct ?
The initial valuation report was prepared by ‘professional’ valuation experts hired by the company (Embassy and IB). What did the valuers do? They just put a stamp on the report prepared by the company i.e. they relied on the valuation number shared with them by the company instead of doing their job properly and doing the valuation themselves thoroughly. That would have (maybe) worked had both companies been private, but its not so easy when one of the parties is listed (IBREL in this case). Also, the IT dept seems to be have been tipped off. Once IT dept gets involved, it doesnt matter whether the amalgamating companies are private or public.
From the proceedings in the court, it is obvious that proper valuation wasnt done. The whole swap ratio seems to be based on the ‘calculations’ done by the two managements. Obviously, the ratio wasnt in favour of the shareholders of IBREL. Neither Management would do a deal which will leave them at loss, so they have many avenues to be compensated by the other party (outside this deal), the only sufferers are minority shareholders. Had due process been followed, this case wouldnt have prolonged for so long and the court wouldn’t have required to hire an amicus curriae. The original valuers took so long to submit affidavits which the court had asked them to submit because (your guess is as good as mine), they knew what shoddy work they did. Hence, the court had no option but to hire an independent valuer.
We retail shareholders are so deep in the hole now that even after fully knowing that the swap ratio was not justified (IB has net zero debt with huge landbank, Nam Estate has huge debt with assets whose worth is unclear. They just dangled a carrot of the ‘potential’ to develop millions sqft of commercial RE), most of us still hope that court approves the merger process, just so that the overhang of the court case clears and we again hope that we may see some appreciation of the severely battered stock.
Disc: Invested. Very very expensive lesson learnt.
I agree with all your observations. However, let’s just examine the positives that are there in the present situation. The whole issue started because of an Intervenor application filed by a minority shareholder, with respect to some of the properties (Not the whole company). The main allegation is that they were undervalued and as a result the swap ratio decided for the merger is unfavourable to interest of the minority shareholders.
Now the main aspects which will be examined by the NCLT are also mentioned in the previous order. Amicus Curie appointed is not a professional valuer, he is only an advocate who will examine the legal questions framed by the court and will assist the court with the legal position.
Now if we examine the issues framed by the NCLT, when an objection is raised against a valuation report for merger or the swap ratio, there should be evidence of it being highly unreasonable. The court will not interfere only for the reason that an alternative method of valuation exists which would suit the minority shareholders or it suits the person making such objection. The burden is always on the person making such objections to prove these facts that valuation is so highly unreasonable and would severely affect the minority shareholders. You can read ‘In re Cadbury’ case, which is a landmark case delivered by the Bombay High Court on circumstances in which the court can interfere with valuation reports submitted by the internal valuers of a company.
Also, the person who initially filed those objections has already sold his stake and abandoned this litigation. That shows his lack of seriousness and probably the lack of research also which might not be enough for the NCLT to stop the merger.
Therefore, i don’t think the NCLT will interfere with the merger process and it will be cleared soon. Assuming that the NCLT delivers a finding that the valuation and Swap ratio was incorrect, it will direct them to revalue those particular properties and decide a new swap ratio. The merger would then be cleared with some further delay. At no point I think that Embassy would back out from this merger as they have a substantial stake in Ibrealestate already and I don’t think they will exit at current Valuations in deep losses. So let’s wait and hope for the best.
