Sintex Plastic Ltd

This thread is very good study on value traps and how high debt, buying at wrong time in cycle, poor corporate governance, poor corporate structure can destroy shareholder wealth. The bad news always comes after share falls.

Welspun Corp Limited has announced that its wholly owned subsidiary Sintex BAPL has finalised an investment of upto ~Rs 807 crore to set up manufacturing unit in the state of Telangana through a wholly owned step down subsidiary, Sintex Advance Plastics Limited (SAPL), which will be spread over the next three financial years starting from FY25. The project will be funded through a combination of debt and equity.

The proposed investment is for manufacturing ~59 KMTPA of plastic pipes, ~5,300 MTPA of water storage tanks and ~8,900 MTPA sandwich moulded tanks. The pipes and fittings would include CPVC, UPVC, HDPE, and OPVC pipes and shall cater to the exponentially growing water distribution segment.

Source: Sintex BAPL to invest Rs 800 crore+ for new manufacturing unit in Telangana

I think only retail investros are trapped here. Mgmt has 0.08% stake and general public has 99.62%.

Sintex BAPL owned by welspun corp not by sintex plastic any more. sintex plastic doesn’t have any more business nor revenue.

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This is an excerpt from Welspun’s Investors Report…

"As you are all aware, we submitted
our bid in the CIRP process under a consortium. The acquisition cost for the consortium was
INR 1,251 crores. For the plastic product business, which WCL has acquired, the acquisition
cost is INR 1,141 crores. There was a cash in the company and the subsidiary of Sintex-BAPL
to the extent of INR 735 crores, which was utilized for this particular transaction. Thus, the net
implied cost for WCL for this national iconic brand, Sintex is close to INR 406 crores only

Even in the CIRP process when the company was into stress, the company has been
EBITDA positive and cash positive. At its peak in FY '19, the revenue for the plastic product
business was close to INR 1,000 crores and the EBITDA was in the vicinity of INR 220 crores
with an EBITDA margin of 22%."

Source: https://www.welspuncorp.com/uploads/investor_data/investorreport_Financial%20year%202022%20-%202023_958.pdf

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Cyrus Patel: Yes. Good morning. Congratulations on your acquisition. I have only two questions. What is going to happen to the existing shareholders of Sintex plastics, which are-- is it going to remain a quoted company? Is it going to be delisted? What is going to happen?

Akhil Jindal: Yes. So, basically because this company has been acquired under the IBC, so there is no shareholding left in this company of any other investor or shareholder other than Welspun Corp. So Welspun Corp is a 100% owner of the new Sintex-BAPL. And no other investor has any stake left in the company. So it’s a 100% subsidiary today.

Cyrus Patel: So it will be delisted?

Akhil Jindal: The parent-- this company was never a listed company; the parent of this company was a listed company. And I understand that, that company is also going through an IBC process. So what would happen to that company would be decided in the NCLT courts.
Cyrus Patel: Okay. So the Sintex Plastic Technology, which is the listed company is currently being traded on the exchanges, and that will continue to be traded until any further notice from any of the authorities, right?

Akhil Jindal: That’s right. I mean whether it’s traded or not traded, sorry, I’ve not kept track of it. But this was originally the promoter of the Sintex-BAPL that we have acquired. And the Sintex-BAPL, as I mentioned to you, is now 100% subsidiary of Welspun Corp.

Cyrus Patel: Okay. Understood. And for which they are getting paid INR 1,250 crores in total?

Akhil Jindal: Yes, INR 1,251 crores was paid to the creditors of this company. And to that extent, no cash travelled back to the Sintex Plastic, as you as you asked.

Thank you for sharing. This also clarifies that Sintex Plastics is not owned by Welspun Corp, and what they have acquired is only Sintex-BAPL for 1,250 crore. Sintex Plastics is in the IBC process and its fate will be decided by the NCLT court.

The final verdict is that the losers here are Sintex Plastics’ creditors (with 141 crore in debt) and public investors. The promoters have already exited.

Let me know if anyone has access to this below:

From investor’s paradise to graveyard: the tragic tale of Sintex

Emerald Insight
https://www.emerald.com › content › doi › full › pdf › ti…
](From investor’s paradise to graveyard: the tragic tale of Sintex | Emerald Insight)

The insolvency regime prioritizes the interests of creditors and hence, the interest of minority shareholders of an entity undergoing CIRP remains largely ignored. They occupy the lowest position in the ‘distribution waterfall’. They don’t have any representation in the CoC. The minority shareholders of DHFL and Sintex Industries suffered huge losses when the resolution plans suggesting for the delisting of the entities were approved by the NCLT and they were left with no recourse.

The public shareholders are denied a fair bargain by providing an exit opportunity at a market-determined price and are instead left at the mercy of the Resolution Applicant (RA).

The provision that existing public shareholders be given exit opportunity at a price which equal to or more than what is offered to the promoters is of little help considering that promoter’s equity is often written off, making it highly unlikely that public shareholders will receive any value. Further, in insolvent liquidations, there is no liquidation value attributable to equity-holders.

Another amendment in the Securities Contracts (Regulation) Rules, 1957 (SCRR) in 2021 mandated a minimum of 5% public shareholding for an entity to remain listed post-CIRP. Such a mandate disincentivises the new entity post-CIRP to be listed and hence, they go for delisting which again is against the interest of minority shareholders.

Therefore, once a RP is approved for a listed company, the possible scenarios are:

  • Liquidation of the company in which case they get virtually nothing;

  • Continuation of the company with or without listing, based on the resolution plan which largely results in dissolution of shares again squeezing out the shareholders.

In both the scenarios, the existing public equity shareholders get squeezed out and usually end up with almost nothing.

Need for protection of minority shareholders

One could argue that the treatment of such shareholders is justified if they chose to remain interested in the company even when the company had reached at that stage. While this reasoning is not misplaced, it is also important to consider that the shareholders are often misled hoping that they might end up getting a better deal.

The minority shareholders argue that they don’t have much say when equity owners run down the company. Further, most of such minority shareholders are retail or small shareholders who don’t possess the awareness and the level of information to make a timely decision.

Another concern is that the CIRP can be triggered on a mere default and the company need not be balance sheet insolvent.

The SEBI consultation Paper

Addressing the concern of the minority shareholders, SEBI came out with a framework for protection of interest of public equity shareholders in case of listed companies undergoing CIRP. The key recommendations are as follows:

Opportunity for Public Equity Shareholders: Public shareholders will have the opportunity to acquire equity in the new entity that is formed post CIRP. Promoter and promoter group, KMPs etc. would be excluded while identifying such public equity shareholders.

Minimum and Maximum limit: The acquisition of equity by public shareholders will be minimum 5% and a maximum of 25% of the capital structure. The pricing terms for this acquisition will be the same as those agreed upon by the resolution applicant.

Mandatory Delisting on failure to achieve minimum Shareholding: For the company to continue as a listed entity, at least 5% of the fully diluted capital structure must be held by public shareholders. If the resolution applicant fails to achieve the 5% public shareholding, the company will be delisted, and the consideration received from public equity shareholders will be refunded.

Exemptions from Delisting Regulations: The recommendation also states that exemptions from Delisting Regulations will be applicable only in cases of liquidation or if the public equity shareholding remains below 5% of the new entity after the offer.

Source: Out of Focus: SEBI’s Distorted Lens on Shareholder Protection in the IBC Landscape - CBCL