Institutional Investors’ Advisory Services (IiAS) has asked shareholders of Zomato to vote against each of the three special resolutions, including the preferential issue of shares that will pave the way for the company’s ₹4,447 crore Blinkit acquisition.

The proxy advisory firm has cited Zomato’s provision of a lack of adequate clarity over the deal as the primary reason behind the call to vote against the resolutions. The e-voting began on June 26, 2022, and shall end on July 25, 2022.

The market has not responded positively to Zomato’s Blinkit (formerly Grofers) buyout plan. Zomato’s stock has tumbled 23.3 per cent on the BSE from the time the plans were made public on June 24. The Sensex has grown by 1.95 per cent during the same period.

“We recognise that getting into the quick commerce space is a natural progression for Zomato; it is a service that Zomato’s competitors already provide. However, the board has not provided sufficient information for us to make an informed decision with respect to transactions benefits and valuations,” IiAS noted in its voting recommendation report.

Zomato intends to fully acquire loss-making Blink Commerce through the issue of around 629 million of its own shares at a prescribed preferential allotment price of ₹70.76 per share, totalling ₹4,447 crore. Zomato also intends to pay in cash ₹60.7 crore for the acquisition of the warehousing and ancillary services business of Hands-on Trade.

Weak financial profiles

“Both Zomato and Blinkit have weak financial profiles, combined, nor is there any visibility regarding profits—standalone or combined. The financial impact of the acquisition could be significant, and the same has not been addressed. Blinkit does not have a track record in the quick commerce business and consequently no domain expertise,” IiAS added.

“Ernst & Young has performed a comprehensive valuation exercise and arrived at a fair valuation of Blinkit, in accordance with the norms. We have additionally obtained an independent fairness opinion from Morgan Stanley for this transaction, which attests to the bona fides of the transaction,” Zomato responded to IiAS’s concerns.

Conflict of interest

Investors have also raised the issue of a conflict of interest between the promoters of the two companies. Zomato’s co-founder, Aakriti Chopra, is married to Blinkit’s founder, Albinder Dhindsa. Both companies also have a common investor, Sequoia.

“Given her designation as co-founder, we note that she would be part of the leadership team and aware of Zomato’s fundraising and investment plans. Given that she could be privy to confidential information, the company has not disclosed the measures, if any, that were undertaken to ensure that conflict of interest is addressed,” IiAS added.

“Aakriti Chopra is neither a director, nor key managerial personnel, nor is she a person in accordance with whose directions or instructions the Board of Directors is accustomed to act. She was not involved in any discussions, negotiations, or decisions in relation to the proposed transaction, with such decisions being independently taken by the board and the investment committee. Yes, there are common investors. However, the same are not on the board of Zomato and hence have had no role in the decision-making for this transaction,” Zomato responded.

Zomato ESOP 2022 pool

Zomato is also proposing to create a new Zomato ESOP 2022 pool, equivalent to the combination of its own ungranted ESOP pool and unvested ESOPs of employees of Blinkit. Under the stock option plan, Zomato will grant up to 33.6 million options. This is the second special resolution by Zomato that is opposed by IiAS.

“For Zomato ESOP 2022, there is no indication of the exercise price for the options, enabling the company to grant these at deep discounts. We do not favour ESOP schemes where there is no clarity on the exercise price or where there is no clarity on the performance metrics for vesting,” IiAS added.

The third special resolution, which is also opposed, pertains to extending Zomato ESOP 2022 to employees of subsidiary companies, including the employees of Blink Commerce.