Listing of demerged co shares: Clear the air on fair value

Of late, companies proposing demergers have been on the rise. The long list includes Adani Enterprises, Crompton Greaves, CESC, Future group and Gayatri Projects, among others. For most, the stated motive is value unlocking for shareholders, and for some, it is ‘strategic realignment’. For a few others, it may even be out of compulsion to hive off the division and dispose it off later to meet their debt obligations.

Recently, the listing of Arvind Fashions, the demerged entity from Arvind, has created a lot of confusion for shareholders, as the stock opened at a price that was much lower than their estimates. But after opening at a listing price of ₹590.95, it has since then been hitting upper circuit and on Friday it closed at ₹791.8. Marketmen and shareholders were expecting the stock to open at around ₹1,000.

According to SEBI rules, listed companies can issue shares as part of a scheme with an exchange/entitlement ratio approved by their board of directors. The board is to approve such a ratio based on the report of the audit committee recommending the scheme, the valuation report of an independent chartered accountant and the fairness opinion of a SEBI-registered merchant banker on the valuation of the listed and unlisted entities. However, the valuation report is only mandatory in cases where there is a “change in the shareholding pattern or entry of new shareholder”.

SEBI has further said the “relevant date” (as prescribed under the ICDR Regulations), for the purpose of computing the price of the shares, should be the date of the board meeting of such company passing the scheme of arrangement. While Arvind got listed on November 28, 2018, shares of Anup Engineering got listed on March 1.

The scheme

Arvind, the listed entity (post demerger), is now a textile company and its principal products/services are finished fabrics and garments; Arvind Fashions has consolidated pre-demerger share capital with a change in face value at ₹4 each from ₹2. Swap ratio for demerger was one equity share for every five held in Arvind.

The engineering business including holding in Anup Engineering demerged into Anveshan and then Anup Engineering was merged into Anveshan. The swap ratio for the demerger was one equity share issued by Anveshan for every 20 equity shares held in Arvind. The swap ratio for the merger was seven equity shares to be issued by Anveshan for every 10 equity shares held in Anup Engineering. Anveshan, post the deal, was renamed Anup Engineering and got listed a few days ago.

The audit committee report (independent auditor: Walker Chandilok & Co LLP) and the SEBI-registered merchant banker (Vivro Financial Services) had approved the scheme of amalgamation and demerger. The reports and the process were also approved by Arvind’s shareholders and its board besides the exchanges and other regulatory bodies.

The confusion on listing suggests that some investors may not have considered the consolidation of face value to ₹4 from ₹2 while arriving at their own valuation. For shareholders, finding the fair value of each share of listed or demerged entities is always a difficult proposition. For better understanding of retail investors, the audit committee report can state each vertical’s fair value explicitly, so that they can have some idea of the indicative listing price.