ANALYSIS: SAT ruling in Kotak Bank case puts bourses on the back foot

1 September 2022

The recent order by the Securities Appellate Tribunal upholding an appeal by Kotak Mahindra Bank Ltd against National Stock Exchange of India's order to the bank to refrain from invoking the pledge of securities of defaulting broker Arcadia Share and Stock Brokers has again shined the spotlight on the bourses' jurisdiction over entities dealing with their members.

It also puts the bourses into a quandary on how to deal with a broker who siphons off securities from clients, pledging these to borrow funds for its own use and then refuse make good the shortfall of securities in client accounts.

The NSE had made a claim on the securities in the broker’s demat accounts saying it included clients’ securities and consequently the pledge of these securities was illegal.

The appellate body however said NSE did not have the legal jurisdiction to issue directions to banks and other entities other than its trading members.

While the NSE is expected to appeal against the SAT's ruling in the Supreme Court of India a recent difficult experience in the court on a similar matter will make it akin to walking on burning coal.

In a similar case the SAT had, in November last year, quashed NSE's order against Axis Bank directing it to freeze the bank accounts of defaulter broker Karvy Stock Broking to meet the claims of investors against the brokerage.

In that order, too, the SAT held that NSE's bye laws permitted it and its defaulter committee to issue directions only against a trading member, which was Karvy Stock Broking in the case being heard, and not against a third party, which was Axis Bank the appellant.

The NSE immediately went to Supreme Court of India appealing against SAT's order. The Supreme Court, however, dismissed the exchange's appeal on Feb 14 saying that "we are not inclined to interfere the order passed by the Securities Appellate Tribunal."

But there are reasons why NSE's hand can be seen to be stronger in the current case pertaining to Kotak Mahindra Bank.

For this one will have to first look at SAT's line of thinking in the Axis Bank case. The Securities and Exchange Board of India, which was a party to that case, had strongly argued before the  SAT that since the monies in Karvy's Stock Broking's bank accounts were proceeds from unlawful activities by the broker it had the first right of claims on it.

On the other hand, Axis Bank had argued that it had a banker's lien on Karvy's deposit accounts as it had extended loans to the broking firm which became non-performing.

The SAT made an important point in that ruling that it would have accepted SEBI's contention had evidence been shown to exist that the monies in the broker's bank accounts were linked to the siphoning off of clients' securities and were not the exclusive monies of the broking firm.

But now in the Kotak Mahindra Bank there may be evidence to show that a chunk of the securities lying in Arcadia Share and Stock Broker's demat account were not the broker's own shares bought by it from its own funds but were rather clients' securities that had been illegally siphoned off by the broker.

The NSE had got a forensic audit carried out on the broker's operations which had shown that it were the clients' securities that were illegally pledged by the broker. The SAT order mentions this aspect but does not consider the implications from it.

The NSE may consider using the evidence from the forensic auditor's report to tell the Supreme Court that the securities in the broker's demat accounts were unlawful and therefore the broker could not be considered as the legal owner of the securities as Kotak Mahindra Bank had argued before SAT.

The NSE had declare the broker a defaulter and expelled it from the exchange’s membership on Jul 2, 2021, for the misuse of clients' funds and securities and failure to resolve investor complaints against it.

The market regulator is also expected to see that stock exchanges' stand is vindicate since its own circulars require stock exchanges to direct banks and depositories to freeze bank and demat accounts when dealing with a case of broker default.

ACC's CFO Yatin Malhotra resigns, held position for two years

1 September 2022

ACC Ltd's Chief Financial Officer, Yatin Malhotra, has resigned with immediate effect, the company said in a filing with stock exchanges on Wednesday.

The reason behind the resignation was not provided by the company or the CFO. Securities and Exchange Board of India's listing regulations requires disclosure of reason behind resignation in the case of independent directors but not when the CFO of a company resigns.

Malhotra was the CFO of ACC from September 1 2020. Prior to him, Rajani Kesari was the CFO from August 1 2019 to August 31 2020.

According to the company's annual report for 2021 (Jan-Dec) Malhotra was paid a remuneration of 20.7 mln rupees in 2021 which included 1.61 mln rupees performance linked incentive for Sep-Dec 2020 and "performance shares of Holcim Ltd (ultimate holding company)" of 1.18 mln rupees.

ACC's promoter holding was recently been acquired by the Adani Group and the open offer by the acquirer under the takeover rules is currently going on.
Holcim Group recently sold its entire stake in ACC and Ambuja Cements Ltd to the Adani Group for 501.8 bln rupees and the open offer by the acquirer under the takeover rules is currently underway.

MOIL cuts prices of manganese ore by 10-15%

1 September 2022

--[I] MOIL: Cut prices of grades of ferro by 15% today
--[I] MOIL: Cut prices fines and chemical grades by 10%

MOIL Ltd has cut prices of select ferro grades of manganese ore by 15% with immediate effect, the company said in a filing with stock exchanges today. This applies to ore with "manganese content of Mn-44% and above," the company said.

For other manganese ore grades the prices have been reduced by 10%. The prices of fines and chemical grades of manganese ore have also been revised downwards by 10%.

The company also said that the price of electrolytic manganese dioxide has been increased with effect from today to 1,65,000 rupees per tn from 1,55,000 rupees per tn.

High input costs, weakening demand pose challenges, says Excel Ind

1 September 2022

Chemical producer Excel Industries Ltd has pointed to prices of key raw materials rising to "new highs" in recent weeks in its annual report for 2021-22 (Apr-Mar).

"In addition to the unfavourable input cost situation... we are seeing a weakening of demand in several key end user segments and geographical areas," the company said.

The company was also encountering a "customer pushback to further price increases"

The profitability of Excel Industries is likely to get impacted by these factors in the current and next quarter.

The company admitted in its annual report that it expected the business environment in the current financial year "to be very challenging."

An equity fund manager at a large fund house told Informist that yellow phosphorus prices have stayed elevated in the current quarter and that this was a major raw material for Excel Industries.

Excel Industries imports its key raw materials. Yellow phosphorus prices are steered by Chinese producers, who have access to domestic supplies.

The company noted this risk in its annual report. "China has a track record of taking advantage of this situation by pegging the price of the Raw Materials at a high level and at the same time pricing the downstream intermediates and finished goods aggressively," it said.

But current reports from China are pointing to temporary shutting down of yellow phosphorus manufacturers in Sichuan due to lack of power supply. Operational producers are reluctant to offer reliable quotations according to these reports.

Prices of yellow phosphorus in Yunnan and Guizhou regions of China have jumped by over 20% in the last one month, data from Shanghai Metals Market, a leading online metals data provider. The yellow phosphorus with benzene content of 99.9% or more was quoted at around 26,500 yuan per tn in early August and it was quoting at 31,900 yuan per tn.

Excel Industries produces specialty chemicals, intermediates and actives and sells to end user segments like soaps and detergents, lube oil additives, mining chemicals, polymer additives, agrochemicals and pharmaceuticals.

Tata Steel funds arm's capex, acquires new shares for 540 mln rupees

30 August 2022

Tata Steel Ltd has funded capital expenditure of its wholly-owned subsidiary Tata Steel Mining by acquiring freshly issued equity shares of the latter for 540 mln rupees.

Tata Steel said in a stock exchange filing today that the subsidiary company issued 28.2 mln equity shares of face value of 10 rupees at a premium of 9.15 rupees per share on a preferential basis to Tata Steel on Monday.

The cash paid by Tata Steel for the issue this will be utilised by Tata Steel Mining for capital expenditure purposes. Tata Steel holds 100% equity in the subsidiary company and the equity holding went up to 850.12 mln shares after Monday's preferential share issue.

Prior to this transaction, Tata Steel has paid Tata Steel Mining 6.45 bln rupees during the current financial year for acquiring 336.85 mln shares issued by the latter on a preferential basis at a price of 19.15 rupees a share which included a premium of 9.15 rupees a share.
 
This was done to fund the subsidiary company's acquisition of 100% shares of Rohit Ferro-Tech and was done in two tranches -- one in April and the second one in June.

Grasim to incur 27.6-bln-rupee capex Jul-Mar in viscose, chemical ops

30 August 2022

Grasim Industries Ltd's chairman Kumar Mangalam Birla's emphasis on the company's capital expenditure plans for its existing businesses in viscose staple fibre and chemicals and the new paints business in the annual shareholders meeting held on Monday came on the back of elaborate details provided by the company earlier this month post disclosure of June quarter results.

Birla told shareholders that existing businesses' capex guidance of 31.2 bln rupees for the 2022-23 (Apr-Mar) will be "towards capacity creation and modernisation of plants" as against 19.6 bln rupees capex incurred in 2021-22.

But recent data by the company indicated that only 11.4% of the guided capex figure for 2022-23 was spent in the June quarter.

The Jul-Mar period of the current financial year will, therefore, see a surge in capex spending by Grasim Industries in its existing businesses alone. The company is expected to spend 27.63 bln rupees during these nine months.

Paints capex
Birla told shareholders that of the additional capex amount of 100 bln rupees for the new paints business the company had spent 6.1 bln rupees as of the end of 2021-22.

The recent data by the company showed that another 2.1 bln rupees of paints capex was incurred in the June quarter.

It meant that going forward Grasim would likely incur capex of 91.8 bln rupees towards the paints business alone.

But the company recently indicated that it will start spending bigger chunks of the 100-bln-rupee planned capex for paints from the second half of the current financial year onwards in order to meet the target of 2024-25 for going live with paints production.

The company's chief financial officer, Ashish Adukia, told analysts and investors in a recent post-earnings conference call that from now on the capex spends in paints will "be front loaded because we've started ordering for equipment etc."

Adukia said that paints unit construction was going on in almost four sites. "Directionally, yes, there will be large paints capex next year along with other capex," he said.

Viscose capex
Of the total guided capex for existing businesses, Grasim had earmarked 14.31 bln rupees for the viscose staple fibre segment for the current financial year of which 5.87 bln rupees is for capacity expansion and 8.44 bln rupees is for maintenance and modernisation.

But tn the quarter ended June the company had incurred only 11% of the targeted amounts for each of these two elements.

The viscose staple fibre capex is unlikely to include any brownfield expansion, Grasim's managing director Hari Krishna Agarwal told analysts in the recent conference call in response to a question. He said the company would "love to do that… but for the time being that is not… on the drawing board."

According to Agarwal the company was trying to balance and optimise the capex spends with the debt requirements keeping debt to equity ratio and debt to EBITDA ratios in mind. EBITDA is earnings before interest, tax, depreciation and amortisation.

Chemicals capex
In its chemicals segment Grasim has committed a capex of 12.63 bln rupees for the whole of 2022-23 but the actual expenditure as of June 30 was only 10.1%.

The company is, therefore, expected to spend 11.35 bln rupees more in the Jul-Mar period of the current financial year.

The full year capex target in chemicals covered 7.19 bln rupees towards capacity expansion with 0.66 bln rupees spent in Apr-Jun and 5.44 bln rupees towards maintenance and modernisation of which 0.62 bln rupees capex was incurred in the June quarter.

Grasim has also targeted capex of 4.23 bln rupees for its operations in viscose filament yarn, textiles and insulators. Of this, the company incurred 0.69 bln rupees in Apr-Jun.

Debt concerns
Analysts have expressed concerns of the high rate of capex by Grasim.

The company's consolidated net debt went up to 67.8 bln rupees as of Jun 30 from 43 bln rupees at the end of March. The gross debt stood at 171.4 bln rupees as of Jun 30 while liquid investments were worth 103.6 bln rupees.

Tata Steel independent director quits to join US energy department

29 August 2022

Tata Steel Ltd's independent director David Crane has resigned from his position in order to join the US Department of Energy.

Since his new position required him to step off from all private sector positions Crane has put in his resignation, the company said in a stock exchange filing today.

Crane will leave the Tata Steel Board on Sep 5 and join his new position the next day according to his resignation letter

He joined Tata Steel's board as a non-executive independent additional director on Oct 11 last year.

After Crane's departure from the board position Tata Steel will have five independent directors and six non-independent directors.

In 2021-22 (Apr-Mar) the company had seen one independent director resign, another retire and a third one re-appointed on expiry of term. It has also appointed two new independent directors in that year which included Crane.

SEBI Watch: NDTV case vindicates SEBI's stand on indirect acquisition

29 August 2022

The Adani Group's ongoing attempt to acquire a controlling stake in New Delhi Television by converting debt into equity shines the spotlight on an order last month by Securities Appellate Tribunal on how these loans should be viewed.

SAT overturned a Securities and Exchange Board of India order holding that the 4-bln-rupee interest-free borrowing by NDTV promoters under onerous conditions from Vishvapradhan Commercial should be treated as equivalent to the acquisition of a stake by the latter.
 
In the original order of June 2018, SEBI had pointed out that Vishvapradhan Commercial's loan agreement with the NDTV promoter company, which held 26% stake at that time, was not a normal lending transaction and its primary purpose was to acquire the broadcaster's shares.

To prove its point, it pointed out that the loan agreement gave Vishvapradhan Commercial the right to convert its loan into shares aggregating to a 99.99% stake in the NDTV promoter company "at any time during the tenure of the Loan or thereafter without requiring any further act or deed on the part of the Lender."

The market regulator had, therefore, concluded that "the exercise of the right to convert warrants into shares of RRPR (promoter company) thereby indirectly acquiring 26% of NDTVs equity is not dependent on the repayment of the loan."

Based on this finding, it held that Vishvapradhan Commercial had breached the takeover code by not making an open offer for NDTV shares after signing the loan agreement.
 
But these contentions were subsequently thrown away by the Securities and Appellate Tribunal while hearing appeals by Vishvapradhan Commercial and NDTV promoters.
 
On its part, SAT said that from a reading of the loan agreement and the call option agreements it was clear that either the loan had to be repaid or the call, conversion or purchase options would get exercised. SAT said the wording of the agreement indicated that VCPL would be entitled to exercise the warrant conversion if the loan remains unpaid at the end of the tenure. “In our opinion, it does not mean that the warrant conversion option could be exercised even after the loan is extinguished," SAT had said.

Thus, it rejected SEBI’s contention the warrants could be exercised even during the tenure of the loan.

The events of the last few days have given us new material to evaluate whose position was closer to reality. The events show that SEBI had its finger on the pulse of the complex web of covenants in the legal agreements between the promoters of NDTV and the lender.
 
The question in the minds of every minority shareholder of a listed company today is: If a promoter uses its shares to borrow or carry out deals under such onerous clauses, can it continue to be considered the true owner of those shares? It also points to the need for promoters to disclose the terms under which they resort to raising funds against their shareholding.
 
Separately, another worrying aspect is that SAT seems to have overlooked the fact that when it issued its order last month, the 10-year tenure of the loan was already over, and Vishvapradhan Commercial could, at any moment, convert its loan into shares of the promoter company.

Even if one accepted SAT’s reading that default was a condition for the conversion of the debt into shares, SAT should have asked why no open offer was made immediately after July 2019 when the loan expired and presumably slipped into default.

SEBI has got every reason to tap itself on its shoulders given how the NDTV case has turned out. But it must introduce the controlling shareholder concept in our securities market as this column argued for recently (https://www.informistmedia.com/sebi-watch-ndtv-case-shows-need-to-relook-controlling-shrholder-norm/).

Metal Stocks Outlook: Weak steel and aluminium price outlook to weigh

26 August 2022

Metal stocks came in a under a bit of fire this week with Nifty Metal losing 2.3% in average value over that of the previous week.

This is likely to be the scenario next week also as uncertainties around price outlook and margins play in the minds of the metal sector investors.

According to a report by Kotak Institutional Equities earlier this week the domestic steel prices have declined 20% in the last three months due to regional price weakness and that they would continue to remain under pressure given the current premium to import parity. It also said that even if export duty on steel were to be cut it will have only limited benefits.

Downside risks to prices are also seen for aluminium. The brokerage felt that current aluminium prices, which have remained range bound in last one month after seeing a sharp fall earlier, are not likely to rise as majority of smelters in Europe were running at cash losses and production curtailment announcements were starting to be made by the producers.

Headwinds in metal and mining sectors still persisted, said Edelweiss Securities in a sector update today. It said that domestic hot rolled coil price in the traders market slipped further this week "owing to high inventory at steel producers and expectations of price cuts in the first week of September."

It also pointed to a slowing demand for secondary rebars leading to a dithering in its prices.

Bayer CropScience gets nod on related trade but some shareholders oppose

24 August 2022

The results of voting on resolutions in the annual shareholders meeting of Bayer CropScience Ltd on Monday indicate that a section of non-promoter shareholders were opposed to the jump in related party transaction limit with the ultimate promoter holding company Bayer AG to 30 bln rupees from 18 bln rupees.

The ordinary resolution on related party transactions, in which promoter shareholders were not permitted to vote as per Securities and Exchange Board of India's norms, saw 20% of non-institutional public shareholders and 14.1% of institutional public shareholders vote against the proposal.

Overall, 14.1% of public shareholders who voted in the meeting were against the proposal. But since the ones voting in favour were greater than 50% the company got the approval to hike the related party transaction limit.

The shareholder approval will now enable Bayer CropScience to buy goods from, or to effect sales to, Bayer AG, along with other specified types of related party transactions for a total value of 30 bln rupees every year from 2022-23 (Apr-Mar) to 2026-27.

The company has justified the need for related party transactions with Bayer AG on the grounds that it gave access to scientific know-how and enabled it to become part of Bayer’s global supply chain.

It also justified the jump in the limit to "future growth plans.”

In terms of proportion of Bayer Cropscience's annual revenue in 2021-22 the raised related party transaction limit of 30 bln rupees amounted to 63%. It was higher at 70% in the previous financial year.

Further, the 30-bln-rupee limit was 2% of Bayer AG’s consolidated turnover in 2021 (Jan-Dec).

Earlier, Bayer Cropscience had taken shareholder approval in August 2017 to make related party transactions with Bayer AG for 18 bln rupees every year till 2021-22.

The value of related party transactions with Bayer AG in 2021-22 was 16.7 bln rupees, close to the 18-bln-rupee limit.

It indicates a likelihood of Bayer CropScience utilising the new 30-bln-rupee limit near to its full extent in the current financial year or in the following years.

In the shareholding pattern of Bayer Cropscience as of June 30, foreign promoter entities including Bayer AG, Monsanto Company and two others, and domestic promoter entities Bayer Vapi and Monsanto Investments India, together held 71.4% of the company's shares.

Bayer AG is the ultimate promoter holding company of Bayer Cropscience.