According to the proxy voting advisory, there are not enough disclosures by the Piramals on promoter group entities and related party transactions and the rationale can also be achieved through inter-se transfer instead of the merger

Bengaluru-based InGovern Research Services has advised shareholders of Piramal Enterprises (PEL) to vote against the proposal to merge PHL Holdings Pvt Ltd (PHPL) with the company citing lack of rationale and business logic.

In an advisory note, InGovern, said, “Rationale given for this amalgamation can also be achieved through an inter-se transfer or a scheme of amalgamation at the promoter group level and does not suggest any specific business logic for PEL shareholders.”

PEL has issued a notice for a court convened meeting on 13 March 2013 for a composite scheme of arrangement and amalgamation under Section 391 to 394 read with Section 78 and Sections 100 to 103 and other applicable provisions of the Companies Act, 1956, between PHPL and the company.

PHPL is a company forming part of the Promoter Group of PEL and as of 31 December 2012, holds 48.73% stake in PEL. Post the merger, Sri Krishna Trust, a family trust of the Piramals, which holds 100% stake in PHPL, would directly get shares in PEL. Institutional investors hold 28.3% stake in PEL. Aberdeen Global Fund and Life Insurance Corporation of India (LIC) are the largest institutional shareholders in PEL with 9.37% and 3.23% stake, respectively.

PEL in the notice to its shareholders has not made sufficient public disclosures on PHPL or its step-down subsidiaries. On the face of it, the transaction seems to be a straight forward merger of a holding company with its listed subsidiary, where shareholders of PHPL will directly get shares in the listed entity PEL.

“However”, InGovern said, “a deeper scrutiny of PHPL reveals that the entity had entered into related party transactions with its step-down subsidiaries, which have now been merged with PHPL in October 2012, in the past three years. This raises concerns with regards to the current scheme of amalgamation between PHPL and PEL.”

InGovern said it looked at the filings made by PHPL and its step-down subsidiaries for the past three years in addition to the public filings and stock exchange filings made by PEL during this period. InGovern said it also approached the company for further details of the transaction but were told to visit the company for inspection of the documents and the same were not made available to the proxy advisory electronically. “The company has clarified that PHL Holdings will not have any debt in the books of PHPL as on the appointed date and that there will be no adverse impact on the financials of PEL due to the merger,” the report said.

“PEL should clarify to its shareholders the rationale for these past transactions and their potential effect due to these related party transactions on PEL shareholders if the current merger goes through. The company should also publicly disclose the financial documents for PHPL ending 30 September 2012 and 31 December 2012 as well as all scheme related documents, for greater public scrutiny,” InGovern said.

According to the proxy advisory, the rationale given (by PEL) for this amalgamation can also be achieved through an inter-se transfer or a scheme of amalgamation at the promoter group level and does not suggest any specific business logic for PEL shareholders.

Recently, PHPL transferred its shareholding in Piramal Life Sciences to Sri Krishna Trust through an inter-se transfer and the same can be used in this case instead of going for merger of PHPL with PEL, InGovern said.

“Given the backdrop of the related party transactions that have happened in the past between PHPL and its step-down subsidiaries, it seems as if the current merger might have been affected to cover up some of these past corporate actions. We urge the company to provide more clarification on the business rationale for such a transaction,” the proxy advisory said.