Industrial and automotive battery maker Amara RajaBatteries is seeking shareholder approval for a Rs 40.3 crore related-party transaction, one which governance experts fear unduly favours an entity owned by its promoters.
Amara Raja is seeking approval through a postal ballot, that ends on Friday, for entering into a lease agreement withAmara Raja Infra Pvt Ltd (ARIPL) to “take on lease land measuring 62 acres for a period of 99 years for total consideration of Rs 40.30 crore with effect from October 1”. The land is in Andhra Pradesh’s Rayalaseema region. The new lease is in the vicinity of Amara Raja’s existing premises, part of the proposed 482 acres of an industrial park being developed by ARIPL. The company has undertaken expansion for enhancing the capacity in both industrial and automotive batteries at Nunegundlapalle village, Bangarupalyam mandal, in Chittoor district.
CONTENTIOUS MOVE
Amara Raja’s promoter entity, ARIPL, promoting an industrial park in Chittoor, Andhra Pradesh
Amara Raja wants to lease out 62 acres on a 99-year lease for Rs 40.3 cr
Wants to pay entire amount upfront
Has already leased 112 acres in two tranches
SES says company paying 33 per cent more than price paid only a month earlier
Also, finds other contract terms are loaded against the company
These facilities have already been put up on 100 acres of land taken on a 99-year leases from ARIPL. The listed firm’s promoters, Ramachandra Galla and Jayadev Galla, are directors of ARIPL and with their relatives own all the paid-up capital.
In addition to these 100 acres, the company took another 12 acres on a long-term lease in August. The third lease, now up for approval, will take the total lease holding of Amara Raja to 174 acres or a little more than a third (36 per cent) of the total area of the industrial park. According to the terms of the latest transaction, lease consideration for the land comes to Rs 65 lakh an acre. This is 33 per cent higher than the price paid for the 12-acre parcel leased out earlier. In August, the company had sought approval for the lease deal with ARIPL at Rs 47.5 lakh an acre.
Apart from the rate, another key departure from the August deal is that in the latest proposal, the entire consideration of Rs 40.3 crore is proposed to be paid upfront to the promoter-owned private entity. In August, Amara Raja agreed to pay Rs 5.7 crore, including the cost for development of infrastructure and common facilities by ARIPL. “The cost of the land is Rs 2.10 crore payable upfront and the balance Rs 3.6 crore is towards developmental/user fee payable by the company to ARIPL in a phased manner, depending on completion of infrastructure/developmental works,” according to the notice issued then at the annual general meeting.
An email to the company from Business Standard seeking comments, sent on Tuesday to spokespersons and a subsequent reminder on Thursday, did not elicit any response.
‘Turn it down’
Proxy advisory entity Stakeholders Empowerment Services (SES ) has recommended shareholders vote against the resolution. In a detailed report, it has said: “SES finds that within a month, the rate of land has gone up from Rs 47.5 lakh/acre to Rs 65 lakh/acre, an increase of more than 33 per cent. Further payment terms have also undergone changes at the detriment of the company.”
Also noting the listed company had already taken up considerable space in the industrial park, SES questioned whether it was a case where the promoters were not finding buyers and were “making the company take the park area making upfront payments. The entire development money is also being paid up front”.
SES says it finds the terms of contract are loaded against the company and it appears the promoters are using their dominant position to push the contract through. The Amara Raja brand, says SES, is owned by the company but the promoters are using it for their own benefit.
Source: http://www.business-standard.com/article/markets/amara-raja-wants-to-pay-promoter-entity-upfront-for-99-yr-lease-114091800925_1.html
Something more on the topic
ReplyDeleteSuckered: Amara Raja to Pay Promoters 40 cr. Upfront to Lease Land It Doesn’t Need
When you're a shareholder of a company, you're less influential than the promoter, of course. But with that level of control, can a promoter try to take money away from the company that you should rightfully have a say in?
Look at Amara Raja batteries. The stock's done well, of course. But now the promoters want to get shareholder approval for the company to pay a large sum as an upfront rent for a 99 year old lease. And guess who they are paying rent to? The promoters!
Amara Raja is doing a postal ballot, with e-voting, on a proposal to take a 99 year lease on a 62 acre property from Amara Raja Infra Private Limited (ARIPL), a company wholly owned by the promoters and their families.
ARIPL is developing a 482 cr. property (in which this 62 acres is being purchased) in Chitoor, AP.
The company will pay Rs. 65 lakhs per acre to ARIPL for the 99 year lease, all of it upfront! Paying for a lease upfront is very strange (and only done when the deal is equivalent to a purchase of the property and the land will be used immediately).
And the interesting thing is: they have no need to use that land today; they are buying it because :
...it would be advantageous to take additional land at this point in time as availability of land in large parcel would be difficult and at huge cost as and when such decisions are taken.
Business Standard has noted that they had done another lease from the same ARIPL, for 10 acres, at Rs. 47.5 lakh per acre, which means this deal is a 33% increase in one month.
It seems a firm called SES has found the contract terms are loaded against the company too. And that the brand Amara Raja is owned by the company but the promoters are using it for their benefit.
Our view
If you're a shareholder this is quite lousy. The company made about 367 cr. last year, and it does seem excessive to pay 10% of that to the promoters for what is excess land (since the company doesn't currently have plans to expand, but is buying the land anyhow).
Effectively this is the company paying Rs. 40 cr. to the promoters to lease land they don't currently want, and by paying all of the money upfront. It's quite possible that the promoters want to dump the land onto the company, having found no buyers elsewhere.
If you ask us, if we were a shareholder we would vote against the resolution (though since promoters own 52% of the company it is unlikely to fail). But the fair thing would be that the promoters should abstain from voting (since they are interested parties) and to only count the votes of remaining shareholders.
We hope SEBI will take note of such deals - and there are a large number of such deals - where the promoters do things that are equivalent to using their large shareholding and operational control to move money from the company's pocket to theirs, for reasons that don't seem to sound genuine.
Source: Deepak Shenoy
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