The Nanda family, promoter of Escorts, are planning to increase their voting control to 41.1% by transferring its and its associate companies' voting rights to a trust owned by them. But this will reduce voting rights of other shareholders
Moneylife Digital Team
In yet another example of poor corporate governance, the Nanda family promoted Escorts Ltd, is planning to increase its voting control to 41.1% through a Court convened meeting on 20th May, says a report from Institutional Investor Advisory Services Ltd (IiAS).
During the meeting, a special resolution for amalgamation between Escotrac Finance & Investments Pvt Ltd (ESCOTRAC), Escorts Finance Investments & Leasing Pvt Ltd (EFILL) and Escorts Construction Equipment Ltd (ECEL) with Escorts would be discussed. IiAS has suggested that investors vote against the resolution as it is not in their interest.
According to a filing by Escorts to the Bombay Stock Exchange (BSE), EFILL and ESCOTRAC are part of promoter group and not persons acting in concert. Escorts hold 49.81% each in both EFILL and ESCOTRAC, thus making both the entities its associate companies. Both EFILL and ESCOTRAC hold 6.5% and 12.83% stake in Escorts, which when clubbed together with the stake of Nanda family (12.43%), takes the promoter and promoter group shareholding and thus voting rights of 31.76% in Escorts. How the Nandas, promoter family of Escorts, holds a 31.7% control of voting with only 12.43% of shareholding in the company, asks IiAS.
According to Company Law Section 42, subsidiaries cannot hold voting rights in parent. However, by keeping their stake in both EFILL and ESCOTRAC below the 50% threshold, Escorts and the Nanda family, allowed these units to have voting rights in the parent.
ECEL, on the other hand is 100% owned by Escorts. In case Escorts decides to merge all three EFILL, ESCOTRAC and ECEL with itself, the promoters, the Nanda family would be at risk as their stake in these companies would get extinguished.
To avoid the risk, the Nanda family is planning to transfer 19.3% voting rights of EFILL and ESCOTRAC in Escorts to Escorts Benefit and Welfare Trust. The trust would receive EFILL's 6.8 million shares, ESCOTRAC's 13.5 million shares and ECEL's 16.9 million shares. Therefore post merger, the trust would end up with 37.3 million shares out of 122.5 million shares in Escorts. While this will make the promoter's stake to decline to 10.7%, they would end up with more voting control (about 41.1%) through the trust they control.
According to IiAS, adding shares of associate companies to promoter family holding is a misleading disclosure, to create an impression of a larger than actual shareholding by the promoter family. In addition, the Nanda family, recently bought 4% shares of Escorts from Reliance Mutual Fund by way of creeping acquisition.
"Investors should note that the list of public shareholders with more than 1% in Escorts includes OK Balraj (Trustee of Escorts ESOS) holding 3.1%, and Rajan Nanda (Trustee of Escorts Trust) holding 1.3%. Taking this into consideration, the effective promoter control is higher by 4.4%," the IiAS added.