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Lessons From Bosch Chassis Systems

Published on Wed, Sep 09,2015 | 17:41, Updated at Wed, Sep 09 at 17:41Source : 


Companies and shareholders need to find a common ground on exit strategies
Bosch Chassis Systems proposes to increase the face value of its shares from Rs.10 to Rs.100,000. After the reorganization of share capital, each shareholder will receive shares as per their entitlement. All fractional holdings will be aggregated and the resulting number of shares will be transferred to a trustee for sale. The proceeds will then be distributed to the shareholders with fractional entitlements. Based on the recommendation of the independent valuers, the company has fixed the sale price at Rs.600 per share.

The company reasons that the move will benefit these shareholders, who now get an exit opportunity. Further, it believes that overhead costs incurred on servicing the fragmented minority shareholding will be reduced significantly post consolidation.

But not all investors are convinced. They believe the offer price of Rs.600 per share, which is the same as the delisting price in 2008, is too low and does not take into account the improved fundamentals of the company.

This is not an isolated case. IiAS has observed a similar pattern in other unlisted companies (Victor Gaskets, Bosch Rexroth, Micro Ink) where a reorganization of the share capital has helped the company reduce its minority shareholding. In such cases, even after successful delisting, a small portion of the stake remains with shareholders who did not participate in the offer. In most cases, the refusal to tender shares arises due to differences over valuation. This compels companies to adopt more aggressive tactics and forcibly squeeze out the minority shareholders.

IiAS believes a more balanced approach is required. Companies, on their part, need to respect the views of shareholders and find a more amicable solution. They need to strengthen their communication with shareholders, in order to convey the rationale and appropriateness of the offer price. Shareholders too, need to be more reasonable. The delisting process requires the consent of both regulators and shareholders. Once approved, individual shareholders must respect the decision of the majority and not hold the company to ransom by demanding a higher exit price. As IiAS has argued earlier, valuations are an inexact measure. Therefore, any evaluation of the company’s position must be based on its fundamentals and cannot be driven by shareholder desire.

Manipulative measures by the management create an atmosphere of mistrust, which dents the robustness of corporate democracy. Companies and shareholders must therefore find a common ground on exit decisions.

To know why companies and shareholders need to find a common ground on exit strategies, please see the enclosed IIAS report.

Attachments : F1.0 Institutional EYE_Reorganization of Share Capital.pdf

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