Strictly for the punters

I came across an interesting case brewing up in SC which could result in a windfall to Goldstone Infra investors, irrespective as to which shareholders will be eligible to participate in the open offer – the ones holding the shares at the time of the event or even the current ones who may have bought them much later. Some amount of digging revealed an interesting situation.

The case is as follows:

On January 25, 2007 the Board of Directors (BOD) of Goldstone Infratech (GI) passed a resolution to convene an EGM for seeking the approval of its shareholders for issue of 1.5 crore share Warrants to Goldstone Exports (GE), who already held 9.51% in GI, on preferential basis. Accordingly, on February 24, 2007, the shareholders of the GI approved the preferential allotment and on April 30, 2007, the BOD allotted the share warrants to GE on preferential basis. Thereafter, on Oct 29, 2008, the BODs of GI allotted 1.5 crore Equity Shares to GE pursuant to the conversion of warrants, thereby, increasing the shareholding of GE from 9.51% to 47.19% resulting in the triggering of open offer under SEBI regulations then. Accordingly, GE made the public announcement to the shareholders of GI in terms of SEBI (SAST) Regulations, 1997 at a price of Rs.23 per share taking the date of Board meeting i.e. January 25, 2007 as reference date. However, on examining the letter of offer, SEBI directed GE to revise the offer price taking the date on which BODs authorized the preferential allotment of Shares i.e. Oct 29, 2008 as reference date which comes to be Rs. 43 per share. GE filed an appeal in SAT against this order of SEBI. SAT upheld the SEBI order, that for the purpose of determination of offer price, the date on which the BODs authorized the preferential allotment of equity shares to GE upon conversion of warrants, should be considered as reference date and not the date of Board meeting in which they approved the issue of share warrants as no voting rights accrued on that date. Then GE moved the SC against this order of SEBI/SAT. This case has been going on for last 4 years and the final outcome is now awaited on Oct.’ 10.

The current price of GI is about 17. Now let us look at a few scenarios:

1.     Promoters (GE) win the case and Court considers 23 as the open offer price:

a.  Investors at the time of the event i.e. holding shares in 2007 will be eligible to participate in the open offer, never mind when they bought the shares (even if they were to buy them today @17, the would still get the offer letter wherein they could tender these shares @23).

b.  All investors (pre and post the event) can participate in the open offer which means there will be a scramble for the shares considering the attractive differential. It is a fact that public is often blinded by the differential value and ignores the acceptance ratio, the ratio of shares accepted to those tendered which is fundamental to the profitability or otherwise of the open offer, to their own peril. This fact alone will give enough returns, even if the market price doesn’t actually reach the offer price.

2.  Promoters lose the case and Court asks them to make the offer at 43+ (including the interest for the delayed period since then)/share:

The same scenarios as above will play out but on a much larger scale with the gains being proportionately and significantly higher than the earlier case. In fact in this case, both categories of investors stand to gain handsomely and part b more so since the price will be much closer to the offer price and people who may have bought post the event in 20s or below can still sell at a handsome price which may be in late 30s if not actually 43+.

Considering SEBI’s investor-friendly track record, as well as SAT’s upholding of SEBI’s stand, the chances of the promoters (GE) losing the case appear to be higher, in which case as mentioned above, there is a windfall waiting to happen. In the worst case too, investors buying now will get anywhere close to 20% in a couple of months time (considering the current price of 17) even assuming that the offer price is fixed at 23 and only old investors are eligible, for the price then will settle around 20.

However, as in all cases, there is no free lunch. There are some risks associated with this event.

1. While going thru the shareholding pattern, I saw that under Public shareholders in the Non-institutional category, there is a column Bodies Corporate which has a 22.77% stake mentioned against it. But the identity of this group with such a significant shareholding as not been mentioned anywhere in the public domain. This group could very well tilt the acceptance ratio one way or the other.
2. The court may yet again postpone its verdict (though they have said that this will be the final outcome), in which case the delay would erode the gains in the first scenario depending upon the period of the delay - anything beyond say 2 years (till that time you could still get 10% annualized returns) while the second scenario would still bring in good profits.