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IIAS asks investors to seek details, but says vote for Rs 240-crore related party deal; rigorous board process followed, says company
The Amit Tandon-led investor advisory firm, IIAS, has raised concerns over a plan by health care player Max India to invest up to Rs 240 crore in a senior citizen services firm owned by promoter Analjit Singh and his daughter Tara Singh.
Though the advisory firm is not against the investment plan, it has asked investors to seek more details. IIAS has also said the new investment will take the company’s total related party transactions to 40 per cent above the limits prescribed by the company law, whose risk level it rates “high”.
Max India is seeking shareholder approval for a resolution authorising the board to make this related party investment, through a postal ballot. Investors are required to send their votes by Wednesday (May 16).
In March, the company had sent a notice of the postal ballot, which sought among other things to “authorise the board to invest in securities viz equity shares, convertible debentures, convertible and/or redeemable preference shares of Antara Senior Living Pvt Ltd under section 372A of the Companies Act, 1956 for an aggregate consideration not exceeding Rs 2.4 billion.”
Antara Senior Living Pvt Ltd was incorporated in May 2011 with an equity share capital of Rs 0.1 million (Rs 1 lakh) with a face value of Rs 10 per equity share. Of this capital, Analjit Singh and Tara Singh hold 9,000 and 1,000 shares, respectively.
In a voting advisory released on Friday, recommending investors to vote in favour of the resolution, IIAS noted Max India had not disclosed details of the Antara plan such as the nature and outcome of the surveys and pilot studies, expected returns, details on distribution of funds into specific projects, board structure and break-even periods considering it was a highly capital-intensive business. “Investors should note that senior living is a relatively unexplored concept in India with first-of-its-kind facilities. Very little information is available about the business model and market acceptance of such a project. We suggest shareholders seek information on the above from the company.”
It also rated the risk level of the lack of information on the source of funds of this investment as “moderate.”
In response to an email query, a Max India spokesperson pointed out IIAS had clearly advised shareholders to vote in favour of the resolution. “Max India has a comprehensive governance process. The decision to enter into the senior living business went through this rigorous decision-making procedure, including a thorough evaluation by a strong and active board which scrutinised the decision on the shareholders’ behalf.”
The spokesperson added senior living presented a rapidly growing yet inadequately tapped business opportunity in India and Max India was uniquely poised to succeed in the senior living initiative.
According to the Companies Act, the aggregate of all inter-corporate transactions should not exceed the higher of (i) 60 per cent of the sum of paid-up capital and free reserves of the parent and (ii) the total free reserves of the parent. Any amount over and above this limit will have to be approved by the passing of a special resolution through a postal ballot.
According to IIAS, the proposed investment by Max India will take its total related party transactions to Rs 3,000 crore. As against this, the total free reserves of the company stand at Rs 2,120 crore. “The company will breach its total related party transaction limit, as specified under section 372A of the Companies Act, by over 40 per cent,” the advisory notes. The risk level of this portion was rated “high” by IIAS.
IIAS, however, recommended investors vote in favour of the resolution saying, “The company has sufficient cash to fund investments... Therefore, this will not impact the leverage ratios of the company.” IIAS has said it understands this is an operational decision of the company to enter into lifestyle retirement resorts and related activities. It has also noted the shares of the promoters are being bought at par.
The Max India spokesperson also highlighted these points in his response. “The postal ballot notice comprehensively discloses all the information required under the law and we encourage our shareholders to engage with us if they feel the need to know more,” the spokesperson added.
IIAS also noted the remuneration paid to Mohit Talwar, recently elevated as deputy managing director of the firm, is on the higher side. “The proposed remuneration of Rs 52.6 million (Rs 5.26 crore) for Mohit Talwar as deputy managing director is higher than the industry average for managing directors and is not completely linked with the performance of the company,” it said. However, the advisory recommended in favour of this resolution also, saying, “IIAS usually recommends that managerial remuneration be linked to company performance in terms of market cap and/or net profits. However, we recognise that Mohit Talwar is a professional executive (non-promoter) who has strong credentials and requisite experience for the role.”
Reliance Mutual Fund (4.83 per cent), International Finance Corp (3.9 per cent), Aranda Investments (3.05 per cent) and Morgan Stanley (1.53 per cent) are some of the large investors in the company. The promoters hold 37 per cent.