The market regulator Securities and Exchange Board of India (SEBI) has hauled up Prabhat Dairy for not cooperating with the SEBI-appointed forensic auditor Grant Thornton, and has ordered the company to submit all the demanded documents without any delay.
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SEBI has made it clear that it will allow delisting only after the forensic audit is completed.

SEBI has sent a strongly worded warning letter to Prabhat Dairy stating “The deliberate attempt on your part by not providing information/documents in relation to forensic audit citing vague and weak grounds was not in the interest of investors and shareholders and thus delaying the process.” The company has provided only three of the 27 documents sought by the forensic auditor as of now. SEBI directed them to share this 16th September letter to the bourses but they have not yet done so. This company can well be a test case for SEBI to bring rogue promoters to book. The promoters’ open defiance of SEBI is baffling and SEBI should take urgent steps to protect the interests of minority shareholders.

In April 2019, Prabhat Dairy sold its flagship fresh milk business to Lactalis for Rs1,700 crore. In September 2019, it announced its delisting plans catching its investors by surprise. The company applied for delisting from the bourses in December 2019. Investors had expected a huge dividend but were shocked to hear of delisting instead. Since then, neither the delisting has taken place (delisting process has been stuck), nor has the money been distributed.

Last week, the company acknowledged that it had received Rs1,317 crore during 2019-20 post certain adjustments, but the company claims that it “could not complete the working capital adjustment and complete the business transaction with the buyer due to Covid situation.” Thus Prabhat Dairy has short-changed its minority investors after giving them hopes of a bonanza.

Last year, the company had told investors that it would transfer the money it received from the sale proceeds to an escrow account and set-up a five-member transaction committee consisting of three independent directors, which will supervise the utilisation of the proceeds.

In an Exchange filing on 25 March 2019, the company said “It is the intention of the Board of Directors of the company to distribute the net proceeds of the transactions to the members of the company, in due course after meeting tax and indemnity obligations.” Hence, the delisting announcement, though within the ambit of SEBI regulations, was against the intent specified by the company in March 2019 to share the proceeds with its shareholders.

Even if one deems that the company used a part of the sale proceeds for repayment of debt, Prabhat Dairy had total financial liabilities of only Rs147 crore. This means it would have almost Rs1,550 crore in the company’s escrow accounThus Prabhate been distributed to shareholders.

Several shareholders had alleged that the company had hiked expenses ahead of delisting to keep the delisting price lower than the actual value.

Forensic auditors are said to be focusing on an expense of Rs438 crore. Recent statutory filings by Prabhat Dairy revealed that the company is showing ‘estimated transaction costs and taxes’ on sale of shares and business sale, even 18 months after striking the deal. The company has shown Rs204 crore as indemnity, for claims arising in future and Rs234 crore as ‘management estimate’ of taxes. It is this Rs438 crore that has come under the lens of the forensic auditor among other things.

These games to reduce the book value ahead of the delisting are familiar negative tactics which we reported in the case of Vedanta too. This is an unfair, unhealthy pattern in which promoters seek to hoard wealth by not treating shareholders fairly/ equally.

Prabhat Dairy has shown Rs325 crore of cash on hand as on 31 March 2020, quite atypical for Indian corporates. Last week on 8th October, the company announced its results for the year ended 30 March 2020 and reported a net loss of Rs109 crore on a turnover of Rs533 crore.

The company has 16,000 retail investors and nearly 50% of the shareholding is with the public. After minority investor complaints about financial bungling in the company piled up, SEBI commissioned a forensic audit (of the last two fiscal years) in July 2020.

Despite hiving off the fresh milk business last year for Rs1,700 crore, the current market cap of the company is only Rs465 crore. Promoters have pledged 59.88% of their holding. There are allegations that the company had not properly shown the sale proceeds on its balance sheet, to keep the book value low so that its shares could be delisted at a much lower price than the actual value.

If the delisting goes through, it would provide an opportunity to private equity firm Rabo Equity Advisors Pvt Ltd to exit Prabhat Dairy. Rabo Equity had invested Rs80 crore in the company during 2012-2013 along with French investor Proparco, which had put in Rs60 crore at the same time. In September 2015, the company came out with an IPO (initial public offer) and both Rabo Equity advisors and Proparco made partial exits. Prabhat dairy raised Rs485 crore during the IPO which included an investment from TVS Capital too.

Ontario Pension Board, Mondrian Investment Partners, Sundaram Alternate Opportunities Fund, Mondrian Emerging Markets Fund, India Agri-business Fund and Societe De Promotion are amongst the institutional investors of Prabhat Dairy.

If institutional investors cannot force promoters to stay clean, we can never expect good governance in Indian companies. Retail investors often tend to invest in a company thinking that there are institutional shareholders to keep a watch on the promoters.

Retail investors reportedly invested in the company because of the potential for dairy business. The stock had first listed at Rs117 in September 2015 and the current price is Rs47.55. Meanwhile, the company has applied for a timeline extension on the delisting vote. Promoters need to hold more than 90% stake in the company to delist.

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