The history of Indian stock markets is replete with instances where promoters of listed entities show utter disregard for their minority shareholders. A recent replay of this which went rather unnoticed by the market participants involved a company named "Inox Leisure Ltd", where its promoter i.e. Gujarat Flurochemicals, entered into a transaction that made them richer at the expense of the minority shareholders. Gujarat Flourochemicals increased its stake in Inox Leisure Ltd through a transaction that was innovative in nature, subtle in execution and complex for the understanding of a minority shareholder. As such, no one is complaining yet.

A little bit of the history

After fighting a gruesome takeover battle against Reliance Capital for controlling interest in Fame India Ltd, Inox Leisure Ltd gathered a majority stake of 50.27% in Fame India while Reliance Capital could only reach to 35.39% stake in Fame India. Sometime later, Fame issued a rights issue through which Inox further increased its stake in Fame to 68%+ as Reliance Capital did not participate in the rights issue. Post rights issue, Reliance Capital stake fell from 35.39% to around 22%.

In FY13, Fame India merged with Inox Leisure Limited for a share swap ratio of 8:5. For every 8 shares of Fame India Limited, shareholder received 5 shares of Inox Leisure Limited.

As shown above, before the merger, 390,90,512 (3.9cr) shares Fame India Ltd were held by Inox Liesure Ltd which belonged to all shareholders including 'minority shareholders'. After the merger, these 3.9 crores shares were converted to 2,44,31,570 (2.44 crores) equity shares of the Inox Liesure Ltd and were placed under the heading "Inox Benefit Trust" in the non-current assets. The total cost of this 2.44 crore shares of Inox Liesure Ltd shown in 2013 Annaul Report is Rs 183.4845 crores indicating a cost price of Rs 75.1.

Corporate mis-governance angle:

In the last 2 weeks, the reported trasactions shows that Inox Benefit Trust sold 36 Lacs shares to the Inox Promoters (Gujarat Flourochemicals) at a price lower than its own acquisition cost. The cost to Inox Benefit trust (which is a part of Inox Leisure Ltd) is Rs 75.1 whereas the sale to promoters has happened at Rs 63.6, indicating a loss of 11.5 per share to Inox's shareholders. These trasactions only indicate that the promoters have have used their vetto to increase personal stake through creeping acquisition at a substantial discount and put the minority shareholders of Inox Leisure Ltd to into a disadvantageous position.

Diagnosing the Entire Scheme: Promters got the shares at 36% disount in our estimate

If we further diagnose the entire scheme that has been played by the promoters, it would look something like this:

1. Promoters gave loans in FY10 to Inox Leisure Ltd for acquiring Fame India Shares. Promoters earns interest till date on this loan.
    
2. Inox Leisure after acquiring Fame India Shares, merged Fame to itself. As a part of the merger, Inox received its own shares (2.44 crores shares). The effective cost per share works out to be Rs 75.1. If the interest paid to the promoters on the loan provided to Inox for acquisition is considered, the cost would roughly work out at Rs 100 per share.
    
3. In Sep 2013, Promoters (Gujarat Flourochemicals) bought the shares back from "Inox Benefit Trust" at an average of Rs 63.6 per share. This is nearly 36% discount to the actual cost price (inclusive interest paid on loan taken).

If the promoters would have increased their stake from open market where Inox Benefit trust is not the seller, they would have to shelve out a significantly higher amount and the minority shareholder would have been fairly rewarded due to the increase in the share price.

Irony for market participants

The entire saga of Inox shows the financial artistry shown by the promters management of Inox Leisure to personally benefit at the cost of other shareholders. However, many market participants, according to us, could still look at the increase in promoters holding in Inox Leisure Ltd as a positive step for the stock price. Hence, we will not be surprised if some mutual funds investors and large HNIs start looking at Inox Leisure Ltd in a positive light espcially after PVR Ltd stock price moving up by 50% in last six months. However, a true long term investor will always be wary of investing in Inox Leisure Ltd.

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