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Institutional EYE

Commentary on Corporate Governance Issues

Vascon Engineering: Time to dig deeper

There has been a sudden and steep fall in the share price of Vascon Engineers Limited this week, after it announced cancellation of the Compulsory Convertible Debenture issue. In two trading sessions the share moved down as much as 33%, with investors loosing around Rs 3000 million.

Is the Board within its right to cancel the transaction?

A preferential issue in a listed company, once agreed upon between a company and the investor, is only subject to shareholder approval (- and stock exchanges confirming that they will list). Once shareholders have accepted the offer, the consideration has to be received.

Preferential shares have to be allotted within 15 days. The Vascon management or its board can at best tinker with the terms – and maybe not even this. They cannot cancel the transaction as they have an obligation to fulfil terms for which it sought shareholder approval. If an investor has decided to back down, the company needs to pursue legal remedy. It cannot say the management and the investor are in agreement and the company will not to go ahead with the allotment.

There is an alternate explanation for the developments, including the company readily agreeing to the termination of the agreement, which fits the sequence of events. This account avers that this was a strategic investor, with change in control, in the garb of a financial investment. But this, if true, has grave consequences, and needs further enquiry.

It is imperative for SEBI to examine both the transaction and its cancellation

SEBI needs to look at the developments in Vascon very carefully. It needs to ask:

  • Was this a genuine transaction or was this a change of control in the guise of a financial transaction investor or was this a sham transaction with an eye on the market?

  • Did the due diligence reveal something that is not known to the (minority) shareholders of Vascon?

SEBI needs to examine all relevant documents relating to the transaction, and the correspondence relating to the cancellation. It should also examine the share trading data.

SEBI needs to clarify:

  • What is a preferential issue? Is it only an intent or is it a contractually binding agreement from the investor subject only to approval from shareholders of the company and from stock exchanges for the listing of the securities.

  • Does the management have the authority to cancel a transaction which was subject only to approval by shareholders, and was duly approved by them? Conversely if a preferential issue has been approved by shareholders, can it then be cancelled by the company management without shareholder approval? If so, this will have consequences for the market.

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