Business Today Net Special

A Unique Transformation

This is the first time it has happened in the history of corporate finance. The B.K. Birla-Akzo Nobel venture Century Enka has put forth a proposal that envisages the conversion of equity to debt, the opposite of the traditional practice of converting debt to equity through the issue of convertible debentures. BT’s Dilip Maitra explains the logic behind the transaction that will have the same impact as a buyback of shares, without the accompanying immediate cash outflow.

B.K.Birla
Director,
Century Enka

If you are aware of how corporates raise funds, you surely know about convertible debentures and partially convertible debentures, which are debt instruments that get converted, fully or partly, into equity shares. But ever heard of equity being converted to debentures? No? Well, if the Calcutta High Court and shareholders agree, Century Enka will soon create history by converting, for the first time, equity into debenture. The Rs 763-crore Century Enka, a leading manufacturer of nylon and polyester filament yarn and the 28:36 joint venture between the B.K. Birla group and Akzo Nobel of Netherlands, respectively, has informed shareholders its plan of doing so.

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Down, But Not Out

The company plans to cancel the entire holding of all shareholders holding shares below 10 in number and in exchange and issue debentures having face value of Rs 71 for every share of Rs 10 each. The conversion will be automatic unless a shareholder informs the company, in writing, otherwise. Debentures will carry 12 per cent interest and will be redeemed, along with interest, after three years from the date of issue. The offer is attractive to shareholders as Century Enka’s share price is hovering around Rs 50-55 for the last few months.

And the company benefits too. The primary objective of this exercise is to eliminate the unnecessary cost of servicing small shareholders, throughout the year, year after year. Like most old companies, Century Enka also has a very large number of small shareholders---it has 2.83 lakh shareholders holding 10 or less number of shares accounting for 83 per cent of total number of shareholders. To service these shareholders, company has to maintain folios, registers, and initiate transfers (if any), dispatch annual reports, and give dividends. The estimated cost for each shareholder ranges from Rs 30 to Rs 85 lakh for the year, apart from the dividend cost. Says G.M. Jain, Vice-President (Finance), Century Enka: "Whatever we spend over and above the dividend is a complete waste. Neither the company nor the shareholders benefit. The savings that the plan will generate will compensate for the interest cost on debentures." The indirect advantage from the scheme is that about 6 per cent of the equity will be cancelled raising the promoters’ holding in the company to some extent.

Debentures will be listed on the debt exchange and Enka will also offer to buy them back if the shareholder wants to sell his share. This offer provides an added benefit to the small investor as debentures will provide a much-needed exit route to them who, otherwise, find it difficult to sell the odd lot of shares. Says N.G. Khaitan of Khaitan & Co, the solicitor firm that outlined the scheme: "This exercise can be a good example for most traditional Indian companies that have a very large number of small shareholders." More so now because the recession is forcing every one to cut cost wherever possible.

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