The Securities and Exchange Board of India (Sebi) has sought clarifications from the Kishore Biyani-controlled Future Retail on the manner in which the listed entity intends to merge its fully-owned subsidiary Future Value Retail (FVRL) with itself.
According to a person familiar with the development, the capital market regulator has expressed its concerns on the quantum of convertible debt being issued after the merger, and is of the view that the deal could not be in the best interests of minority shareholders of the listed parent entity as it would lead to dilution of equity. FVRL has convertible debt of R685 crore, out of which R285 crore has already been bought back by the holding company.
Since after merger the convertible debt of FVRL will be replaced by Future Retail, it will lead to dilution of equity in the parent firm once the debenture holders convert them into shares. Sebi feels this will hurt the minority shareholders of Future Retail.
“The merger proposal is pending with Sebi as the debt component of nearly R700 crore in the proposed deal structure has not gone down well with the regulator. While the company has clarified on the matter, the regulator is yet to give its nod,” said a person privy to the development.
In October last year, the board of Future Retail (formerly Pantaloons Retail India) decided that it would merge FVRL with Future Retail in a bid to cut down on costs and streamline operations. Kishore Biyani’s FVRL operates 159 Big Bazaar stores, 28 Food Bazaar stores and several KB’s Fairprice convenience chain of stores.
While sources add that the market watchdog has indicated that the deal cannot be permitted in the current structure, company officials say that the necessary clarifications have been submitted to Sebi and the deal is not detrimental to the interests of minority shareholders. An email query sent to Sebi on Friday remained unanswered till the time of going to the press.
"Sebi has been seeking certain clarifications against the convertible instruments to be issued pursuant to the merger. The necessary clarifications have now been given to Sebi through stock exchanges. As the wholly-owned operating entity is merging into the listed entity, it would give better transparency in operational reporting to the shareholders. Further, since there is no dilution of equity the deal is not against the interest of minority of shareholders,” a Future Retail spokesperson told FE in an emailed response.