Ruchi Soya FPO: Baba Ramdev owes a big “Thank You” to bankers

Clearing off “debts” in Indian ethos has always had a special mention. And in keeping with the spirit of our tradition, Baba Ramdev should, ideally, be sending a big “Thank You” note to the powers that be for helping the Yoga Guru in his entrepreneurial journey. More pertinently, he should be grateful to the state-owned lenders for not only showing their magnanimity in lending him money to buy Ruchi Soya but also for facilitating the company’s follow-on public offer.

To begin with, there is no denying that the Insolvency and Bankruptcy Code is a watershed moment in the annals of Indian banking given the manner in which crony capitalists have lost their crown jewels. Major amendments in the Code ensured dubious promoters were kept at bay by blocking any back-door attempts to buy back their businesses cheap.

The preamble of the Code also states that it aims to promote entrepreneurship, and stimulate availability of credit. A noble intent indeed, but in the case of Ruchi Soya, which went into insolvency in December 2017, the process and outcome leave much to be desired.

After a hard-fought battle, in April 2019, Patanjali Ayurved won the rights for Ruchi Soya for ₹4,350 crore, leaving the lenders with more than a 50% haircut. But after losing their shirt, the bankers had the confidence and gumption to back the bidder by providing him funds to buy the asset too. In November 2019, Patanjali got commitments of ₹1,200 crore from State Bank of India, ₹700 crore from Punjab National Bank, ₹600 crore from Union Bank of India, ₹400 crore from Syndicate Bank (now Canara Bank) and ₹300 crore from Allahabad Bank (now Indian Bank). The banks, ideally, should have taken a charge on the assets of Ruchi Soya or that of its borrower, Patanjali Ayurved. Instead, the lenders were happy to lend fresh loans against Patanjali’s 99.97% (292.50 million shares) shareholding in Ruchi Soya. The deal got consummated after SBI Capital Trustee took charge of the pledge.

According to Shivaprasad Chhatre, ex-banker with 35 years of experience, including compliance roles across BNP Paribas, Kotak Mahindra Bank and ICICI Bank, the state-owned lenders have gone out of their way to help the promoters in this case. “It’s a pure accommodation transaction while trying to be within the framework of law, and not compliance, going by the spirit of the law,” says Chhatre.

Ruchi Soya’s scrip got relisted on the bourses in January 2020. Since then on the back of low public float of 1.10%, the stock hit stratospheric highs, inflating the company’s market cap at one point (June 2020) to $6 billion (around ₹46,000 crore). This ensured that the collateral value of the pledged 99.97% holding was always more than the loan taken. The valuation jump also meant that retail shareholders, who were diluted 99% as part of the bankruptcy takeover, had no reason to grieve. Though the market cap has since come down to $3.64 billion (₹27,720 crore), Patanjali managed to create “enormous” shareholder value without putting a penny of its own.

The bankers turned benevolent once more by paving the way for Ruchi Soya’s FPO. As 2021 drew to a close, the lenders in unison agreed to release the pledge. As per the FPO prospectus, the consortium comprising State Bank of India through a letter dated June 1, 2021, Union Bank of India vide its letter dated June 3, 2021, Canara Bank vide its letter dated June 3, 2021, Indian Bank vide its letter dated June 3, 2021, and Punjab National Bank through its letter dated June 8, 2021, collectively agreed to release the pledge. In September 2021, SBI CAP Trustee Company (common security trustee appointed by the consortium) confirmed release of the pledged shares. The lenders also granted Ruchi Soya extension of time for re-pledging 80% of the promoters’ holding from 90 days after release date (that is December 16, 2021) to 180 days after release date (that is, up to March 15, 2022) and the remainder 20% within 30 days after completion of lock in period, that is, three years. In doing so, the lenders helped Patanjali comply with the lock-in norms of the SEBI ICDR (Issue of Capital and Disclosure Requirements) Regulations.

The provisions of the ICDR regulations (113 and 114) mandate that the minimum promoter holding has to be 20% of the post-issue capital and, in computing that contribution, shares which are pledged are not eligible. In Ruchi Soya’s case, the entire shareholding was pledged and that would have meant that promoter (Patanjali) would have had to bring in 20% of the FPO issue size, that is ₹860 crore, as their contribution. Instead, they got the bankers to release the pledge, rather bring in additional funds. In an FPO, either the company can sell new shares or offer existing shares to investors. Ruchi Soya’s FPO was a fresh issue of equity shares worth ₹4,300 crore. Hence, it was a dilutive issue with the promoter’s stake expected to come down post the FPO.

Were the bankers within their right to release the pledge on the mere assurance of the borrower that the stake would be re-pledged? A legal expert with a Mumbai-based firm goes on to explain: “Before a company goes for a public issue, it has to get the buy-in of the lenders, in case the shares are pledged. At the end of the day it is a commercial understanding between the borrower and the lender. Otherwise the FPO cannot go through, or the company has to seek a specific exemption from SEBI.”

Chhatre believes that while the pledge release is the lenders' prudential call, the banks must have felt that assuming the risk of releasing the security against a sideline agreement to re-pledge the shares after a certain period is safe enough to facilitate the FPO. “With this arrangement, the banks would be hoping to get back at least 50% of the amount in default,” says Chhatre.

Finally, on March 31, Ruchi concluded its ₹4,300-crore follow-on public offer with an overall subscription of 3.39 times as 17.60 crore shares were bid for against the 4.89 crore shares on offer. Post the offer, Patanjali's holding in Ruchi Soya is expected to come down to 81% with the remainder (19%) held by public shareholders.

“The FPO appears to be a well-drawn financial arrangement by the promoters, bankers, lead managers with the concurrence of the trustee company. Since it remains in the framework of regulation, it cannot be questioned by any quarters,” feels Chhatre.

While one can argue that in the case of Ruchi Soya, the bankers have not fallen foul of the law, would they have been as accommodative for a smaller borrower? But then as long as the spiritual and temporal mix, lending in this country will always be influenced by the Hand of God.