CASE STUDY OF ACQUISITION OF RUCHI SOYA BY PATANJALI

Have you invested just
Rs 1,15,000 in RUCHI SOYA shares , You would have earned Rs 1 Crore  , a jump of 8929%

CASE STUDY OF ACQUISITION OF RUCHI SOYA BY
PATANJALI GROUP

Ruchi
Soya Industries, a company which sells edible oil and soya products under
popular brands like Mahakosh, Ruchi gold and Nutrela brands, was delisted in
November 2019, about two years after the insolvency proceedings against the
company were initiated in 2017 by the lenders.

The
sale transaction was completed in December 2019 and Patanjali Ayurved paid Rs
4,350 crore to take over. The company was relisted in January this year. However,
existing shareholders of Ruchi Soya got only one share for every 100 shares
held in the newly formed entity.

RELISTING OF SHARES

On
27 January 2020, the day the edible oil maker relisted after Patanjali acquired
it under the provisions in the Insolvency and Bankruptcy Code, the Ruchi Soya
share price was at Rs 17. It skyrocketed over the next few months to touch Rs
1,535 on 29 June — a jump of 8929 per cent.

A
leap of 8929 per cent in five months of relisting after insolvency, and then a
steep fall for six consecutive trading days — the stock movement of Baba
Ramdev’s Patanjali Ayurved-acquired Ruchi Soya Industries has left markets
perplexed and raised questions over leeway to companies that have come out of
the insolvency process.

A sharp fall in share prices

The
market cap of this lesser-known firm also rose to over Rs 45,000 crore . The
sharp increase in Ruchi Soya’s stock price came at a time the benchmark Sensex
fell 11 per cent over the last five months.

But
since 29 June 2020 , the stock consistently fell by 5 per cent for six
consecutive days, triggering the lower circuit — the levels where trading
activity in a stock are suspended following a sharp fall in share prices — on
six trading days until Monday.

A Loss of Rs 41 Crore in March 2020

Ruchi
Soya Industries reported a loss of Rs 41 crore in the quarter ended March 2020
and total revenues of Rs 3,190 crore — the first quarterly results after the
acquisition

At
the time of announcement of the results, the company said the pandemic has
impacted capacity utilisation at its plants due to unavailability of labour and
transportation as well as procurement of packing materials. However, it expressed
confidence of recovering its trade receivables.

99% of Shares 
of Listed Company Held by Promoters after Takeover

BSE data
shows that of the total 29.58 crore equity shares, the promoters owned 29.29
crore shares or 99 per cent. This left only about 1 per cent with the public.
The low level of public shareholding has also translated into low trading
volumes for the stock.

According to
existing listing guidelines, companies have to ensure 25 per cent public
shareholding. However, since Ruchi Soya Industries was relisted following the
resolution process, the promoters have 18 months to raise the non-promoter
shareholding to 10 per cent and 3 years to take it to 25 per cent.

IS REVERSE
MERGER POSSIBLE?

Such high levels of promoter
shareholding also led to speculation that Patanjali Ayurved, a private unlisted
company, may be considering a reverse merger with Ruchi Soya, a claim that
the latter denied as factually incorrect in a disclosure to the stock
exchanges.

A reverse merger is a situation
where a private company could take over a publicly listed company thus
indirectly listing itself without undergoing the lengthy process of an initial
public offer.

Acharya Balkrishna is the chairman
and managing director of Ruchi Soya. Yoga guru Baba Ramdev is a board member.
Both are also the founders of Patanjali Ayurved, a company that posted revenues
of more than Rs 8,000 crore in 2018-19.

Lessons Learned

There
is a demand supply mismatch and there are no valuation metrics available.

Any
company that comes out of the insolvency process is like a black box with no
clear picture about its present financial position or the plan of the
promoters.

All
such stocks should not be allowed to be traded until an information memorandum
akin to a prospectus is put in the public domain so that the public can make an
informed decision. In addition, the time limit to increase the public float
should be curtailed

When
the new promoters came in, there was a reduction in capital by 99 per cent as
for every 100 shares held, an investor got one share. So the increase in price
is not as substantial if one considers that.

“The
current high valuation will not remain when the free float of the company will
increase,”