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Not Such a Sweetheart Deal After all; Ex-promoter Maran Comes Back to Haunt Ajay Singh-led SpiceJet; Could More Issues unfold?

SpiceJet shares today tanked over 9.7% in intra-day trading, while the Sensex rose by 0.35%. The shares closed at Rs. 59.40, a decline of 4.45% from Friday’s closing price. SpiceJet was in the news today for all the wrong reasons.

What is Going on?

News sprang up today of a suit filed in the Delhi High Court by erstwhile promoter Kalanidhi Maran and his Kal Airways Pvt Ltd. Both Maran and Kal Airways (herewith referred to as the ex-proms) were promoters of SpiceJet until February 2015, when they transferred their entire equity interest in the company (a combined 58.46%) to Ajay Singh, who was one of the original founders of the Airlines. The suit now contends, that as per terms of the Feb 2015 Share Sale and Purchase agreement, Spicejet and its Board were to issue preferential shares, and 2 tranches of convertible equity warrants to the ex-proms.

One of tranches would give the ex-proms, the right to convert them into 18.9 cr. equity shares, for a price of Rs. 16.30 per share. The stock is currently trading at Rs. 60! That is a 72.8% discount to Market Price. The other tranche would give the ex-proms the right to convert their warrants to equity shares for Rs. 20.76 per share – a discount of 65% to CMP.

From the FY15 Annual Report (Pg 54),

The Company has also received advances from the Outgoing Promoters towards share warrants and towards an option to subscribe to up to 3,750,000 CRPS, proposed to be issued to them, subject to any necessary approvals.

Looking at the Form No: AOC – 2 (which sheds some light on contracts entered into with related parties), we find some intriguing details of the Share Sale and Purchase agreement. There are 3 that stand out:

1. The Board of the Company approved the issue of upto 3,750,000 non-convertible redeemable preference shares (CRPS) of Rs 1,000 each basis the subscription offer received by the previous promoters subject to the approval of the shareholders of the Company and such other approvals as may be required.

The company has acknowledged the receipt of Rs. 120.03 cr. from the ex-promoters against these CRPS.

2. Allotment of 1,91,69,000 equity shares to Mr Kalanithi Maran and 4,50,00,000 equity shares to M/s Kal Airways Private Limited respectively, having nominal value of Rs 10 each against conversion of options attached to warrants issued on a preferential basis.

These warrants have already been factored into the calculation of equity shares of the company. Again, their FY15 AR reveals that a total of 64,169,000 (6.41 cr. shares) share warrants have been included (Pg 62 of the AR) as a part of outstanding shares (ostensibly, these shares would belong to Maran and Kal Airways, since this is the exact no: of warrants as per the sale condition). This amounts to more than 10.70% of the company, but is not disclosed as a part of Shareholding pattern! Possibly because the shares have been split up among various smaller companies. Also interesting to note, is this little excerpt from the AR, which says the following:

  • The 6.41 cr, share warrants can be exercised at a price of Rs. 20.76;
  • Effectively meaning that on full issuance, the company would receive Rs. 133.21 cr. However, the company has so far received only 25% of that amount, i.e. Rs. 33.30 cr.
  • Despite not having received the entire amount (75% still pending), SpiceJet has gone ahead and accounted for the whole 6.41 cr. issuance as part of their share capital. The ex-promoters still have to pay Rs. 99.91 cr. (This AR was released in December 2015, and represents data as of November 25, 2015.)

3) The shareholders of the Company in their meeting held on September 24, 2014 approved the aggregate issue of 189,091,378 warrants convertible into equivalent number of equity shares having a nominal value of Rs 10 each to previous promoters for a consideration aggregating to Rs 30,821.89 lakhs (18.9 cr. shares at a price of Rs. 16.30 per share, totaling Rs. 308.22 cr).

AR FY15 reveals that the company has received Rs. 230.47 cr. from the ex-promoters (Maran and Kal Airways) towards the issuance of these warrants. Another Rs. 77.75 cr. and the ex-proms shouldn’t have any troubles getting their hands on these warrants. Friday’s Delhi HC ruling seems to be about this particular tenet.

Details of amounts received against these 3 conditions are on Page 63 of the AR FY15.

What Could This Mean for Current Investors?

A Dilution of value. A pretty massive one at that. Currently, investors hold a total of 59.95 cr. shares. If the warrants were to be issued and subsequently exercised, that would increase the no: of O/s shares to 85.27 cr. The original investors would still hold the 59.95 cr. shares, which brings down their stake to 76.02% of the inital value – that is, a dilution of nearly 24%. The difference would be owned by Kalanithi Maran and Kal Airways.

Here is what issuance of the warrants would do:

Warrants convertible to equity: 25.32 cr. shares;

Current O/S shares: 59.95 cr.;

After conversion, total O/s shares: 85.27 cr.;

Maran and Kal ownership: 29.69%.

If SpiceJet were to go for a secondary sale of equities, a sale of 25.32 cr. shares in the market would fetch them (@Rs. 60 CMP), funds of Rs. 1,519.2 cr. But the ex-proms would get the same deal for just Rs. 441.43 cr.!

The Ajay-Singh led Board would be loath to allow the issuance of these warrants to the ex-promoters, solely beacuse of this massive dilution crisis that it would spark. As a result, Maran and Kal resorted to judicial measures to ensure that their warrants would come through. This is what the Delhi High Court on Friday ruled on, directing SpiceJet and its Board to issue said warrants to the ex-promoters.

An additional interesting point to note is that encumbered/pledged shares, which are in favor of Allahabad Bank and Yes Bank, are currently at a considerable 33.37% of promoter holding; a total of 12.07 cr. shares. Interestingly, prior to Ajay Singh taking over the company in Feb 2015, 8.31 cr. of the promoter’s shares were pledged, meaning that pledging has increased since then. As per the BSE disclosures, additional shares were pledged to Allahabad Bank during Q4 FY15 in 2 tranches. (Read them here and here.)

Our View

So far, the High Court ruling has given put paid to any rumors; the company will have to issue one tranche of equity warrants to the ex-proms, who would realistically call the shares in and thus increase their stake in the company.

Remarkably, the company has turned around its profitability trends since Ajay Singh took over:

SpiceJet Results

This would explain the resurgent share prices.

However, there is still t
he question of the other 2 conditions; will the ex-proms be able to call in their options and end up with a significant stake in the company? We will wait for some more updates from the courts before we make any judgement calls on the effects on share-holders.