A Case Study On Ruchi Soya

Ruchi Soya is one of the largest manufacturers of edible oil in India. Ruchi Soya Industries Limited, through its subsidiaries, engages in the manufacture and sale of edible oils, vanaspati, bakery fats, and soya food primarily in India. It also offers soya chunks, granules, and soya flour products. Ruchi Soya made most of its money supplying refined edible oil to other consumer goods companies.

However, in a bid to push sales, they offered very generous credit terms to their customers. Collecting cash became an afterthought and at the end of the day, they were left with receivables to the tune of 5000 crores. Receivables they simply couldn't retrieve. Their debt burden spiralled out of control.

In December 2017, Ruchi Soya Industries entered into the Corporate Insolvency Resolution Process because of its total debt of about Rs 12,000. The lenders agreed to resolve the bankruptcy proceedings by selling Ruchi Soya to another FMCG company. Patanjali and Adani Wilmar were top contenders. Eventually, though, Patanjali won out. They acquired 99% of the company and
settled 4000 crores in dues.

Putting up 4000 odd crores is no easy task and Patanjali did not have the resources to buy Ruchi Soya upfront. Instead, they put up around 1000 crores on their own and borrowed the rest from the same banks that had sold Ruchi Soya. So technically the banks loaned out 3000 crores to Patanjali in a bid to retrieve 4000 crores in dues from Ruchi Soya.

Loans are often backed by collateral. Collateral that’s usually worth something. So when Patanjali borrowed 3000 crores, they borrowed all this money by pledging Ruchi Soya shares as collateral. In fact, they pledged almost their entire shareholding (99% of Ruchi Soya) in the process.

The company relisted on the market back in Jan 27th, 2020. Shares that were pretty much worthless (just a year ago) began trading at 16.5. Perhaps people expected Ruchi Soya to turn the tide. But then in almost spectacular fashion, the company’s stock price rallied by a whopping 9100%. From 16.5 to 1500 in 5 months, Ruchi Soya had defied all odds. A week ago, the company was worth 44,700 crores. But since 29 June, the stock consistently fell by 5 percent or 6 percent consecutive days, triggering the lower circuit the levels where trading activity in a stock are suspended following a sharp fall in share prices.

Analysts point out that the rise in Ruchi Soya’s stock price was mainly on account of the low level of free float or the percentage of the shares with the public. This is also adding greater volatility to the price movements.

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. 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.

After Ruchi Soya’s takeover, Patanjali owns its oilseed processing facilities and popular brands like Nutrela, Ruchi Gold, Ruchi Star. At the time of acquisition, Patanjali had expected the combined turnover to be Rs 20,000-25,000 crore in the financial year ended March 2020, of which around Rs 13,000 crore would come from Ruchi Soya alone.

In terms of market-cap, Ruchi Soya is now bigger than several biggies like Lupin, Torrent Pharma, Tata Steel, Ambuja Cements, PNB, Hindalco, UPL, Colgate-Palmolive and Havells India. But analysts feel SEBI should take note and probe what is driving the ongoing rally on the counter. They said the market regulator should ask the company when it is planning to meet the minimum public shareholding norms of 25 per cent.

Investors feel that low free float of shares of the company is the main reason behind the sharp rally. Nothing is related to fundamentals. It is a perfect example of demand-supply dynamic. Retail investors currently own less than 1 per cent in the company. They think SEBI should take note and put the scrip in the T2T segment. Retail investors should not be allowed to buy such shares. Trade-to-trade (T2T) is the segment where one compulsorily take delivery for every trade, and cannot square off intraday. They think that SEBI should do some investigation and try to identify who are the buyers and why are they acquiring these shares.