In today’s Finshots, we explain why NSE and BSE have banned the promoters of Patanjali Foods from selling their shares

The Story

Okay, let’s clear one thing up. Baba Ramdev actually doesn’t own shares directly in Patanjali Foods. The bulk of the shares is owned by group companies such as Patanjali Ayurved. But it has been alleged that it’s Baba Ramdev who runs the show.

Anyway, last week, the owners of Baba Ramdev-backed Patanjali Foods woke up and found that they couldn’t sell their shares. It was frozen. NSE and BSE, India’s stock exchanges, had noticed something contentious — Patanjali Foods was blatantly flouting a rule laid down by SEBI. A rule that said 25% of the shares of any company listed on the stock exchange must be owned by the public. Now Patanjali Foods was supposed to abide by this diktat by 18th December 2022, but, the public only owns 20% at the moment.

So you could say that the stock exchanges are a bit late to the party.

But why on earth did Patanjali Foods delay the inevitable? Why didn’t it sell shares in time?

Well, to understand that, you must know how Patanjali Foods became a listed company in the first place. Because it certainly didn’t launch an IPO to get there.

See, a decade ago there was an FMCG company called Ruchi Soya which sold things like refined edible oil and soya chunks. Initially, the company did well. But then, it was hit by a maelstrom of adverse factors — For starters, Indonesia cut prices of its refined edible oil and sold it cheaply to India. This hurt Ruchi Soya’s sales. Then, poor monsoons in the mid-2010s affected a large part of the company’s soybean crop. And the final nail in the coffin was that Ruchi Soya wasn’t getting money from its customers on time. They took a long time to pay up. And Ruchi Soya had to resort to debt just to keep its business chugging.

Until one fateful day, it realized it was bankrupt. It didn’t have enough money. Banks were livid and took the company to Bankruptcy Court. They wanted to recover whatever they could.

That’s when our protagonist, the Patanjali Group entered the picture. They liked Ruchi Soya’s business and thought it fit well into their plans to become an FMCG behemoth. So they swooped in and bought the flailing company for ₹4,000 crores.

Now almost all of this money was used to settle previous dues. And the existing shareholders were wiped out. They were left with literally nothing. Because that’s just how these bankruptcy proceedings typically work. This also meant that companies in the Patanjali group ended up owning around 99% of the company. And since it was a company that was earlier listed on the stock exchange, once the takeover was complete, Patanjali just decided to relist it again and continue things. Business as usual.

That’s how Baba Ramdev’s group ended up owning Ruchi Soya.

Anyway, SEBI allows for this kind of shareholding structure — where the promoter or the owners hold a bulk of the shares. But only temporarily. SEBI’s rules say that the owners must reduce their shareholding to 75% within a 3-year period. They need to let the public in.

And the rule is in place because SEBI knows how it could hurt the interest of minority shareholders. See, the owner would have too much influence and could even manipulate the share prices to their whims and fancies. They might sell fanciful stories and make false claims and create artificial demand. And if there aren’t many sellers and just buyers, the price could head north easily.

For instance, after Patanjali took over Ruchi Soya, the company’s share price jumped by a staggering 8,750% in just 5 months. We don’t know if it was just because people believed in its prospects under the Patanjali management or because somebody was trying to create artificial demand.

But in any case, Patanjali capitalized on this euphoria. They decided to launch a Follow-on public offering (FPO). It’s like an IPO but executed by a company that’s already listed. Meaning Ruchi Soya would introduce new shares to the public and dilute their own shareholding. For instance, if Patanjali held 99 out of 100 shares earlier, after the FPO they owned only 99 out of 120 shares.

The FPO was a resounding success. And the public lapped up the shares. Patanjali diluted its shares and ended up owning 80% of Ruchi Soya. Investors made a lot of money too because the shares soared by 75% within a month. Everyone was happy. And last year, the group finally decided to rename the company to Patanjali Foods too.

Now you could ask — why didn’t Patanjali sell more shares back then? It could’ve met the regulatory limit well in time if it had just done that, no?

Well, we don’t know the answer to that. So it’s a mystery.

But Patanjali does say that it had planned to sell more shares before the clock struck 12 in December. Their only grouse was that but by then the markets turned sour. The share price was languishing. So they chose to wait.

Now that’s quite a silly argument, isn’t it?

The rules are the rules. You better stick to them. Trying to squeeze out more value from the 5% stake by flouting the deadline should be punished. And maybe just freezing shares isn’t enough. SEBI has the power to impose monetary penalties. If they want to set an example to other companies that such behaviour won’t be tolerated, maybe now’s the time to show some teeth.

Anyway, this lock-in is just a temporary thing. And the Patanjali management including Baba Ramdev has come out to assuage people’s fears. Tell them that it’ll be business as usual. That this doesn’t affect the company financially. And that they’ll sell additional shares in April and obey the rules.

But here’s the thing. Investors are still worried. Not about the freezing of shares but about another fundamental problem — Patanajali’s business has been suffering. And in the past 6 months, the stock has tanked by 30%.

See, a few years ago, Patanjali promised everyone the moon. They said that they would leave their FMCG rivals in the dust and become India’s largest player. And everyone believed them. The media started writing obituaries for all the foreign and even domestic FMCG firms operating in India.

Today, it seems like it was more bark than bite. As The Morning Context points out, its revenues from operations fell by 6.5% between October and December 2022 over the previous quarter. Its rival HUL saw a rise of 4% though. And its operating margin was just 4.6%. Its peers were sitting pretty at 18–30% margins though. And amidst all this, Patanjali Foods’ market share in consumer goods has also been dropping.

But that’s not the most worrying thing. During April to September 2022, 33% of Patanjali’s sales were listed as trade receivables. That means, they’d sold most of their goods on credit. They keep having to wait for payments from their customers. On the other hand, rivals such as ITC and HUL didn’t have such problems. Less than 18% of their sales are tied up in receivables.

And we all know what happened the last time the company saw its trade receivables soaring…Ruchi Soya went bankrupt. So Patanjali will have to be careful, lest they go down the same route as Ruchi Soya.

Until then...

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