Phoenix Mills Limited merges its subsidiary company

The Phoenix Mills Limited (PML), India’s largest retail-led mixed-use developer and operator has announced a scheme of amalgamation of its subsidiary company, Phoenix Hospitality Company Private Limited (PHCPL) with PML. Over a period, PML used PHCPL as a holding company for the number of its projects. Part of PHCPL is owned by the promoters of PML directly.

Phoenix Mills Limited is a leading retail mall developer and operator in India and is the pioneer of retail-led, mixed-use developments in India with completed development of over 17.5 million square feet spread across retail, hospitality, commercial, and residential asset classes. The company has an operational retail portfolio of approximately 6 million square feet of retail space spread across eight operational malls in six gateway cities of India. The company is further developing five malls with over 4.9 million sq. feet of retail space in five gateway cities of India. Besides retail, the company has an operating commercial office portfolio with a gross leasable area of 1.32 million sq. feet and plans to add approximately 4.0 million sq. feet of commercial office across existing retail properties going forward. The equity shares of the company are listed on nationwide bourses.
Phoenix Mills has announced merger of its subsidiary Phoenix Hospitality Company Pvt Ltd with itself and the merger was approved by the respective boards.  PML holds a 56.92 per cent stake in PHCPL with 43.08 per cent being held by Ruia International Holding Co Pvt Ltd.

Ruia International Holding Co. Pvt. Ltd. (RIHCPL) is a promoter group entity and as of quarter ended June 30, 2019, held 32.18% stake in PML out of the total promoter holding of 62.75%.
Phoenix Hospitality Company is a holding company for certain SPVs involved in the business of real estate development.
PHCPL has ownership interests in the following SPVs:

• Starboard Hotels (Palladium Chennai – Operational Retail Mall: GLA of 0.22 MSF; plus underdevelopment commercial office space of 0.43 MSF) - PHCPL holds 50.00% equity stake and the balance 50.00% is held by a third party in the SPV.
• Alliance Spaces (Fountainhead – Commercial Development: Operating GLA of 0.16 MSF and under–construction GLA of 0.55 MSF) – PHCPL owns 57.99% equity stake and PML holds the balance 42.01% equity stake.
• Palladium Constructions (One Bangalore West and Kessaku – Residential Development: Total saleable area of approx. 3.19 MSF; Courtyard by Marriott Agra: a 193-key operational hotel) – PHCPL owns 47.71% equity stake and PML holds the balance 52.29% equity stake.
• Graceworks Realty & Leisure (Phoenix Paragon Plaza – Commercial Development: Operating GLA of 0.41 MSF) – PHCPL owns 77.33% equity stake and PML owns the balance 22.67% equity stake

The Transaction

From the appointed date April 1, 2019,  Phoenix Mills Limited (PML) will merge one of its subsidiary company, Phoenix Hospitality Company Private Limited (PHCPL) subject to the requisite approvals. Pursuant to the terms of the Scheme, PML will allot 6.27 million shares to RIHCPL, i.e. RIHCPL will receive 627 (six hundred and twenty seven) fully paid-up equity shares of PML of face value of INR 2 each for every 100 (hundred) fully paid-up equity shares of face value of INR 10 each held by RIHCPL in PHCPL. Consequently, the promoter group holding in PML shall increase by 1.46% to 64.21% from 62.75%.

History

PHCPL became a subsidiary of PML in 2012. For acquiring 13,21,400 equity shares i.e. 56.92% stake in PHCPL, PML paid INR 154 crore. In 2015, PML invested INR 3.03 crore in compulsorily convertible debentures. In the same year, PHCPL also invested in Alliance Spaces Private Limited, Palladium Constructions Private Limited & Associates– Starboard Hotels Private Limited, Gangetic Hotels Private Limited. In 2016, PML gave a loan of INR 23.25 crore to PHCPL. In 2016-17, PML subscribed to Optionally-Fully Convertible Debentures for INR 23.25. In 2018, it further invested in Optionally Fully convertible Debentures of PHCPL.

During the period, PML has supported PHCPL & its investee companies (which are also directly owned by PML partly) through inter-corporate deposits, subscription to debenture, etc. Further, there have been a couple of reshuffling between the investment held by PHCPL. In 2019, PML converted its compulsorily convertible debentures held in PHCPL into Optionally-Convertible Debentures. We were unable to understand the treatment given to Optionally-Convertible Debentures as it is not mentioned under the scheme or valuation report. One must need to evaluate if it has any implication if it would have shown as equity shares?

Conclusion

Over the years, PHCPL was holding company for many of the projects developed/developing by PML. In most of the projects by PHCPL, PML was also holding stake directly. Till date, most of the funding for developing those projects have been done by PML directly or through PHCPL. Regulatory or risk management may have compelled to have a pyramid structure but having an entity with substantial holding by promotors without infusing funds proportionate to its holding may not be considered an appropriate from corporate governance angle. The decision to merge will simplify the group structure and consolidate PML stake in various projects.  However, the cost of implementation particularly relating to stamp duty will be substantial.