The offer has been necessitated under Rule 19(2)(b) of the Securities Contract (Regulations) Rules, 1957, since the company's maiden public issue in 1993 offered only 20 per cent equity for public subscription. The offer for sale is scheduled to open on September 28.

With such a wide gap between the market price and the offer price, obviously no rational or ordinary investor can be expected to apply for the offer. Notwithstanding the anticipated nil, or negligible, public response at the end of this exercise, the statutory requirement would have been complied with by AML's promoters. Never mind that the promoter holding in AML might not have come down. Just what could have caused AML'spromoters to price the offer so steeply? According to Navnitlal Ratanlal Shah, executive chairman of AML, the company's intrinsic worth is much more than what is depicted by its stock price. He argues that while the market could undervalue AML's shares, as a promoter he could not do so. There appears to be considerable merit in his claim that AML's track record has been impressive. From a modest beginning in 1967 as a partnership firm, AML has come a long way. Ever since it became a public limited company in 1982, AML has performed creditably, churning out consistent profits. The company, besides being the largest producer, is also the largest exporter of bentonite over the years. In fact, more than 90 per cent of AML's turnover comes from exports.

In 1993, AML made its maiden capital issue of 6 lakh equity shares at a premium of Rs 40 a share, which accounted for 20 per cent of the post-issue equity. Just prior to its public offer, AML capitalised its general reserves with a massive bonus issue in theratio of 221:19. In 1995-96, AML rewarded its shareholders with another 1:1 bonus issue. In fact, out of its current paid-up capital of Rs 6 crore, nearly 87 per cent has come about through bonus issue projections.

At the time of its public issue, the company had projected a turnover of Rs 29.36 crore, Rs 31.61 crore and Rs 33.14 crore and net profit of Rs 3.71 crore, Rs 4.04 crore and Rs 4.23 crore for fiscal years 1995, 1996 and 1997, respectively. Against this the company achieved a turnover of Rs 36.31 crore, Rs 51.51 crore and Rs 66.79 crore and net profit of Rs 4.55 crore, Rs 6.03 crore and Rs 7.01 crore for fiscal 1995, 1996 and 1997, respectively. Fiscal 1998 has been even better with AML posting a net profit of Rs 8.16 crore on a turnover of Rs 77.58 crore.

Buoyed by the consistent rise in profitability, AML has hiked the dividend from 20 per cent in fiscal 1996 to 25 per cent and 30 per cent in the following years on an enlarged capital base from the bonus allotment.

Therefore, thoughAML's promoters can rightfully take pride in the company's financial performance over the years, one wonders if they have been a little too unyielding on the pricing front. In spite of the fact that AML's price line never crossed Rs 90 on the bourses in calendar 1998 (see table), the offerors filed their draft `offer for sale' document with Sebi in the first week of June 1998 at a proposed offer price of Rs 210. This proposal was promptly cleared by Sebi within 45 days.

The offerors, however, had a change of mind and towards the end of August sought and obtained Sebi's fresh permission to offer the shares at Rs 170 per share. Though the offer price reduction signified a marginal climbdown, it is still steeply priced in the context of AML's market quotation and past earnings.

Of course, from the records available it is clear that right from the beginning, the promoters have been determined to dictate a price, inconsiderate of the market sentiments. Thus, the offerors in their bipartite agreement with AMLin May stipulated that the share could not be offered at less than Rs 150 a piece.

Does the conduct of the offerors signify their immense confidence in their company? Or, is it just plain greed? For all their managerial inputs, the promoters of AML have invested a cumulative amount of just Rs 18.66 lakh since 1983-84. As against this, today the pre-offer promoter holding in AML has swelled to 47,13,100 shares, thanks to the mega bonus bonanza. In terms of market capitalisation, their holding works out to almost Rs 40 crore. And their cost of holding per share in AML is a mere 40 paise. Even if one imputes a notional annual compounded return of 24 per cent (after ignoring the dividends), their cumulative investment is worth only Rs 2.69 crore. Which renders the average cost of holding per share at just Rs 5.70.

It is in this background that anyone subscribing to normal market sentiments would find it rather difficult to comprehend the insistence of AML's offerors on pricing the offer out of reach ofinterested investors. They have tried to justify the premium sought by them on the basis of the `value of business'. For this purpose, they have arbitrarily chosen a capitalisation rate of 5 per cent or 20 times the average earnings of the company, which, despite AML's predominant market position, ought to be deemed questionable.

Instead, if one were to apply a capitalisation rate of 8 per cent, which was the maximum factor permitted in the erstwhile Controller of Capital Issues (CCI) dispensation, the value per share works out to only Rs 130. At another level, on the basis of EPS and book value, even the offerors have valued the AML share at only Rs 102 and Rs 52 respectively.

The average share value under these methods of evaluation works out to only Rs 95. From a different standpoint, the state-owned Gujarat Mineral Development Corporation's current market price of Rs 65.20 per share discounts its last reported EPS of Rs 26.5 just 2.4 times. All things considered, notwithstanding the pre-eminentposition of AML in the industry and its impressive financial performance, the offerors, in the view of one school, have carried their obsession a little too far. In this context, this school's ire is directed at the regulator, Sebi. It wonders if being a regulator only requires proof-reading skills. More so, when AML's statutory offer for sale is in danger of being the biggest non-starter yet.

The AML offer also brings into question the present compulsion on an unwilling promoter, who is quite confident of his company and committed to his corporate mission, to divest his holding. The offerors of AML have clearly shown how to beat the regulators while still being at the right side of the law.

(Arranged by Investar -- The Aarthik News & Research Syndicate)