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Sonear Industries Limited - Draft Red Herring Prospectus
Sonear Industries Limited - Draft Red Herring Prospectus
ISSUE SCHEDULE BID/ ISSUE OPENS ON : [ ], 2010 BID/ ISSUE CLOSES ON : [ ], 2010
CMYK
TABLE OF CONTENTS Presentation of Financial Information and Use of Market Data Forward Looking Statements and Market Data
I II
RISK FACTORS PART I INTRODUCTION Summary of the Industry & Business of the Company The Issue General Information Capital Structure Objects of the Issue Basis of Issue Price Statement of Tax Benefits
1 9 10 19 28 46 48 57 66 80 86 88 97 104
III
ABOUT THE ISSUER COMPANY Industry Overview Business Overview Regulations and Policies History and Other Corporate Matters Management Promoters and group companies Dividend Policy PART II
IV
FINANCIAL STATEMENTS Report of the Peer Review Auditor, Kumar Piyush & Co., Chartered Accountants Management Discussion and Analysis of Financial Conditions and Results of Operations 105 134 141 146 157 168 170 174 203 215 217
LEGAL AND REGULATORY INFORMATION Outstanding Litigations, Material Developments and Other Disclosures Government/Statutory and Business Approvals Other Regulatory and Statutory Declarations
VI
VII VIII
MAIN PROVISIONS OF THE ARTICLES OF ASSOCIATION OF THE COMPANY Main Provisions of the Articles of Association of the Company. OTHER INFORMATION Material Contracts and Documents for Inspections Declaration
DEFINITIONS AND ABBREVIATIONS CONVENTIONAL OR GENERAL TERMS TERM Companies Act FCNR Account Financial Year/ Fiscal/ FY Indian GAAP Insurance Act IT Act IT Rules SCRA SCRR SEBI SEBI Act SEBI Regulation/ (ICDR) Regulations SEBI Insider Trading Regulations DESCRIPTION The Companies Act, 1956, as amended from time to time. Foreign Currency Non Resident Account The period of twelve months ended March 31 of that particular year. Generally Accepted Accounting Principles in India. Insurance Act, 1938, as amended from time to time. The Income Tax Act, 1961, as amended from time to time. The Income Tax Rules, 1962, as amended from time to time, except as stated otherwise. Securities Contract (Regulation) Act, 1956, as amended from time to time. Securities Contracts (Regulation) Rules, 1957, as amended from time to time. Securities and Exchange Board of India constituted under the SEBI Act. Securities and Exchange Board of India Act, 1992, as amended from time to time. SEBI The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. The SEBI (Prohibition of Insider Trading) Regulations, 1992, as amended from time to time, including instructions and clarifications issued by SEBI from time to time.
ISSUE RELATED TERMS TERM Allotment/ Allotment of Equity Shares Allottee ASBA/ Applications Supported by Blocked Amount ASBA Investor/ ASBA Bidders ASBA Form Bid DESCRIPTION Unless the context otherwise requires, issue of Equity Shares pursuant to this Issue. A successful Bidder to whom the Equity Shares are allotted An application for subscribing to an issue, containing an authorization to block the application money in a bank account. An Investor who intends to apply through ASBA process and is applying through blocking of funds in a bank account with the SCSB Bid cum Application form for ASBA Investor intending to subscribe through ASBA An indication to make an offer, made during the Bidding Period by a prospective investor to subscribe to the Equity Shares at a price within the Price Band, including all revisions and modifications thereto. The highest value of the optional Bids indicated in the Bid-cum-Application Form and payable by the Bidder on submission of the Bid for this Issue. The date after which the members of the Syndicate will not accept any Bids for this Issue, which shall be notified in a widely circulated English national newspaper, a Hindi national newspaper and a regional newspaper. The date on which the members of the Syndicate shall start accepting Bids for this Issue, which shall be the date notified in a widely circulated English national newspaper, a Hindi national newspaper and a regional newspaper. The form in terms of which the Bidder shall make an offer to subscribe to the Equity Shares of the Company and which will be considered as the application for allotment in terms of the Red Herring Prospectus. i
Bid-cum-Application Form
TERM Bidder
DESCRIPTION Any prospective investor who makes a Bid pursuant to the terms of the Red Herring Prospectus and the Bid-cum-Application Form. Book Building Process Book building mechanism as provided under Schedule XI of the SEBI Regulations, in terms of which this Issue is made. BRLM Book Running Lead Manager to this Issue, in this case being Keynote Corporate Service Limited. CAN/ Confirmation of The note or advice or intimation of allotment of Equity Shares sent to the Allotment Note Bidders who have been allocated Equity Shares after discovery of Issue Price in the Book Building Process. Cap Price The upper end of the Price Band, above which the Issue Price will not be finalized and above which no Bids will be accepted. Co- Book Running Lead PNB Investment Services Ltd. (PNBISL) Manager (Co-BRLM) Cut-off The Issue Price finalised by the Company in consultation with the BRLM and Co-BRLM. Only Retail Individual Bidders who are applying for a maximum bid amount not exceeding Rs. 1,00,000/- are entitled to Bid at the Cut-off Price, for a bid amount not exceeding Rs. 1,00,000/-. QIBs and Non Institutional Bidders are not entitled to Bid at the Cut-off Price. A Bid submitted at Cut-off Price is a valid Bid at all price levels within the Price Band Depository A depository registered with SEBI under the SEBI (Depositories and Participant) Regulations, 1996, as amended from time to time. Depositories Act The Depositories Act, 1996, as amended from time to time. Depository Participant Designated Date A depository participant as defined under the Depositories Act. The date on which funds are transferred from the Escrow Account to the Public Issue Account after the Prospectus is filed with the Registrar of Companies, Delhi & Haryana, Delhi, following which the Board of Directors shall allot Equity Shares to successful Bidders. Designated Stock Exchange In this case being the Bombay Stock Exchange Limited. Draft Red Herring The Draft Red Herring Prospectus filed with SEBI, which does not have Prospectus/DRHP complete particulars on the price at which the Equity Shares are offered and size of the Issue Equity Shares Equity Shares of the Company of face value of Rs. 10 each unless otherwise specified in the context thereof. Escrow Account Account opened with Escrow Collection Bank(s) and in whose favor the Bidder will issue cheques or drafts in respect of the Bid Amount when submitting a Bid. Escrow Agreement Agreement to be entered into among the Company, the Registrar to this Issue, the Escrow Collection Banks, the BRLM and the Co-BRLM in relation to the collection of the Bid Amounts and dispatch of the refunds (if any) of the amounts collected, to the Bidders. Escrow Collection Bank(s) The banks, which are registered with SEBI as Banker (s) to the Issue at which the Escrow Account for the Issue will be opened, in this case being []. First Bidder The Bidder whose name appears first in the Bid-cum-Application Form or Revision Form. Floor Price The lower end of the Price Band, below which the Issue Price will not be finalized and below which no Bids will be accepted. Indian National A citizen of India as defined under the Indian Citizenship Act, 1955, as amended, who is not an NRI. ii
Issue Price
DESCRIPTION The issue of 1,77,12,444 Equity Shares of Rs. 10 each fully paid up at the Issue Price aggregating Rs. [] Lacs. The period between the Bid / Issue Opening Date and the Bid/Issue Closing Date inclusive of both days and during which prospective Bidders can submit their Bids. The final price at which Equity Shares will be issued and allotted in terms of the Red Herring Prospectus or the Prospectus, as determined by the Company consultation with the BRLM and the Co-BRLM, on the Pricing Date. Means mutual funds registered with SEBI pursuant to the SEBI (Mutual Funds) Regulations, 1996, as amended from time to time. All Bidders, including sub-accounts of FIIs registered with SEBI which are foreign corporate or foreign individuals, that are not QIBs or Retail Individual Bidders and who have Bid for Equity Shares for an amount more than Rs. 100,000/-. The portion of this Issue being not less than 15% of the Net Issue consisting of 26,56,867 Equity Shares of Rs. 10/- each aggregating Rs. [] Lacs, available for allocation to Non Institutional Bidders. Draft Red Herring Prospectus/ Red Herring Prospectus/ Prospectus Means the period commencing on the Bid/Issue Opening Date and extending until the issue closure Date. The price band of a minimum price (Floor Price) of Rs. [] and the maximum price (Cap Price) of Rs. [] and includes revisions thereof. The date on which the Company in consultation with the BRLM and the CoBRLM finalizes the Issue Price. The Prospectus, to be filed with the Registrar of Companies, Delhi & Haryana, Delhi containing, inter alia, the Issue Price that is determined at the end of the Book Building Process, the size of this Issue and certain other information. Account opened with the Banker to this Issue to receive monies from the Escrow Account for this Issue on the Designated Date. Consists of 88,56,221 Equity Shares of Rs. 10 each aggregating Rs. [] lacs being upto 50% of the Net Issue, available for allocation to QIBs. 5% of the QIB Portion shall be available for allocation on a proportionate basis to Mutual Funds only. A mutual fund, venture capital fund and foreign venture capital investor registered with the Board; a foreign institutional investor and sub-account (other than a sub-account which is a foreign corporate or foreign individual), registered with the Board; a public financial institution as defined in section 4A of the Companies Act, 1956; a scheduled commercial bank; a multilateral and bilateral development financial institution; a state industrial development corporation; an insurance company registered with the Insurance Regulatory and Development Authority; a provident fund with minimum corpus of twenty five crore rupees; a pension fund with minimum corpus of twenty five crore rupees; National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005 of the Government of India published in the Gazette of India. The Red Herring Prospectus issued in accordance with Section 60B of the Companies Act, which does not have complete particulars on the price at which the Equity Shares are offered and size of this Issue. It carries the same obligations as are applicable in case of a Prospectus and will be filed with the iii
TERM
DESCRIPTION Registrar of Companies, Delhi & Haryana, Delhi before the opening of this Issue. It will become a Prospectus after filing with the Registrar of Companies, Delhi & Haryana, Delhi, after pricing and allocation. Registrar/ Registrar to this Beetal Financial And Computer Services (P) Limited Issue Resident Retail Individual A Retail Individual Investor who is a person resident in India as defined in Investor Foreign Exchange Management Act, 1999 Retail Individual Bidders Individual Bidders (including HUFs) who have Bid for an amount less than or equal to Rs. 100,000 in any of the bidding options in this Issue. Retail Portion Consists of 61,99,356 Equity Shares of Rs. 10/- each aggregating Rs. [] Lacs, being not less than 35% of the Net Issue, available for allocation to Retail Individual Bidder(s). Revision Form The form used by the Bidders to modify the quantity of Equity Shares or the Bid price in any of their Bid-cum-Application Forms or any previous Revision Form(s). Stock Exchanges Bombay Stock Exchange Limited and the National Stock Exchange of India Limited. SCSB is a Banker to an Issue registered under SEBI (Bankers to an Issue) Self Certified Syndicate Regulations, 1994 and which offers the service of making an Application Bank (SCSB) Supported by Blocked Amount and recognized as such by the Board. Syndicate The BRLM, the Co-BRLM and the Syndicate Member. Syndicate Agreement The agreement to be entered into between the Company and the members of the Syndicate, in relation to the collection of Bids in this Issue. Syndicate Member Keynote Capitals Limited and [] Transaction Registration The slip or document issued by the Syndicate Member to the Bidders as proof Slip/ TRS of registration of the Bid. Underwriters The BRLM, the Co-BRLM and the Syndicate Member. Underwriting Agreement The Agreement among the Underwriters and the Company to be entered into on or after the Pricing Date. COMPANY RELATED TERMS TERM SDL, Sonear the Company, We, us and our Articles/ Articles of Association Auditors Board of Directors/ Board Director(s) Memorandum/ Memorandum of Association Registered Office of the Company DESCRIPTION Unless the context otherwise requires, refers to Sonear Industries Limited a public limited company incorporated under the provisions of Companies Act, 1956. The Articles of Association of the Company i.e., Sonear Industries Limited. The statutory auditors of the Company, being M/s M.C. Jain & Company Chartered Accountants. The Board of Directors of the Company or a committee constituted thereof. Director(s) of the Company unless otherwise specified. The Memorandum of Association of the Company. 20, NWA, Punjabi Baugh West Club Road, New Delhi 110026
iv
INDUSTRY RELATED TERMS AND ABBREVIATIONS TERM/ ABBREVIATION BIS BPLR BS BWR CBM CEC CER CIF HDF HPL KL KVA MDF MR PB PLB PPB ABBREVIATIONS ABBREVIATION AGM AMBI AS ASBA AY BSE BG/LC CAGR CDSL DP ECS EGM EPS ESOP FCNR Account FEMA FII FIs FIPB FULL FORM Annual General Meeting Association of Merchant Bankers of India Accounting Standards issued by the Institute of Chartered Accountants of India. Application Supported by Blocked Amount Assessment Year Bombay Stock Exchange Limited. Bank Guarantee/ Letter of Credit Compounded Annual Growth Rate. Central Depository Services (India) Limited. Depository Participant Electronic Clearing System Extra Ordinary General Meeting of the shareholders. Earnings per Equity Share. Employee Stock Option Plan Foreign Currency Non Resident Account. Foreign Exchange Management Act, 1999, as amended from time to time and the regulations issued thereunder. Foreign Institutional Investor (as defined under SEBI (Foreign Institutional Investors) Regulations, 1995, as amended from time to time) registered with SEBI under applicable laws in India. Financial Institutions. Foreign Investment Promotion Board, Department of Economic Affairs, Ministry of Finance, Government of India v DESCRIPTION/FULL FORM Bureau of Indian Standards Bank Prime Lending Rate British Standard Boiling Water Resistant Cubic Meter Central Empowered Committee Certified Emissions Reductions Cost, Insurance and Freight High Density Fibreboard High Pressure Laminates Kilo Litre Kilo Volt Amperes Medium Density Fibreboard Moisture Resistant Particle board Pre Laminated Particle Board Plain Particle Board
ABBREVIATION FVCI GDP GIR Number GoI/ Government HUF INR / Rs./ Rupees NAV NR
FULL FORM Foreign Venture Capital Investors registered with SEBI under the SEBI (Foreign Venture Capital Investor) Regulations, 2000. Gross Domestic Product General Index Registry Number. Government of India.
Hindu Undivided Family. Indian Rupees, the legal currency of the Republic of India. Net Asset Value. Non Resident A person resident outside India, as defined under FEMA and who is a citizen of NRI/Non-Resident Indian India or a person of Indian origin, each such term as defined under the FEMA (Deposit) Regulations, 2000, as amended. NSDL National Securities Depository Limited. NSE National Stock Exchange of India Limited. P/E Ratio Price/Earnings Ratio. PAN Permanent Account Number. RBI The Reserve Bank of India. RBI Act The Reserve Bank of India Act, 1934, as amended from time to time. RoC/Registrar of The Registrar of Companies, Delhi & Haryana, Delhi Companies RoNW Return on Net Worth. USD/ $/ US$ The United States Dollar, the legal currency of the United States of America. Notwithstanding the foregoing: a. b. In the section titled Financial Statements on page 105 of this Offer Document, defined terms shall have the meaning given to such terms in that section. In the section titled Main Provisions of the Articles of Association of the Company on page 203 of this Offer Document, defined terms have the meaning given to such terms in the Articles of Association of the Company.
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PRESENTATION OF FINANCIAL INFORMATION AND USE OF MARKET DATA Unless stated otherwise, the financial information used in this Red Herring Prospectus is derived from the Companys restated financial statements as of and for year ended March 31, 2010, 2009, 2008, 2007, and 2006 prepared in accordance with Indian GAAP and the Companies Act and restated in accordance with SEBI Regulations, as stated in the report of the statutory Auditors. Our fiscal year commences on April 1 and ends on March 31 of a particular year. Unless stated otherwise, references herein to a fiscal year (e.g., fiscal 2009), are to the fiscal year ended March 31 of a particular year. In this Red Herring Prospectus, any discrepancies in any table between the total and the sum of the amounts listed are due to rounding-off. All references to Rupees or Rs. are to Indian Rupees, the official currency of the Republic of India. One crore is the unit in the Indian numbering system representing 10 million or 100 lac and one lac is the unit in the Indian numbering system representing 100,000; thus, for example, Rs. 10 crore equals Rs. 100 million. All references to $, US$ or U.S. Dollars are to United States Dollars, the official currency of the United States of America. Market data used in this Red Herring Prospectus has been obtained from industry publications and internal Company reports. Industry publications generally state that the information contained in those publications has been obtained from sources believed to be reliable but that their accuracy and completeness are not guaranteed and their reliability cannot be assured. Although the Company believes the market data used in this Red Herring Prospectus is reliable, it has not been independently verified. Similarly, internal Company reports, while believed to be reliable, have not been verified by any independent source.
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FORWARD-LOOKING STATEMENTS AND MARKET DATA We have included statements in this Red Herring Prospectus which contain words or phrases such as will, aim, is likely to result, believe, expect, will continue, anticipate, estimate, intend, plan, contemplate, seek to, future, objective, goal, project, should, will pursue and similar expressions or variations of such expressions, that are forward-looking statements. All forward-looking statements are subject to risks, uncertainties and assumptions about us that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. Important factors that could cause actual results to differ materially from the expectations include, among others: General economic and business conditions in the markets in which we operate and in the local, regional and national and international economies; Changes in laws and regulations relating to the industries in which we operate; Increased competition in these industries; The Companys ability to successfully implement the growth strategy and expansion plans, and to successfully launch and implement various projects and business plans for which funds are being raised through this Issue; Our ability to meet capital expenditure requirements; Fluctuations in operating costs; Unanticipated variations in the duration, size and scope of the projects; Our ability to attract and retain qualified personnel; The effect of wage pressures, seasonal hiring patterns and the time required to train and productively utilize new employees; Changes in political and social conditions in India or in other countries that we may enter, the monetary and interest rate policies of India and other countries, inflation, deflation, unanticipated turbulence in interest rates, equity prices or other rates or prices; Any adverse outcome in the legal proceedings in which we are involved.
For a further discussion of factors that could cause our actual results to differ, see the sections titled Risk Factors Business Overview and Managements Discussion and Analysis beginning on pages ix, 66 and 134 of this Red Herring Prospectus respectively. By their nature, certain market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains or losses could materially differ from those that have been estimated. Neither we nor the Book Running Lead Manager nor the Co-Book Running Lead Manager , nor any of its respective affiliates have any obligation to update or otherwise revise any statements reflecting circumstances arising after the date hereof or to reflect the occurrence of underlying events, even if the underlying assumptions do not come to fruition. In accordance with SEBI requirements, we , the Book Running Lead Manager and the Co-Book Running Lead Manager will ensure that investors in India are informed of material developments until such time as the grant of listing and trading permission by the Stock Exchanges.
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SECTION I - RISK FACTORS An investment in Equity Shares involves a high degree of risk. You should carefully consider all of the information in this Red Herring Prospectus, including the risks and uncertainties described below, before making an investment in the Companys Equity Shares. If any of the following risks occur, the business of the Company, financial condition and results of operations could suffer, the trading price of the Equity Shares could decline, and you may lose all or part of your investment. The financial and other related implications of risks concerned, wherever quantifiable have been disclosed in the risk factors mentioned below. There are certain risk factors mentioned where the effect is not quantifiable and hence not disclosed. RISK FACTORS INTERNAL TO THE COMPANY 1. We are a party to certain legal proceedings that, if decided against us, could have an effect on our reputation, business prospects and results of operations. Classification of these legal and other proceedings instituted against our Company, Promoters/ Directors and proceedings filed by us are given as follows. Summary of litigations/ notices pending against our Company: Particulars Show cause notice (SCN) by Director General of Central Excise Intelligence (DGCEI) under Central Excise Act Total No. of cases/ disputes 2 Approximate amount involved where quantifiable (Rs. in lacs) 93.92
93.92
Summary of litigations/ notices pending against our Promoters: Particulars Show cause notice (SCN) by Director General of Central Excise Intelligence (DGCEI) under Central Excise Act Total No. of cases/ disputes 2 Approximate amount involved where quantifiable (Rs. in lacs) 871.19
871.19
Summary of litigations/ notices pending against our group companies: a) Against Surya Vikas Plywood Limited Particulars Show Cause Notice (SCN) by Central Excise department under Central Excise Act Show Cause Notice (SCN) by DGCEI under Central Excise Act Total No. of cases/ disputes 1 1 2 Approximate amount involved where quantifiable (Rs. in lacs) 160.72 648.74 809.46
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b) Against Surya Boards Limited Particulars Show Cause Notice (SCN) by DGCEI under Central Excise Act Show Cause Notice (SCN) under Haryana General Sales Tax Act Show Cause Notice (SCN) under Central Sales Act Show Cause Notice (SCN) under Haryana Value Added Tax Act Show Cause Notice (SCN) under CENVAT Credit Rules Total No. of cases/ disputes 1 1 4 1 2 9
(Rs. in lacs) Approximate amount involved where quantifiable 1861.88 40.81 2491.09 0.08 2.47 4396.33
For details of litigations /notices issued against the Company/ Promoters/ Group Companies, please refer to information commencing from page 141 of this Draft Red Herring Prospectus. 2. Contingent liabilities not provided for, which if materializes may have an adverse effect on our financial condition and future financial performance. The contingent liabilities not provided for as on March 31, 2010 are as follows: a) Outstanding Letter of Credit as on 31.03.2010 amounting to Rs. 77,036,327/-. b) Bank Guarantee of Rs. 6,530/- given to Sales Tax Department, Ahmedabad. c) A Surety Bond of Rs. 4,000,000/- in favor of the Sales Tax Department for the payment of VAT and CST is given jointly with its associate concern Surya Vikas Plywood Private Limited for another associate concern Surya Boards Limited.
d) The Company has paid a sum of Rs. 100,000/- which has been shown as advance and is in appeal with CESTAT against a demand of Rs. 4,242,439/- on account of under valuation for March 2002 to June 2005 along with penalty of Rs. 4,242,439/- under Rule 25 and 26 of The Central Excise Rules2002, each and interest of like amount. The CESTAT vide its stay order No.381-382/2010-Ex Dated 14th May, 2010 has granted stay on the recovery of demand till the disposal of Appeal. In the event, any of the above contingent liabilities materialize it may have an adverse effect on our financial condition and future financial performance. 3. Some of our group Companies have made losses in last three financial years. Some of our group companies that have incurred losses during the last three financial years are as tabulated below: (Rs. in lacs) Sr. No Name of the Company F.Y. 2009-10 F.Y. 2008-09 F.Y. 2007-08 1 Surya Boards Limited (46.90) 2 Surya Vikas Plywood Limited (118.39) 3 Donear Laminates Private Limited (0.11) (0.09) (0.07) 4 Surya Decolam Private Limited (0.11) (0.12) (0.34)
4.
We have experienced negative Cash Flow from operating activities in the Financial Year 2005-06 to 200910. We have reported a negative cash flow from operating activities for the past 5 financial years as per the restated financial statements. The same is stated below: (Rs. in lacs) Sr. No Particulars F.Y.2009-10 F.Y.2008-09 F.Y.2007-08 F.Y.2006-07 F.Y.2005-06 1. Negative Cash Flow (1640.41) (944.61) (747.93) (92.51) (429.15) from Operating Activities
5.
We do not currently own the premises at which our registered office and present Factory unit is located, as the same is on lease arrangement. As a result, we may face problem of relocation in case of termination of lease and may incur higher costs. The premises at which our registered office and factory is located is not owned by us. We have lease arrangement with Mr. Jitendra Kejriwal, the promoter of our Company for the registered office premises and we pay monthly rent of Rs. 1.00 lacs for the occupation of the premises. The lease is valid for period of 3 years commencing from 06/06/2010. Further, we also have lease arrangement with Mr. Jitendra Kejriwal for the present factory unit located at 28 KM, Rohtak Milestone, Delhi Rohtak Road, Rohad Nagar Bhadurgarh, Distt. Jhajjar and we pay rent of Rs.1.00 lac per month for the occupation of the premises. The lease is valid for a period of 5 years commencing from 1/06/2010. The lease may be renewed subject to mutual consent of the lessor and us. In the event that the lessor requires us to vacate the premises, we will have to seek new premises at short notice and for a price that may be higher than what we are currently paying, which may affect our ability to conduct business or increase our operating costs.
6.
We have not yet placed orders for the plant & machinery and equipment requirements for our proposed project as specified in the Objects of the Issue. Any delay in procurement of plant & machinery, equipment, etc. may delay the implementation schedule and may affect our costs, revenue and profitability. We propose to purchase plant & machinery and other fixed assets worth Rs.3267.35 Lacs which would be funded from the proceeds of this Issue. We have not yet placed orders for the plant & machinery as specified in the section Objects of the Issue. Any delay in procurement of plant & machinery, equipment, etc may delay the implementation schedule. We may also be subject to risks on price escalation of plant & machinery and other equipments that we require. Hence our project could face time and cost over-run which could have an adverse effect on the operations of our Company.
7.
We propose to invest an amount of Rs.2000.00 lacs out of the proceeds of the issue for subscription to shares of our two group companies that would increase our stake to more than 51%. This would result into making them as subsidiaries of our Company. We cannot assure you that our Company would achieve the desired benefits from this investment. We propose to invest Rs.2000.00 lacs in our group companies namely, Surya Vikas Plywood Limited and Surya Board Limited as equity of Rs 1000.00 lacs each. These companies are in related line of business activity and provide synergy to our activity. We will hold 79.30% stake in Surya Vikas Plywood Limited and 79.62% in Surya Board Limited post our investment. These companies would utilize the money towards procurement of plant and machineries and expanding the existing production facilities. In the event these companies do not achieve the desired level of profitability due to the factors within their control or the factors out of their control, it may have an impact on our financials and the expected return on investments.
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8.
The brand Donear is not registered in our name. Our group Company M/s. Surya Boards Limited had made an application for registration of brand Donear under class 19 (non metallic building material), 20 (furniture and articles not otherwise classified), under Trade Marks Act. The same was objected by Donear Synthetics Pvt. Ltd. Any adverse outcome of the same may affect us. We have been using the brand Donear for more almost two decades for selling our products and have created a niche for ourselves under this brand in the plywood market. Our group company had made an application to Trademark authority in the year 1994 under class 19 and in the year 2000 under class 20 for registration of brand that was objected by Donear Synthetics Pvt. Ltd. in the year 2001. In the past decade, there have been no further development in this regard and we continue to use the brand for selling our products. Any adverse decision in this regard by the Trademark Authority may restrict us to use the brand. Management Proposal: The brand name Donear is registered under Class 24 (fabrics) by Donear Synthetics Pvt. Ltd. Our company is using the trademark since long under Class 19 and 20 of the Trademarks Act. We are defending the objections raised by Donear Synthetics Pvt. Ltd. Recently we have launched new brand name SONEAR and we propose to use the same in future. We have changed the name of the company to SONEAR INDUSTRIES LTD. and obtained certificate of change of name from RoC New Delhi and Haryana. Our group company Surya Boards Ltd. has made and application for registration of SONEAR brand. We are holding license to use the same from Surya Boards Ltd. for a period of 10 years. We are also proposing to subscribe to the equity capital of Surya Boards Ltd. which will become our subsidiary after the initial public offer. In view of the same and in view of various other initiatives taken by us we do not forsee any difficulty as far as brand name is concerned.
9.
There are certain trademark registration, licenses and approvals in the name of Donear Dcor Pvt. Ltd. There are a few trademarks and approvals applied in the name of Donear Dcor Pvt. Ltd. The company has changed its name to Sonear Industries Limited w.e.f. May 21, 2010. The company is required to file a separate request for each trademark application with the Registrar of Trade Marks for change in name of the applicant. The company is yet to make an application to the same.
10. The proposed project for setting up the new manufacturing unit of our Company at Yamunanagar, Haryana to manufacture particle board is partially funded from the proceeds of this Issue and balance from the term loan. Any delay / failure of the public issue or delay in disbursement of term loan shall adversely impact the implementation of the project. Our proposed project at estimated cost of Rs.2700.00 lakhs for manufacturing of particle board will be partially funded from this Issue to the extent of Rs. 1200 lacs. We have received a sanction for the term loan to the extent of Rs.1500.00 lacs from Bank of Maharashtra located at NBCC Towers, Bhikaji Cama Place, New Delhi vide its letter dated 19/08/2010. The said sanction is for a period of 6 month, post which we would be required to have a fresh sanction from the bank and the same may take time for fulfilling the requirements of pre-sanction. We shall enter in an agreement with the Bank and the same is proposed to be executed after the receipt of issue proceeds. Incase we do not comply with the bank requirements then it may lead to delay in disbursement of amount to the Company. Any delay or failure in raising the funds from this Issue may adversely affect the implementation of the project and the plans of the Company to foray into particle board market. Further, it may also limit ourselves to the present product portfolio and may also limit our growth opportunities to cater the wide spectrum of products.
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11. The land for proposed manufacturing unit at Yamuna Nagar to manufacture particle board is taken on lease from our group company namely, Surya Vikas Plywood Limited. We have entered into a agreement dated 01/04/2010 for a period of 10 years towards the said lease. In the event we are unable to renew our lease agreement, it may lead to disruption, relocation of manufacturing unit or incurring of higher rental cost and the same may have impact on our financials. We propose to set up manufacturing unit on the land leased from Surya Vikas Plywood Limited, our group company for a period of 10 years commencing from 01/04/2010 against the security deposit of Rs.10.00 lacs and a monthly rent of Rs.1.00 lacs. The unit will have facilities for manufacturing of Particle Board product. We have estimated a total cost of Rs.2700.00 lacs for setting up the unit and the same is completely funded by a mix of term loan and issue proceeds. In case the lease agreement is terminated or not renewed by both the parties to agreement, it may lead to disruption or relocation of factory unit to different location or complete shutdown of particle board operations. We may even require paying higher rental amount. Crystallization of any of the said events may impact our financials in short run as well as long run. 12. The implementation of the proposed project for Particle Board is at a very preliminary stage. Any delay in implementation of the same may increase the capital cost and also affect returns from the project. The Company is planning to set up new manufacturing facilities at Yamunanagar, Haryana. The Company has estimated the cost and drawn the implementation schedule accordingly. Presently, the implementation is at a very preliminary stage. The Company has procured the land on lease basis from Surya Vikas Plywood Ltd. one of our group company. Any delay in implementation of the same will increase the capital cost and also affect the realization of returns from the expansion. 13. If we are unable to obtain required approvals and licenses in a timely manner, our business and operations may be adversely affected. Further, we also require the license from Central Empowered Committee for establishment of the proposed Particle Board unit. Our business model is largely dependent on the licenses and approvals of statutory and other regulatory authorities. We may from time to time, require certain approvals, licenses, registrations and permissions for undertaking our business for which we are required to make applications to the respective statutory body. If we fail to obtain any of these approvals or licenses, or renewals thereof, in a timely manner, or at all, our business could be adversely affected. Presently, following are the license and approvals that have expired and we have made the necessary applications for renewal of the same. The State Level Committee (appointed by Central Empowered Committee (CEC)) has already given us their approval and recommended to CEC for issuance of Forest License, for establishment and operation of Particle Board Plant. For further details please see section titled Government/ Statutory and Business Approvals beginning on page no 146of this Draft Red Herring Prospectus. 14. We can provide no assurance that our new product namely, Particle Board will be commercially successful. We propose to set up manufacturing unit at Village Damla, Delhi Road, Yamunanagar, Haryana for manufacture of particle board. We cannot assure that our new product will be accepted by and be successful in the competitive market and whether we would be able to recover the incurred cost. Failure to sell the product or slow down in sale of our product may result into delay to achieve break even for this unit. We may also run into losses leading to shutdown of operations. This would negatively impact financials, brand of the Company and weaken our product portfolio. Management Proposal: The management does not forecast any problem with regard to the quality of particle/ MDF Board. xiii
15. We had entered into certain transactions with the related parties, which were not in compliance with the provisions of section 297 of the Companies Act, 1956. We had entered into a business transaction of purchase/sale with our group companies namely, Surya Vikas Plywood Limited and Donear Plywood Private Limited in previous financial years. We were required to comply with the provisions of section 297 of the Companies Act, 1956 and the same was not complied with. To safeguard the interest of Company, we have filed an application dated 22nd July 2010 with Company law Board, New Delhi for compounding of offences under section 621A of the Act. 16. We have entered into lease arrangement with Mr. Jitendra Kejriwal, the promoter of our company for the offices and proposed factory unit. The lease deeds entered have not been registered under the Registration Act, 1908 and the same may not be considered as evidence in the court of law at time of any dispute. We have entered into lease arrangement or Leave and License arrangement for the present properties located at Delhi and Bangalore and the proposed factory unit at Haryana. We are required to register these properties under the relevant section of Registration Act, 1908 and the same has not been complied with. In the event there is any dispute or we refer to court of law for resolve of dispute then the lease deed may not be admissible as evidence in a court of law for resolution of dispute, unless the defects of non-registration of property is rectified. However to rectify the defect we would be required to pay the necessary stamp duty and the penal charges as referred in the Registration Act 1908 and the amendments thereof. 17. We are dependent on our management team for success whose loss could seriously impair our ability to continue to manage and expand business efficiently. Our success largely depends on the continued services and performance of our management and other key employees. In the recent past our senior management has contributed to large extent for the top line growth of the Company during the recession and which in turn helped the company to maintain the profitability. We believe that any loss of service of the senior management could impair the ability to continue to manage and expand the business efficiently. 18. Our business is dependent on our manufacturing facility. Any breakdown at our manufacturing facility may have a material adverse effect on our business, financial condition and results of operations. Our manufacturing facility is subject to operating risks such as the breakdown or failure of equipment, power supply or processes, obsolescence, labour disputes, strikes, lock-outs, continued availability of services of our external contractors, earthquakes and other natural disasters. Though the Company has not faced any disruption in the manufacturing unit since inception, the occurrence of aforesaid factors or events cannot be ruled out in future that may result in material adverse effect on business and financials of the Company. 19. We may be unable to seek compensation from our suppliers for defective components or raw materials. We are required to source components and raw materials from suppliers for which advances and even prompt payments may have to be made. We cannot assure you with a reasonable certainty that the raw materials that we would procure in the future will not be defective. Further should we receive any defective raw materials, we may not be in a position to recover advance payments or claim compensation from our suppliers consequently increasing the manufacturing costs or reducing the realisation of our finished products.
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20. Depleting forest reserves may reduce the raw material availability, resulting in increase in raw material cost. Every year large hectares of forests are utilized as firewood. There have been instances in recent past of natural calamity occurring at forest like fire resulting to huge loss of natural forest resources. Such continuous depletion of the natural forest resources may result in reduction of raw material availability and consequently increase our raw material costs and could significantly affect our operating results. Management Proposal: The shortage of forest wood will not effect the working of the company as the company is importing the basic raw material i.e. Gurjan Plywood, Indonesian Plywood and Malaysian Plywood, 21. We import sizeable portion of our raw material from Asian, African, European and South American nations that exposes us to the currency fluctuation risk. We import raw material like wood log and paper for manufacturing of natural and decorative plywood and decorative laminates. The imported raw material forms substantial part of the total cost of the product. While we have taken steps to reduce operating costs, we were significantly affected by currency fluctuation in F.Y. 2008-09 resulting to lower profits even though there was increase in sales of the Company. Management Proposal: There is no risk to the company due to fluctuations in foreign currency. The company is taking the hedging cover for the imports by booking the forward cover. 22. Our application for registration of trademarks as given herein under, are still pending for registration. The trade marks which are yet to receive final registration, for which provisional registration has been obtained by us from the Trade Mark Registry under Trade Marks Act, 1999 are as follows: Sr. No. 1. 2. Provisional No. 01708501 01708502 Date of Application 09/07/2008 09/07/2008 Trade Mark Name KEJORRI KEJORRI Class in respect of which application has been made 17 19
23. There are restrictive covenants in the agreements with the Banks/ Institutions from whom we have borrowed, which among other things, require the Company to obtain prior permission from them for certain acts which may limit Companys discretion in these matters. There are restrictive covenants in the agreements with the Banks/ Institutions from whom we have borrowed, which among other things require the Company to obtain prior permission from them for change in capital structure, Change in Management, declaring dividend and undertaking of new project etc. which may limit Companys discretion in these matters. 24. Some of our group concerns/ entities are engaged in the similar line of business. There maybe potential conflict of interest between the operations of our Company on one hand and the operations of few of the Group Companies on the other. Some of our group concerns/entities are engaged in the business of plywood and other related products. We presently have not entered into non-compete agreements or any other agreement that restricts us or our group company to enter into or venture into any business relating to wood industry. There may be potential conflict of interest between the operations of our Company on one hand and the operations of few of the Group Companies on the other.
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EXTERNAL RISK FACTORS 25. As a manufacturing company we are dependent on smooth transportation for raw material and for delivery of our finished product to our customers. Any disruption in transportation facilities may adversely affect our business. We heavily depend on sea route for transportation of imported raw materials. We rely on the road and other transportation network on need basis. We hire third party transportation services to deliver the products to our distributors and customers. Disruption of transportation services due to natural calamities, strikes, lock out or any other reason would affect the timely procurement of raw materials and delivery of our products. Any such disruptions could materially adversely affect our business, financial condition and results of operations. 26. Competition from other domestic producers / unorganized sector may adversely affect our competitive position and our profitability We face competition from other existing domestic producers and potential entrants to the industry in which we operate that may adversely affect our competitive position and our profitability. Loss of market share and competition may adversely affect our profitability. We also face competition for customers from other players in the organized and unorganized markets. We expect competition could increase with new entrants coming into this industry and existing players consolidating their positions. Some of our competitors may have access to significantly greater resources and hence the ability to compete more effectively. 27. Environmental regulation imposes additional costs and may affect the results of our operations We, like other producers, are subject to various central, state and local environmental, health and safety laws and regulations concerning issues such as damage caused by air emissions, wastewater discharges, solid and hazardous waste handling and disposal, and the investigation and remediation of contamination. These laws and regulations are increasingly becoming stringent and may in the future create substantial environmental compliance or remediation liabilities and costs. These laws can impose liability for non-compliance with health and safety regulations or clean up liability on generators of hazardous waste and other substances that are disposed of either on or off-site, regardless of fault or the legality of the disposal activities. Management Proposal While we believe that our facilities are in compliance in all material respects with applicable environmental laws and regulations, additional costs and liabilities related to compliance with these laws and regulations are an inherent part of our business. 28. A slowdown in economic growth in India could materially and adversely affect the Companys results of operations and financial condition Our performance and the quality and growth of our business are dependent on the health of the overall Indian economy. There have been periods of slowdown in the economic growth of India during the 1990s. The Indian economy is also largely driven by the performance of the agriculture sector, which depends on the quality of rainfall during the monsoon season and is therefore difficult to predict. In the past, economic slowdowns have harmed manufacturing industries including the industry to which we belong. Any future slowdown in the Indian economy could harm our results of operations and financial condition.
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29. Changes in Indian Government policies could adversely affect economic conditions in India, and thereby adversely impact our results of operations and financial condition The market price and liquidity of the equity shares, may be affected by Indian Governments policy changes in India. For example, rising interest rates, increases in taxation or the creation of new regulations could have a detrimental effect on the Indian economy generally and us in particular. The Indian Government has in recent years sought to implement economic reforms, and the current Indian Government has implemented policies and undertaken initiatives that continue the economic liberalization policies pursued by previous Indian Governments. For example, the Indian Government has announced its general intention to continue Indias current economic and financial sector deregulation policies and encourage infrastructure projects. However, the roles of the Indian Government and the State Governments in the Indian economy as producers, consumers and regulators have remained significant and there can be no assurance that liberalization policies will continue in the future. Any significant change in such liberalization and deregulation policies could adversely affect business and economic conditions in India generally and our results of operations and financial condition in particular. 30. Global economic, political and social conditions may harm our ability to do business, increase its costs and negatively affect the stock price. External factors such as potential terrorist attacks, acts of war or geopolitical and social turmoil in many parts of the world could constrain our ability to do business, increase its costs and negatively affect our stock price. These geopolitical, social and economic conditions could result in increased volatility in India and worldwide financial markets and economy, and such volatility could constrain its ability to do business, increase its costs and negatively affect our stock price. 31. Natural calamities could have a negative impact on the Indian economy and cause the business to suffer India has experienced natural calamities such as earthquakes, tsunami, floods and drought in the past few years. The extent and severity of these natural disasters has an impact on the Indian economy. Any negative impact of natural disasters on the Indian economy could adversely affect the business and the market price of our Equity Shares. 32. Any downgrade of Indias sovereign debt rating by an international rating agency could have a negative impact on our results of operations and financial condition Any downgrade of Indias credit rating for Indian domestic and international debt by international rating agencies may adversely impact our ability to raise additional financing and the interest rates and commercial terms on which such additional financing is available. This could have an adverse effect on our ability to obtain financing to fund its growth on favorable terms or at all and, as a result, could have a material adverse effect on our results of operations and financial condition. 33. The price of our Equity Shares may be highly volatile, or an active trading market for its equity shares may not develop. The price of our Equity Shares on the Indian Stock Exchange may fluctuate as a result of several factors including: - Volatility in Indian and global securities market; - Our results of operations and performance; - Performance of the competitors; - Adverse media reports, if any, on Sonear or the Industry; - Changes in the estimates of our performance or recommendations by financial analysts on our Company; xvii
Significant development in Indias economic liberalization and de-regulation policies; and Significant development in Indias Fiscal and environmental regulations. General market conditions; and Domestic and international economic, legal and regulatory factors unrelated to our performance. There can be no assurance that an active trading market for our equity shares will develop or be sustained after this Issue or the price at which the Equity Shares of our Company are initially traded will correspond to the prices at which the Equity Shares of our Company will trade in the market subsequent to this Issue.
Prominent Notes 1. The net worth of Sonear as per its audited restated financial statement as on March 31, 2010 is Rs. 1595.96 lacs. Book value, per equity share of the Company as per its audited restated financial statement as at March 31, 2010 is Rs. 10.12. The average cost of acquisition of the equity Shares of Rs. 10 each by the Promoter are as under: Name of the Promoter Mr. Jitendra Kejriwal Mrs. Sapna Kejriwal Jitendra Kejriwal (H.U.F) Donear Laminates Pvt. Ltd. Surya Decolam Pvt. Ltd. 4. Cost per share (Rs.) 2.46 0.40 1.08 0.56 5.11
2. 3.
Investors are advised to refer the paragraph on Basis of Issue Price on page 46 of this Draft Red Herring Prospectus before making an investment in the Issue. Except as mentioned in the sections titled Capital Structure beginning on page 19 of this Draft Red Herring Prospectus, we have not issued any Equity Shares in the last twelve months. For details on Related Party Transactions refer to the section titled Related Party Transactions on page 123 of this Draft Red Herring Prospectus. There are no financing arrangements whereby the promoter group, the directors of the Company which is a promoter of the issuer, the directors of the issuers and their relatives have financed the purchase by any other person of securities of the issuer other than in the normal course of business of the financing entity during the period of six months immediately preceding the date of filing draft offer document with the Board. Investors are free to contact the BRLM and the Co-BRLM for any complaints, clarification or information pertaining to this Issue. For contact details of the BRLM and the Co-BRLM, please refer to the cover page of this Draft Red Herring Prospectus. All information shall be made available by the BRLM, the Co-BRLM and the Company to the public and investors at large and no selective or additional information would be available only to a section of the investors in any manner whatsoever.
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10. In addition to the BRLM and the Co-BRLM, the Company shall be obliged to update the Offer Document and keep the public informed about any material changes till listing and trading commences in respect of the shares issued through this issue. xviii
11. For interest of promoters/directors, please refer to the section titled Promoters and group companies beginning on page no. 97 of this Draft Red Herring Prospectus. 12. For details of the group companies having business interests or other interests in our Company, please refer to the section titled Promoters and group companies beginning on page no. 97 of this Draft Red Herring Prospectus.
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PART I SECTION II - INTRODUCTION The information in this section is derived from DRHP report on INDIAN PLYWOOD INDUSTRY by CARE Research. It has not been independently verified by the Company, the Book Running Lead Manager or the Co-Book Running Lead Manager or their respective legal advisors, and no representation is made as to the accuracy of this information, which may be inconsistent with information available or compiled from other sources. For disclaimer clause of CARE please refer to page no. 57 of this DRHP. Summary of the Industry and Business of the Company Industry Overview Background of Indian Economy The Indian economy is one of the largest economies in the world with a GDP at current prices in fiscal 2010 estimated at Rs. 44.64 trillion (approximately US$1 trillion). It is one of the fastest growing major economies in the world, with a real GDP growth rate (inflation-adjusted) of 5.7% in calendar year 2009 and an estimated 9.4% for calendar year 2010. The table below shows Indias economic growth in comparison to other developing countries, as well as the International Monetary Funds (IMF) projections for economic growth through calendar year 2011.
According to International Monetary Fund, World Economic Outlook Database, April 2010, per capita GDP at factor cost (at constant prices) in India has grown from around Rs. 13,669 in the year 1991 at the time of liberalization to an estimated Rs. 33,751 in the year 2010. This increase in per capita income has created increasing wealth and thereby higher disposable income. The construction sector in the country grew at 6.50% in FY2009-10 against 5.95% in FY2008-09. The housing market is a highly sensitive investment area worldwide and investment in the housing sector is often recognised as a barometer to measure the health of an economy. The sector, by its nature is widely linked with a very large number of manufacturing segments. There are about 250 industries, large and small, which depend on the performance of housing and construction industry. This includes larger ones that make cement and steel, medium ones that make plywood, paint, tiles, electrical and the smaller ones that make nuts and bolts. These linkage effects not only stimulate production and investments in the linked segments of manufacturing, they also push up the aggregate additional income generated in the process. In sum, growth in housing stimulates production and overall growth in the economy. In view of
potential growth of housing and infrastructure sector, the overall demand for plywood and laminates is expected to remain buoyant in the short to medium term. Overview of Plywood Industry in India India is one of the largest users of plywood in Southeast Asia with sufficient wood of all varieties. The Indian plywood industry which is growing at a healthy rate remains a niche industry. Moreover, with the recent spurt in the housing sector, plywood and laminates are expected to gain significant role going forward. The Indian plywood industry is estimated to be approximately Rs 10,000 crore and the laminate industry accounts for almost Rs 3,000 crore (app. total Rs 13,000 crore/US$2.77 bn). The plywood industry is growing at a rapid pace of average 15-20% annually with approximately 600 units currently operating across the country. The market is highly fragmented and the small scale units account for approximately 80% of the plywood industry and roughly 50% of the laminate industry. The organised sectors (medium-to-large scale units) 25% annual growth outperformed the overall industry growth. The small scale unit segment has advantages in terms of excise waivers and other benefits due to their Small Scale Industry (SSI) status. The SSI units generally are not fully integrated ones. The Herfindahl Index of Concentration (HIC) for the plywood industry stood at 0.117 in FY2008-09. (Source: CMIE) In India there are two main types of wood products, panel and plywood. Product categories include veneer sheets, particle board (composite wood core with plastic laminate finish), panel products (fibre board), plywood made from both hard and softwood (veneered panels and laminated woods) and medium density fibreboard (MDF). Indian particle board and plywood industry have large producers who account for 15% of the total production, producing approximately 30 mn sqm of plywood and block boards. Of the total market, particle board accounts for over 22% of the market with the rest over 78% accounted by plywood segments. Logs, the key RM for the industry, accounts for 67% of all wood and wood based products imported into India due to relatively lower import tariffs and a local preference for unprocessed wood. India imports logs mostly from Malaysia, Myanmar, Ghana and New Zealand due to a freight advantage and at relatively lower prices whereas total imports of logs have increased 72% y-o-y to US$1.14 bn in FY2009. Overview of Indian Furniture Industry The Indian furniture industry manufactures and exports quality furniture in terms of design, fashion and technology. Indian furniture has a strong reputation worldwide given its artistic component. Nonetheless, a large segment of furniture is imported from various foreign countries as well. It is estimated that the overall Indian furniture industry generates a turnover of Rs 36,000 crore annually. About 85% of the industry falls under small scale units segment and remaining 15% is under organized sector (medium-to-large scale units), made up of manufacturers and exporters catering to the different segments of the industry. Backed by a growing real estate, tourism and hospitality sectors on one hand and rising per capita income and lifestyle product consumption on the other, the Indian furniture industry is expected to grow at a Compounded Annual Growth Rate (CAGR) of 13-15% in the next five years. The concept of good living and better lifestyle is fast catching up the middle class' psyche of Indians. Interior designing is no longer confined to rich and wealthy Indians and even the middle class people do not mind paying extra in getting their homes decorated with modern and designer furniture boosting overall demand. Key Industry Characteristics Highly fragmented industry with approximately 85% falling in the small scale units segments and remaining 15% in the medium-to-large segment. Growth of the industry directly related to economic growth and construction activity. 2
Due to limited resources, timely availability of raw material at right price is crucial to maintain a steady production line. The industry has made good in-roads in the country with extensive distribution network. Increasing brand consciousness High working capital intensive and aggressive pricing strategy to maintain steady cash flows.