The Hindu : The L & T-Grasim deal

Online edition of India's National Newspaper
Saturday, Jul 05, 2003

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Business

The L & T-Grasim deal — Future lessons

By C. R. L. Narasimhan

Details of the Grasim-L&T deal, made public on June 16, will obviously continue to have significance well into the medium term. That is not only because of the inherent complexity of the transaction (which would hopefully end the raging controversy) but also because it is going to take a while before all its aspects are put through. Moreover, there are certain novel aspects that will be tested for the first time. For instance, the acquisition of a majority stake in the demerged L&T (retaining its engineering and construction businesses) by a new L&T trust. That trust will represent the employees. Ways will have to be devised to fund the shares that the employees' trust will acquire from Grasim as part of the transaction. Moving further the working of the company under employees' control will have trend-setting meanings for the entire corporate sector. Another related issue, the conferment of stock options on L&T employees, would be a challenging task considering that a trust made up of employees is going to be the majority shareholder of the demerged company. There have been no precedents here and the way L&T takes care of this will be truly significant.

The role of the institutions in resolving the transaction has been in focus this time just as it was a decade ago when Reliance Industries mounted a bid for L&T. At that time, however, the institutions stood in the way. Their financial clout had not decreased in the interregnum and it is certain that their approach was radically different this time. However, what has been common both times is lack of transparency in the ways the institutions took the eventual decisions. Regulators have no jurisdiction over those cases and it is likely that the institutions themselves do not have a rulebook to guide them. So each case where they have a dominant stake becomes unique and one might add automatically becomes suspect. The fact that most institutions that hold the equity stake — Life Insurance Corporation, Unit Trust of India, IDBI, General Insurance Corporation — are government companies still makes it worse. There could be a vigilance angle to every such decision. The common malaise of public sector of not taking a decision will prevail. It is also clear that the L&T affairs span not just one chronological decade but a decade in which there has been a radical rethinking on matters such as corporate governance, minority shareholders' interests and investor protection. It is not clear whether the institutions calling the shots are ready with the correct responses.

The other big issue is the plight of those who run companies with no clear identifiable groups. Technocrat promoters have been a special category by themselves. In the days before venture capital funding became common, accessing the capital market was the preferred mode for raising equity capital.

Today they are now literally at the crossroads of sweeping changes in regulation and in the financing norms. While earlier it was possible to start a venture as well retain control over it with a comparatively small stake, it is no longer possible to do either. Not many are aware that not long ago the environment in the country actually favoured a diffused ownership of publicly quoted companies. Thus, the promoter group could retain not more than 40 per cent of the initial public offering. In practice the holding was much less. If at all the threat of takeovers was non-existent, it was simply because the corporate sector did not very much fancy growing through "inorganic means.'' There were sound reasons for this. Creating fresh capacities rather consolidating existing ones was the focal point of the licensing policy.

In many cases capacities were created for the first time. Besides, foreign direct investments were few and far between and in any case, wherever allowed, were directed at creating fresh capacities.

Unfortunately for many of those companies, there is today neither a regulatory protection nor any disincentive to takeovers, mergers and amalgamations. On the contrary, it may be fashionable to be a predator and grow through takeovers. A large proportion of FDI flows into the country recently has been driven by mergers and acquisitions. The regulatory and legal systems have both changed drastically. A takeover code is in place. Corporate law, still evolving has already provided an impetus to several types of financial engineering, takeovers and so on.

There are obviously other lessons from the L&T saga. The consolidation in the cement industry is one. The benefit it seemingly confers to both parties — the A. V. Birla group and L&T — is another. Whether the takeover code gets valuable precedents is an issue that can be debated. Inevitably the minority shareholders have not had a say and there can be two opinions as to whether their interests were fully protected in the end. But the most significant lessons will be in the future: will L&T run by a shareholders' trust deliver on its promises? Will the institutions handle future L&T type situations differently? Will there be any restraint to their enormous clout not just in companies without clear-cut promoters but where there are two or more promoter groups?

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