The Hindu : Regulator needs to rejig rules to reality

Online edition of India's National Newspaper
Monday, Dec 02, 2002

Business

Business

Regulator needs to rejig rules to reality

The Aditya Birla Group may be accused of vitiating the spirit of the takeover code. To be sure, they were not the first one to do so. The Reliance had done it earlier. But the Birlas have functioned within the ambit of law, says K. T. Jagannathan .

THE ROAD to L&T is strewn with thorns, it appears. Ask the Aditya Birla Group. It will certainly vouch for it. The SAT (Securities Appellate Tribunal) has refused to stay the SEBI (Securities and Exchange Board of India) directive to stop the open offer by Grasim for L&T shares.

In the wake of the SAT ruling, the regulator has barred the Birla Group firm from garnering L&T shares in any manner until further orders. Surely, the L&T takeover controversy is turning murkier by the day. The unfolding drama has drawn a parallel to the aborted. Swraj Paul raids on Escorts and DCM in the early Eighties in a controlled environment.

A short trip down memory lane will help place the controversy enveloping L&T in perspective. The Ambanis had long aspired to take effective control of L&T but failed in their objective and finally threw in their towel.

The Aditya Birla Group entered the scene after Grasim acquired the Reliance stake of 10.05 per cent in L &T in a negotiated deal at Rs. 306 a share in November 2001. As time went by, the Birla Group beefed up its holding in the capital goods and construction giant to 14.48 per cent through market operation. This surely had helped them bring down the average cost of acquisition.

Controversy arose when Grasim came out with an open offer recently to buy L&T shares at Rs.190 a share. Minority shareholders were obviously livid. And, the regulator stepped in to stall the open offer. The issue came up before the one-member SAT which declined to stay the SEBI fiat on the open offer.

The L&T imbroglio has raised several issues. The SEBI takeover code is triggered only if the 15 per cent threshold limit is crossed. Why will the Birlas make an open offer if they are not keen on controlling L&T? Their intentions are obviously unambiguous. And the open offer price is in conformity with the SEBI guidelines. The question, however, is: Has there been a change in management control when the Aditya Birla Group acquired Reliance's stake? If yes, the minority shareholders should also be given the `level price'. Proving this will virtually open a Pandora's Box, however.

If at all there is a need to take a re-look at rules, the L&T episode reiterates the urgency to do that. In the new liberal era, mergers and acquisitions are going to be the in-thing. Surely, the rules, too, are required to be aligned to the emerging reality. In a low capital-based company, the aspirant for controlling stake need not employ any ingenuity to avoid paying minority shareholders the same price as paid for a block acquisition. The problem however becomes tricky in a large capital-based outfit like L&T.

Not surprisingly, the Birlas have come out with an open offer after the markets stabilised long after they had acquired the Reliance stake. The price offered is in conformity with the SEBI rules. Yet, the offer price has come under flak. Predictably, the Birla Group is accused of playing an `unethical game'.

The moot question is: Is it correct to demand the same price for a small shareholder as was paid to a block holder? The block holder will certainly demand his/her pound of flesh to quit the company.

Should there not be a `way out' formula? Why can't the rules be amended to facilitate open offers at the average price of acquisitions done earlier if this is higher than what SEBI mandates under the existing guidelines? This way it could help small investors even while not placing an undue burden on any genuine buyer who aspires for a controlling stake for better management of the acquired company.

The regulator has also left the term `management control' ambiguous. When Gujarat Ambuja acquired ACC shares from the Tatas a couple of years back, the SEBI saw no change in management control. Consequently, it was contended that the takeover code did not apply in this case, leaving the minority shareholders of ACC fretting and fuming. It is, however, a different matter that the SAT had asked the regulator to probe the ACC case afresh.

In the L&T case, the controversy is rather over the price offered than the open offer itself. It is common knowledge that there are umpteen companies in India which are controlled by promoters holding single-digit percentage of shares.

In a majority of cases, the acquirers do not wait to reach the 15 per cent SEBI threshold limit to gain control of the company. They may not say it in so many words. Yet, they tend to drive the company through back-door management.

FIs' crucial role

The L&T issue has brought the focus back on financial institutions. In former times, the institutions had a clear role in facilitating project promotion. In the current environment, they too have come under pressure to perform. Far from working to improve the return on their investment, these institutions are happy back-seat driving companies funded by them.

Be it the Paul raids on Escorts and DCM or the Reliance bid for L&T, the financial institutions always played the `villain' and stopped the so-called raiders in the tracks. They did so under instructions from the Government of the day.

The profile of these institutions has undergone a metamorphosis what with the public holding shares in some of these organisations. It is time they got out of the `herd mentality' and acted in their individual best interests and for the benefit of stakeholders of their respective organisations.

In companies like L&T, there is no one single entity that be identified as a promoter. The institutions still have the largest share.

That being the case, the argument that the Birlas have taken management control following acquisition of the Reliance stake does not wash. In fact, the collective might of the institutions appears to be successfully checkmating the Birlas on crucial issues such as hiving of the cement business of the company.

If only it had acted fast on the ACC issue, the L&T mess could have been avoided. In the absence of an unambiguously laid-out definition, the regulator will find it tough to prove that there is a change in management control when block shares are bought in ACC and L&T.

Perhaps, the SEBI needs to be manned with market-minded personnel who could objectively take a call on these issues.

More than this, the takeover code itself needs to be re-jigged to reflect the reality. After all, the regulator should facilitate the M&A process rather than ambush it.

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