Sucheta Dalal :Baby and bathwater (9 February 2003)
Sucheta Dalal

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Baby and bathwater (9 February 2003)  

Despite the Attorney General’s go-ahead, the courts will now decide whether Hindustan Petroleum and Bharat Petroleum can be sold without Parliament’s assent. But then, legal luminary Fali Nariman and the former Disinvestment Commission chairman G.V. Ramakrishna are among those who categorically hold that the government cannot bypass Parliament.

Ramakrishna, in fact, made a strong case for repealing the Nationalisation Act, but he now has a worry. What if the government accepts his argument and goes to Parliament with a one-line repeal Act? It could lead to disastrous consequences.

Decades ago, when the government acquired the assets of Shell and ESSO paying a paltry Rs 2.5 crore to Rs 10 crore as compensation, the Nationalisation Act required these to be ‘vested’ in a government company.

If the Act is repealed, rather than drastically amended, Shell and ESSO could hypothetically reclaim their properties by offering back the same paltry compensation. Ramakrishna’s worry is not baseless. When he was the chairman of the Sebi, the government had repealed the Control of Capital Issues Act (CCI) with a one-line repeal order that had terrible consequences for the primary market.

The CCI Act was scrapped and out went all the regulatory and disciplinary powers without these being vested with Sebi, and that allowed the uncontrolled public issue mania of 1992-95. An unthinking scrapping of the Nationalisation Act could create a similar mess.

Shareholder nominees

The large shareholding of Indian investment institutions in Larsen & Toubro (L&T) makes them important players in the takeover attempt by the Aditya Birla group, but it is their presence on the Board of Directors, which makes them even more powerful.

Nearly 35 per cent of L&T’s equity is held by Unit Trust of India, Life Insurance Corporation and General Insurance Corporation. All of them have nominee directors on the company and each of them owns a large mutual fund; moreover the insurance companies trade directly in the market. Doesn’t this give them an unfair advantage through their access to highly confidential board information? It does, but these nominees continue as a throwback to socialist era where sarkari institutions arrogated the right to sit on corporate boards and access inside information. But even if institutions don’t use this information, the notion of shareholder nominees on boards of companies is an anachronism in a free market where there are a variety of other institutional investors both large and small.

Vertical splits

While on L&T, if Kumar Mangalam Birla prevails in splitting the company vertically, it would be the first time that a Cement unit has not been sold outright, with a control premium built into the price.

For instance: Lafarge acquired Tisco’s (1.7 mmtpa) unit in September 1999 at a price of $74 per tonne; in April 2000 it paid an even higher price of $80 per tonne for Raymond’s 2.2 mmtpa cement unit.

Next month, Cements Francias bought 50 per cent of Zuari Cement’s 1.7 mmpta unit at $99 per tonne and later in January 2002 when the market had cooled, Cements Francias acquired 94.7 per cent of Sri Vishnu Cement’s 1 mmtpa unit at $82 per tonne.

Grasim, while offering a much lower price, has claimed that 38 out of 43 restructuring deals have been through vertical demergers rather than subsidiarisation and this has increased shareholder value. But most of these remained with the same management and there is clearly no case where a hostile acquirer, who has drawn protests even from minority investors, has forced a vertical split. Clearly, this too is headed for an interesting board room battle.

Taxing troubles

When it comes to taxes, even the developed countries are cavalier towards taxpayers. Since Vijay Kelkar’s recommendations have agitated both companies (which will pay higher tax) and the salaried classes, let’s look at what happens elsewhere.

Some time ago, Israel had generously decided that any Jewish person can have Israeli residency and will not be taxed on worldwide income for at least 10 years. Without any warning or discussion, the government withdrew the offer and announced that any Jewish or non-Jewish person who spends a single day beyond 60 days in Israel will be taxed on worldwide income.

Further, if he/she exceeds 60 days in 2003, the tax will be retroactive for the past two years. The result? There are plane-loads of Jewish industrialists fleeing the country and taking their money with them. Also, fear of the tax God has dried up donations to worthy causes

-- Sucheta Dalal