Sucheta Dalal :Against the spirit of the Code and good governance - (14 May 2000)
Sucheta Dalal

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Against the spirit of the Code and good governance - (14 May 2000)  

Corporate governance may have been the Indian corporate sectors them song for the last few years, but even the best of our companies do not seem to grasp its nuances. The acquisition of over 11 per cent stake in ACC by Gujarat Ambuja Cement is an example.

Good corporate governance is not about the technicalities which may have allowed Gujarat Ambuja not to make an open offer to buy a 20 per cent of the ACC stock from minority shareholders. It is about respecting the spirit of the regulation and protecting the interests of small investors.

Forget the official claims; every investors, stakeholders, supplier, distributor and lender will tell you that Gujarat Ambuja will eventually control ACC. If the Securities and Exchange Board of India (SEBI), armed with a legal opinion from Solicitor General Soli Sorabjee sifted through technicalities to declare that it is not a takeover, then there is something wrong the takeover legislation. But that is stating the obvious. SEBI’s takeover code is a downright embarrassment. The Takeover Committee headed by Justice Bhagwati has become a more or less permanent body, which interprets every new takeover attempt afresh with new loopholes emerging or being plugged every time. One columnist puts it most succinctly when he says, “Since neither the framer of the code nor the implementers is clear on the issue, how can the user be expected to be clear?

That is true, but the ‘spirit’ of the open offer clause is clear. It is provide the exit opportunity as the promoter to the minority shareholders and not promoters to enrich themselves at the cost of the small guys.

SEBI’s application of the takeover code has been most patchy and erratic. For instance, the Kishore Chabbria-Vijay Mallya tussle for control over Herbertsons is languishing because neither side is in a hurry to find a solution. In Saurashtra Cement SEBI hurt investors by demanding open offer to be made at Rs 30 when the Autoriders Industries bid was at Rs 75. In the bid for Indal it discovered another loophole and looked for a plug. Now there is ACC. SEBI first referred the ACC issue to the Bhagwati committee, had it tossed back to it and then went off to the Solicitor General. Soli Sorabjee said that Gujarat Ambuja (GACL) acquisition did not amount to a management takeover. At that time GACL had acquired 7.2 per cent of the Tata stake but was committed take its holding upto 14.8 per cent. The shares were acquired at Rs 370 each (Rs 455 crore for 7.2 per cent) last December. As against this, the ACC share price was Rs112.60 last Friday, and has never crossed Rs 303 in the last 52 weeks.

If GACL had been asked to make a 20 per cent open offer to ACC’s minority shareholders at the same price of Rs 370, it would have to fork out another Rs 1264 crore making the acquisition prohibitive and may have scuttled the purchase. Hence the need to find a loophole.

Gujarat Ambuja was helped by the fact that the Tatas had created plenty of confusion over the status of ACC in the last five years. They had claimed ACC as a Tata group company (when they wanted to collect brand equity charges from it) but ACC’s former Chairman and legal luminary Nani Palkhivala hotly and publicly contested it. He insisted that ACC was an independent professionally managed company. Gujarat Ambuja has latched on to this claim and used the Tatas inability to push through preferential offer to themselves as proof that it was not a Tata controlled company. That is hair splitting. The preferential offer was blocked by Financial Institutions (FIs) because it was seen as the Tatas enriching themselves at the cost of minority shareholders and themselves.

According to SEBI sources, Sorabjee’s opinion stated that GACL’s 7.2 per cent acquisition did not amount to a takeover, but that if there is change in the facts and circumstances of the case, it would have to be revisited and examined afresh. This crucial little detail seems to have been ignored.

Within days of the SEBI green signal not to make an open offer GACL acquired another four per cent from the Tatas at the same Rs 370 a share (Rs 253 crores). The sufferers are FIs and retail investors who had once subscribed to an ACC rights issue a few years ago at Rs 2000 a share and still waiting for a revival. The FIs did make some noises about GACL’s acquisition this time, but have been silenced by SEBI. Only Unit Trust of India (UTI) has gone public to endorse the SEBI decision. This is the same UTI which, under pressure from SEBI, demanded compensation from Hindustan Lever in the alleged Insider trading case.

Also, was UTI influenced by Gujarat Ambuja’s Narottam Seksaria’s presence on its Board of Trustees? Maybe not, but UTI’s public statement does give cause for speculation. Also, when Sorabjee opined that Gujarat Ambuja’s acquisition does not amount to a takeover, ACC’s Chairman was still Shapoorji Pallonji Mistry, a substantial shareholder of the company and perceived as a Tata man. Immediately after SEBI’s verdict, Tarun Das, the force behind the Confederation of Indian Industry (CII), replaced Mistry. Tarun Das’s appointment is another wonderful irony, because the CII has been flogging the corporate governance theme for almost four years.

SEBI says that the open offer clause is not triggered in the ACC case because the acquisition is under 15 per cent and that GACL is not in a position to appoint a maximum number of directors. But take at look at other views. After the ACC share acquisition the combined production capacity of ACC and GACL at 22 Mln. tonnes makes it largest cement producing combine in the country.

Writing in the Business Standard Urmik Chhaya says -“Through its audacious presentation to the financial institutions, Gujarat Ambuja has almost sought the FIs' blessings to a virtual buyout of ACC”. He adds, “ By factoring in the production capacities of ACC into its own calculations -- and, thereby claiming market leadership everywhere -- Gujarat Ambuja has almost sought the FIs' blessings to a virtual takeover of ACC”. But SEBI thinks differently.

The clever interpretation of the takeover rules has again allowed SEBI to ignore the very basis of its existence – to protect the interests of investors. Within the year, GACL will have acquired the remaining Tata stake and taken charge of ACC and even the fiction of professional management will slowly vanish.But minority shareholders will remain the losers.

This is one case, where investors can forget about a sympathetic hearing from the government as well. After all, the government itself has reportedly sought a blanket exemption from the operation of the takeover code when it sells bulk holdings in Public Sector Undertakings to the private sector.

-- Sucheta Dalal