Sucheta Dalal :Corporate governance thrown to the winds again (21 October 2002)
Sucheta Dalal

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Corporate governance thrown to the winds again (21 October 2002)  

Jun 7, 2005

Corporate governance can never be reduced to a set of rules enshrined in the market regulators’ rulebook. It is about attitude towards stakeholders and a sense of equity and fairplay. That is why, young Kumar Mangalam Birla may have headed SEBI’s committee on corporate governance, but has demonstrated little understanding of it in the manner in which he is seeking to acquire Larsen & Toubro (L&T). Similarly Nimesh Kampani, chairman of J.M. Morgan Stanley as member of SEBI’s takeover committee for over five years seems to have mastered ways of helping companies dodge ‘open offers’ and prevent retail investors from getting a fair deal. Let us look at the facts of the deal that Nimesh Kampani has steered. In April 2001, Reliance held 6.62 per cent stake in L&T and was gradually liquidating its holding. By October 1 that year its holding had dropped to 3.92 percent. Then, in four short weeks, the company turned an aggressive buyer and its stake shot up to 10.05 percent. This sent the scrip price scurrying up to Rs 208.50. Its last purchase was on November 15, 2001 and a day later, Reliance claimed that Nimesh Kampani approached it with an offer from Grasim to buy its entire holding. The deal was struck on November 18 and the price fixed at Rs 306 per share—a hefty 47 per cent premium to the already inflated market price. Reliance also agreed not to buy L&T shares for the next couple of years. L&T’s ‘professional management’, curiously welcomed this change and swiftly replaced the Ambanis on its board with Kumar Mangalam Birla and his mother. SEBI launched an investigation into charges of price manipulation and insider trading which remains incomplete a year later. All it did was to slap a puny fine on Reliance for breaching the disclosure rule under its takeover code. In fact, when the L&T scrip was on a demonic bull run, SEBI did not even bother to investigate the price rise until the Investor Grievances Forum (IGF) lodged a complaint. Soon after the deal, the Birlas clambered on to L&T’s board; since the was identical to Gujarat Ambuja’s purchase of the Tata holding in ACC they called it a ‘strategic investment’ with no change in management control. Naturally, there was no open offer to retail investors at the price paid to Reliance (Rs 306). But the Birlas weren’t content with their 10 per cent holding. They began open market purchases and shored up their holding to nearly 15 per cent. They have now made an open-offer at Rs 190 a share, which is just above their last market acquisition price and in line with the 26-week average price. Legally the deal may be fine (depending on how SEBI interprets its code and past precedent), but in spirit, the Birlas have successfully made a monkey of SEBI’s takeover rules and its pretensions to ensuring a fair deal to investors. So let us see what the main dramatis personae are doing about the offer? SEBI, the regulator has received another complaint from BJP MP Kirit Somaiya who head the IGF. Somaiya makes an interesting case this time. He points out that in all other cases where the disclosure norms were breached, and it affected another industrialist, SEBI’s action were tough. In the Hebertsons case, SEBI held that Kishore Chhabria’s holding beyond stipulated limit was void because it breached the takeover regulations and he had failed to file the statutory declaration. His voting rights for the excess shares were also frozen. In the Bombay Dyeing case when Arun Bajoria’s holding crossed five per cent and he failed to file statutory declaration, SEBI and the Department of Company Affairs (DCA) held that he could not vote on such shareholding and he ultimately sold his shares. In Shirish Finance v/s. Reddy 35 SCL 27 (Bombay) 2002, a Division Bench of Bombay High Court upheld the right of Civil Court to freeze the voting right in respect of shares acquired in violation of the Takeover regulation and held that right to vote on the basis of such shareholding could be restricted by court or by SEBI. Do the rules operate differently in a friendly takeover, especially when the only losers are retail investors? Or are the rules different when they involve the largest industry houses? By the precedent cited by Somaiya SEBI ought to have stopped Reliance’s sale of its shares above the 5 per cent holding. If the Birlas formally take over L&T, its ‘professional management’ loses its clout. But L&T’s professional managers seem most keen to welcome the Birlas and uninterested in the fact that their retail investors feel cheated. What about the financial institutions who hold nearly 35 per cent of L&T’s equity? Despite their substantial shareholding, they raised no objection when the Birlas replaced the Ambanis although they were equally affected by the failure to make an open offer. They now refuse to participate in Grasim’s open offer because the price of Rs 190 is much too low. It is difficult to say if the financial institutions are deliberately playing into Grasim’s hands by staying away from the offer or if they serious about their opposition. Their refusal to participate in the offer only helps Grasim. It allows the Birlas to stagger their acquisition cost and acquire shares when prices are depressed - even if it is after a gap of six months. One institutional chief insists he will be tough. He also says that SBI and the insurance companies have made open market purchases in L&T, which is why the price had touched Rs 190 on Friday. If the price remains at that level or higher, and the open offer gets a poor response, then the takeover regulations provide that Grasim cannot mop up further shares at a price higher than its offer price (Rs 190) for six months after the closure of its public offer. This will prevent it from using the creeping acquisition route to increase its holding for sometime. The institutions, I am told, are also willing to consider a counter offer, provided another buyer is willing to offer a substantially higher price. Who could make such an offer? The public sector Bharat Heavy Electricals Ltd (BHEL) could queer the Birla pitch by making such a counter offer. It could even sell the cement division to the highest bidder. Although this is the reverse of PSU disinvestment, the government could use it to signal that they will not stand by allow big industry houses to short change retail investors. Otherwise, it makes little sense for the Prime Minister to kick off an Investor Awareness Programme from the Vigyan Bhavan next month.
-- Sucheta Dalal