Sucheta Dalal :What's Investor Protection About Anyway? (13 January 2003)
Sucheta Dalal

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What's Investor Protection About, Anyway? (13 January 2003)  

Consider this. We know that Kumar Mangalam Birla’s Grasim Industries has a 15 per cent stake in Larsen & Toubro (L&T) and wanted to acquire 20 per cent more through an open offer. The Securities and Exchange Board of India (Sebi) has stalled the open offer following investor complaints. Investors want Kumar Birla to pay them the same Rs 306 that he paid Reliance Industries, to acquire a block of 10.5 per cent of L&T shares in a block deal. But Grasim has offered only Rs 190 per share and is trying to slither through a loophole in the takeover code claiming that, since it waited a whole year before it made the open offer, it need only offer the average high-low price during the previous 26 weeks.

While Birla made his move to take control of L&T, the company’s professional management revived an old plan to demerge its cement business and tried to bring in a strategic partner. To all of us, the L&T move seemed like the classic poison pill — a ploy to make itself unattractive to predator Birla. The L&T management denies this and claims that it is only taking care of the company’s interests and those of its shareholders. Meanwhile, Grasim tells the media that it is really interested only in the cement plan and quickly offers several alternatives to L&T’s demerger proposal.

But here is the catch. The L&T management says that it was the Boston Consulting Group that suggested the demerger of the cement business and the induction of a strategic partner to bring in funds to finance expansion and growth. But although it received several feelers and inquiries, it has only one concrete offer — from Commonwealth Development Corporation (CDC). And although Grasim’s alternative offers and revisions are splashed on the front page of business newspapers, none of these offers have been conveyed to L&T. In fact, the L&T board has not discussed the CDC proposal either, say L&T sources.

Media reports suggest that all the discussions and proposals by Grasim have been made only to financial institutions (FIs) that hold 40 per cent of L&T’s capital. Newspapers have reported several proposals from the Birlas with different valuations. Recent reports suggest that the Birlas want a vertical split of L&T with shareholdings of the split company remaining in the same ratio as in the main one. Then Grasim would buy out the institutions’ shares, make an open offer and acquire control over the cement company, which is its main interest. It has also offered to divest its entire holding in the main L&T by swapping shares with the FIs.

It must be noted that a vertical split has several problems. L&T’s demerger plan would have allowed it to hold a substantial stake in the profitable cement company and benefit from future price appreciation based on inputs from the strategic partner. A vertical split does not help the parent company and even minority shareholders benefit only to the extent that Grasim purchases their shares during the open offer. If Grasim does a deal with the institutions, then minority shareholders are out in the cold — they could get nothing. Also, the news reports skip the issue of Grasim’s open offer for the main company. If Sebi decrees that they offer a higher price, will Grasim make two offers — one for the parent company and another for the demerged cement company?

That is exactly the problem. Minority shareholders still hold over 35 per cent of L&T shares, but they have no answers and nobody is talking to them. The L&T management did not see it fit to speak to its shareholders even when Reliance sold out to Grasim and two new Birla directors were inducted on the board. And the Birlas are not talking to investors either.

I hear market rumours about an investment bank having hatched the Birlas’ vertical split proposal and hush-hush meetings with the investor action group that aggressively opposed Grasim’s open offer price. However, there are no confirmations and minority shareholders are only confused by conflicting media reports.

This raises several questions. First, has the Sebi code of corporate governance been suspended with regard to L&T? Can FIs, which have nominee directors on the L&T board, conduct their own negotiations with a hostile bidder leaving out L&T’s management and its minority shareholders? Can the FIs negotiate the price and swap deal that benefits them, but leave minority shareholders out in the cold? Can the institutions then, with their significant shareholding and board positions, team up with the Birlas and force a deal on the company?

It must be remembered here that the Ambanis made way for the Birlas on L&T’s board only because FIs called the shots. Top L&T sources say that they gave in because they had no choice. Also, with the Birlas coming in as mere strategic investors, they could not even react as they would have been in a hostile takeover situation. They also say that there was no communication with minority shareholders because there was really nothing to report — one strategic investor (Reliance) was merely replaced by another (Grasim).

What will Sebi do to protect minority shareholders if institutions hustle management decisions again?

The problem is that the corporate governance code does not cover an L&T-type situation. In fact, the role and responsibility of the regulator, various parties to such a deal, minority shareholders and other stakeholders are not even on the agenda of the new corporate governance committee set up by Sebi. That is why good corporate governance cannot be reduced to a precise code where anything that is not specifically disallowed would be considered fair and legitimate. It is time Sebi realises that its corporate governance code will not work in all circumstances, and when the code fails, the regulator needs to step in. Sebi is already conducting a slow and ponderous investigation into insider trading and price manipulation by Reliance and Grasim, and is also investigating whether Grasim has acquired control over L&T in the last year. It now needs to step on the accelerator and complete those investigations and clarify the present situation.

It has to force L&T, Grasim and the FIs to reveal their cards and take steps to ensure that minority shareholders are provided with full and clear information and their rights are protected. The regulator has to learn that investor protection is not about holding grand national seminars but about taking swift and sometimes unconventional actions to protect investors’ rights.

-- Sucheta Dalal