Sucheta Dalal :Chhabria vs MallyaR12;a sordid saga ends? (4 August 2003)
Sucheta Dalal

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Chhabria vs Mallya—a sordid saga ends? (4 August 2003)  

The Securities Appellate Tribunal (SAT) on Friday brought the curtain down on a sordid, decade-old battle between Vijay Mallya and Kishore Chhabria for control over Herbertsons Ltd. In doing so, SAT reversed an order by the Securities and Exchange Board of India’s (Sebi) previous chairman, D.R. Mehta, issued in February 2002 during his very last days in office. Mehta had ordered Kishore Chhabria and Vijay Mallya to divest all shares of Herbertsons’ that were acquired by him in contravention of the takeover rules, in the open market and at a price of Rs 10 each. In response to Chhabria’s appeal to SAT, presiding officer C. Achuthan has delivered a sharp rap on Sebi’s (Securities and Exchange Board of India’s) knuckles and has corrected, what can only be termed, past mischief by the regulator. In the process, SAT has also exposed the rot that had set in the regulatory body, which the present chairman is struggling to clean up.

SAT has now ordered Kishore Chhabria to make an open offer to acquire an additional 20 per cent of Herbertsons’ equity within three months at a price worked out with October 27, 1994, as the reference date. It has also ordered him to pay interest at the rate of 15 per cent to those investors who have been holding the shares as on January 25, 1995, and continue to be shareholders. The price at this rate would be approximately Rs 125 per share. The open offer could finally give Kishore Chhabria control over Herbertsons’ unless Mallya pulls out some more tricks to prevent a closure to the takeover battle.

In order to understand the story, one has to go back to 1993 when Kishore Chhabria walked into Herbertsons’ with a 27 per cent stake at the invitation of a cash-strapped Vijay Mallya. He gradually shored up his holding to anywhere between 43 or more causing Vijay Mallya (who held a 30 per cent stake) to worry about Chhabria’s takeover plans and he launched a massive defence. Over the next 10 years, the takeover battle, was fought mostly in Sebi’s files. It involved much mud-slinging, leak of documents, disappearance of files, efforts by jurists to coach Sebi’s senior officials and a confusing raft of opinions from India’s best known legal brains strongly supporting both sides to the dispute—all with the intention of delaying a decision. Sebi clearly supported the delay because it made no attempt to close the case until the end of February 2002.

Initially, Chhabria’s acquisition of a 10.9 per cent stake had avoided the need to make an open offer by saying that his acquisition was covered by the 1994 takeover rules. He supported a slew of legal opinions to support his stand, and even the SAT upheld his contention. However, in May 1996 Sebi asked Chhabria to make an open offer and followed it up with a show-cause notice to him in October 1996 for failing to comply with its orders. Around then, Vijay Mallya seems to have realised that Chhabria had acquired another 9 per cent of the equity before February 1997, and some more after the new takeover code became applicable.

On December 31, 1997, Sebi chairman D.R. Mehta, again ordered Chhabria to make an open offer, and Chhabria promised to comply. The open offer would have given Chhabria control over Herbertsons’ in 1998 itself. Naturally, Mallya put up a big fight. This apparently took the form of some strange dealings by the regulator, which saw Chhabria’s January 20, 1998, letter to Sebi agreeing to make the open offer, being sent to Vijay Mallya as an investor complaint. Mallya reacted with a legal opinion from Justice P.N. Bhagwati, which said that Chhabria should be asked to divest his holding, rather than make an open offer, since his acquisition was in contravention of the takeover code. If that were not enough, the Herbertsons’ file in Sebi was declared lost and a new inquiry was instituted to re-examine the issue.

What made Sebi’s actions seem mischievous was that both sides to the dispute had all the documents, minutes and even Sebi’s own internal notings to enable the file to be fully reconstructed. In August 1998, a Sebi divisional chief concluded that both Chhabria and Mallya had violated the takeover code and recommended their prosecution along with the imposition of a penalty.

Even as the warring sides flung more mud at each other and the jurists wrote out their respective legal opinions, the matter landed up at the Finance Ministry. In the meanwhile, Sebi forgot that it had asked Chhabria to make an open offer and continued to fire new questions at him. Finally, in February 2002, D.R. Mehta overturned his own earlier order and demitted office after making the controversial decision that Chhabria should now divest nearly 38 per cent of Herbertsons’ equity (36 lakh shares) in the open market at par value.

In overturning Sebi’s decision on last Friday, Achuthan says, ‘‘One need not be a market expert or financial wizard to gauge the adverse consequences of offloading such a huge quantity of shares in one go at such a price for sale in the open market’’. He notes that this would only cause Herbertsons’ market capitalisation to erode and destroy the value of small shareholders holdings. Far from protecting investors’ interest, Sebi’s order would neither benefit them nor the securities market.

SAT also wondered why Sebi passed such an ‘unprecedented order inconsistent with its past practice of directing acquirers to make post-facto public announcements,’ and why it had failed to explain the exceptional stance this time. More importantly, the order did nothing to settle the takeover dispute. So Achuthan notes, ‘‘In my view, Sebi’s direction is not in tune with the objective of the Act and the Regulations and duty cast on Sebi to protect the interest of investors’’.

Clearly, Chhabria will now make an open offer as ordered by SAT. But that doesn’t necessarily mean that the war has been won. Vijay Mallya, if he has the money, can make a counter offer to delay if not defeat Chhabria’s takeover plans. Were that to happen, it would at least benefit minority shareholders.

-- Sucheta Dalal