Sucheta Dalal :Tracking Suspicious Movements (23 June 2003)
Sucheta Dalal

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Tracking Suspicious Movements (23 June 2003)  

Two companies dominated the headlines last week. Maruti Udyog’s whose much-hyped success could pump life into the dead primary market; and the Larsen & Toubro (L&T) de-merger, which is more a triumph for investors than for the Birlas.

The euphoric reportage of both events probably reflect the good cheer generated by a massive stock market rally that has pushed the benchmark BSE sensitive index past 3,500. Add to that the vigorous advent of the southwest monsoon and the investors’ cup of joy is truly brimming over.

Kumar Mangalam Birla must be congratulated for salvaging an extremely complicated and avoidable situation with a deal that seems fair to retail investors as well as other stakeholders. He walked into a royal mess when he acquired a 10 per cent stake in L&T from the Ambanis at an expensive and manipulated price of Rs 306. For the next two years, Birla was intent on proving that he has acted within the letter of the law (if not its spirit), and increased his holding through a creeping acquisition to over 15 per cent while offering retail investors a paltry Rs 190 per share in a mandatory open-offer. Institutional investors also opposed the offer and their mop up of L&T’s floating stock pushed the scrip above the Birla offer price to ensure that it flopped.

The deal that has now been hatched by Grasim and L&T still does not give the investors the price that Reliance got, but it is close enough. The combined value of the engineering and cement stock is placed at Rs 291 per share (valued at Rs 171.3 for cement and Rs 120 for the engineering), but in reality L&T may trade even higher. That would give a price of nearly Rs 300 to small investors who were outraged at Birla’s initial attitude. Birla had to up his offer from Rs 130 to Rs 171 in order to make the deal happen.

This would make Grasim the biggest cement company in the country, but at a hefty price tag of over Rs 4,000 crore (Rs 2,200 crore invested in the equity and Rs 1,868 crore of cement debt that it took over) for 16.5 million tonnes of capacity. The enterprise value of the acquisition works out to $79.49 per tonne, which is well above the $74 per tonne that was offered by the Commonwealth Development Corporation (CDC) as well as Birla’s own earlier offer. However, CDC’s offer to buy a 7 per cent stake had not included a control premium that could come from a strategic buyer.

Fortunately, CDC’s interest helped L&T’s minority shareholders get a fair deal; but all that is now history. Kumar Mangalam Birla has bagged the cement unit and extricated himself from a very nasty situation. But it still does not tie-up all the loose ends connected with the sale of L&T shares.

What about Reliance’s role in manipulating the L&T price prior to Grasim’s acquisition? How and why did Reliance sell off and later hike its shareholding to 10.5 per cent in just two weeks so that it could offload the shares to Grasim at a hefty premium? The Securities and Exchange Board of India, which has cleared Grasim’s involvement, is still dragging its feet over that Reliance end of the investigation for over two years. The investment bank that brokered the initial deal was nowhere in the picture for the Grasim-L&T negotiations. When last heard, the entire board of the capital market regulator was to decide on the Reliance issue.

In the meanwhile, SEBI’s reluctance to act against powerful corporate houses continues to have a deleterious impact on the booming secondary market. The events surrounding Digital GlobalSoft’s (Digital) merger with Hewlett Packard (HP) is a prime example. Investors would recall that when Digital announced its merger with HP on terms that hurt non-management shareholders, the stock plummeted 31 per cent in a single day to Rs 350 (June 9, 2003) in intra-day trading and closed at Rs 371. But there was a lot of action preceding the announcement. The Digital scrip that had traded at an intra-day high of Rs 541 on June 5 and had already dropped a curious 5 per cent before Digital’s announcement after trading hours on Friday.

An investigation by SEBI would reveal that some large mutual funds seem to have had great psychic intuition about the merger ratio and had managed to sell off large quantities of stock before the announcement last fortnight. One foreign fund had brought its holding down from a few lakh shares to zero.

While another large fund, which bought the shares, was scrambling to hedge its bets after it realised that it may have made a terrible mistake. A few days later, analysts who attended the company’s analysts’ meet came away bitterly disappointed at the fact that the company was most reluctant to share details about the deal and its implications for the company with them. Then on June 17 there was yet another shocker. The scrip, which had already been moved up from the post-merger low had closed at Rs 388 on a volume of 18 lakh shares when the company made another announcement. It now said that it anticipated a 31 per cent compounded average growth in the consolidated entity right upto FY 2007. On June 18, the scrip opened with an incredible gap of Rs 62 at a high Rs 449.7.

The gap, which again spells insider operations, is among the highest and most brazen in recent times. Clearly, operators in Digital are confident that SEBI will not even wake up to their trading acrobatics.

A furious analyst says: “If the regulator does not become more alert and always needs to be prodded by the media to investigate suspicious price movements, large institutional investors can never operate in this market without insider information”. Surely, the analyst has a point. Wouldn’t the on-line surveillance mechanism that SEBI takes great pride in, have been triggered by the price movement in the Digital scrip on June 17?

So far, SEBI has not initiated any investigation into suspicious price movements purely based on market movements or abnormal trading volumes. And that is a pity. The Indian capital market is enjoying a well-deserved rally, but this is the time when the regulator has to be on red-alert to ensure that investor confidence is not destroyed through reckless manipulation by scamsters and company insiders.

-- Sucheta Dalal