The Hindu Business Line : <i>Déjà vu</i> at Gujarat Ambuja

A COUPLE of years ago, the promoters of Gujarat Ambuja Cement Ltd acquired a shade less than 15 per cent of equity of ACC secure in the knowledge that the SEBI takeover regulations get activated only when not less than 15 per cent of the shares of the target company are under one's belt. That they had acquired de facto control of management of the target company even with a less than 15 per cent acquisition surprisingly did not cut ice even with the regulators so much so that the persons taking over did not offer to buy out another 20 per cent of the share capital of the company from other shareholders which otherwise is the norm when the 15 per cent glass ceiling is breached or management control is wrested as a result of a buyout of lesser percentage.

Now Gujarat Ambuja is the target company and the acquirer is the Swiss cement major Holcim, which has acquired 14.8 per cent stake. To be fair to it, it has made no secret of the fact that it has acquired management control of the target company — which as much triggers the public offer requirement as the crossing of the 15 per cent Rubicon does — and has indeed made a public offer. But once again the public shareholders are in for as raw deal because Holcim has offered only Rs 90.64 per share for the 20 per cent follow-up acquisition from public shareholders even though it has paid the promoters of Gujarat Ambuja Rs 105 per share, with the extra Rs 14.36 per share being labelled for good measure as non-compete fee.

As per the SEBI Takeover Regulations, the negotiated price or the six-month average price in the stock exchange, whichever is higher, must be offered to the public provided however non-compete fee to the extent it does not exceed 25 per cent of the offer price as determined above need not be paid to the public shareholders. Thanks to this escape route provided in the regulations, the public shareholders would have been hit yet again.

The raison d etre of the public offer requirement is to enable the garden-variety shareholders to profit from the spiralling share prices in the run-up to takeover. It is common knowledge that when a substantial chunk of shares are offered on a platter, hefty control premium is invariably extracted. The philosophy underpinning the takeover regulations is the public should get — albeit on a fraction of its holdings — the same attractive price including the control premium, which the person in a negotiated deal has got.

Holcim has cleverly avoided use of the term `control premium' and has instead plumped for a euphemism — `non-compete fee'. The promoters of Gujarat Ambuja indeed might have withdrawn from the cement business but for that the non-compete fee must be separately, if not transparently, negotiated and cannot be made a part of the share acquisition price even though the two deals admittedly are part of a common objective — takeover. Because, non-compete fee simply cannot be built into the share price — for it simply cannot fluctuate with the number of shares acquired. .

After all, a fee is always expressed as a lumpsum or as a percentage of something, say, turnover or profit but never as a part of the share price. Consider the facts. Holcim has purchased 20 crore shares. At Rs 15 each, as it were, the non-compete fee translates into a whopping Rs 300 crore, period. It would be ridiculous to suggest that the non-compete fee would have been Rs 300 crore plus Rs 15 had Holcim acquired just one more share.

The truth is non-compete fee is not designed to fluctuate with the number of shares acquired. Indeed it can never be factored into the price of the shares. It appears that Holcim has cleverly woven the control premium that it has paid into the share price under the cloak of non-compete fee. It may also be that Holcim, for all one knows, paid both — control premium as well as non-compete tee — and spread the entire extra amount on the shares acquired as non-compete fee.

In any case, the price paid per share must be viewed as the negotiated price. If this tendency to explain away the control premium by facile rationalisation is not checked forthwith, acquirers may be encouraged to adopt novel appellations if only to keep the public at bay.

SEBI should remove this leeway that enables explaining away the extra payment within the prescribed limits as non-compete fee, which by definition cannot be linked to share price for the simple reason that a non-compete fee, to reiterate, cannot possibly fluctuate with the number of shares acquired.

(The author is a Delhi-based chartered accountant.)

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