Grasim's interest in L&T -- Bolstered by a weak precedent

Krishnan Thiagarajan

GRASIM Industries' acquisition of a little over 10 per cent equity stake in L&T from Reliance Industries is likely to be juxtaposed against the 14.4 per cent equity stake acquired in ACC by Gujarat Ambuja Cements in 1999-2000.

With the benefit of hindsight and experience gained from the Gujarat Ambuja-ACC deal, Grasim is likely to structure the deal as a "strategic alliance or partnership". This is to ensure that it does not run foul of the "change in control" trigger for open offers under the SEBI Takeover Code.

But some key questions have come to the fore. Can this deal be allowed to go through in its existing form without attracting the open offer requirement under the Takeover Code? If it is allowed, the Securities and Exchange Board of India would be a doing a grave disservice to a vibrant takeover market.

Whatever the strategic merits and financial compulsions of this deal for Grasim and Reliance Industries, the public/non-institutional investors may once again be left high and dry in this deal.

Besides, whatever the letter of law, do these deals adhere to the spirit of the law, especially in upholding the interests of small shareholders and other non-institutional investors? To what extent can a precedent as the ACC-Gujarat Ambuja deal serve to justify deals of this kind?

The Tatas controlled ACC with a mere 14.4 per cent equity stake. In L&T's case too, there is no clear promoter group with any significant holding. As a professionally managed company with dispersed stock ownership, the only stakeholders expected to have a clear voice in strategic or policy decision-making are the financial and investment institutions.

But it has been customary for these stakeholders to toe the line of the equity holder with the highest stake, irrespective of the overall interest of public and other non-institutional investors.

Following the acquisition of the 10 per cent equity stake, it is apparent that Grasim Industries after this acquisition is slated to assume *de facto* control of L&T and become one of the biggest players in the cement industry (along with Gujarat Ambuja Cement). It has already inducted Mr Kumar Mangalam Birla and his mother, Rajashree Birla, on the L&T board.

Will these actions amount to a `change in control' in L&T, as defined in the Takeover Code, 1997? According to the Code:

``Control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholdings or management rights or shareholder agreements or voting agreements or in any manner.''

Going by the narrow interpretation of "change in control" in the Code, the takeover regulations may not have been breached. But given the dispersed ownership in L&T, it is obvious that with only a 10 per cent equity stake (which may be enhanced to a shade less than 15 per cent over the next three years) and the induction of two directors on the L&T board, Grasim may be in a position to control management or policy decisions, say, the proposed demerger of the cement division of L&T and its timing. If one goes by the spirit of the law in this case, that is the conclusion.

Going by the facts of the deal, the 10 per cent equity stake held by Reliance Industries in L&T could have been termed as "portfolio investment". But by no stretch of the imagination, can Grasim's acquisition from Reliance of that stake fit the portfolio investment category.

If there was no strategic value attached to the Reliance holding in L&T, why would Grasim be willing to pay Rs 306.60 per L&T share, a 48 per cent premium to the market price prevailing on the acquisition date.

In fact, the circumstances show that this deal is a replica of the Gujarat Ambuja-ACC deal. With such a precedent, the only hurdle to the Grasim-L&T deal may be the refusal of financial institutions, holding a 50 per cent equity stake in L&T, to allow Grasim to take control. But their track record suggests that this may not be much of a hurdle.

Grasim may well and truly be in the driver's seat in this mega deal. But has the larger interest of the Takeover Code been served and will the public/non-institutional investors get a fair deal in the process? The answer is a `No' on both counts.

The Pandora's box that SEBI opened by allowing the Gujarat Ambuja-ACC deal to go through without attracting the open offer provisions can only be closed by SEBI acting judiciously and transparently in this case. If the deal is allowed to go through without an open offer, from the shareholders perspective, significant value is likely to be added by Grasim through "restructuring" only over three years. Till then, other L&T shareholders may have to play the waiting game even as Reliance has exited at an attractive price.