The L&T deal -- Unanswered questions

S Vaidya Nathan

THE acquisition by Grasim Industries of a 10 per cent stake in Larsen and Toubro from Reliance Industries is a deal that has some interesting aspects that merit analysis. Quite a few of these issues reflect the general trends inherent to such deals.

Price run-up: The first aspect that stands out is the ramping up of L&T's stock price in the last two weeks preceding the deal. The stock gained close to 35 per cent. The last three trading days before the deal saw the stock hitting upper circuit filters with heavy volumes.

Even in the futures market, on the day single stock futures trading started, volumes were highest in L&T. The price spurt may be explained by saying that the stock was a value buy. But the big spurt in volumes as well as prices suggest some interested trading in the stock.

Was there any insider or informed trading? There were rumours of L&T bagging a big order in Russia; the cement de-merger was close on hand, and that Reliance would make an open offer. As it turned out, these were mere red herring.

Is it possible that some party was interested in bidding up the stock price before the culmination of the deal? This is an aspect the Securities and Exchange Board of India has to look into. SEBI can get a good idea by getting a comprehensive listing of transactions on the five days preceding the deal, and probing corporate/other linkages of the transacting parties. The possibility of any circular trading to ramp up prices must also be examined.

But such price and volume trends are by no means peculiar to this deal. They are integral to any major corporate action, regardless of the company size. But these have gone largely uninvestigated. SEBI needs to make a beginning and why not from this deal.

Emboldened by precedent: What may be a clear case of `change in control' may now be passed off as a strategic alliance or partnership without attracting the onerous open offer requirement under the SEBI Takeover Code.

The ACC-Gujarat Ambuja deal was the first such, and SEBI ruling that an open offer is not required appears to have set a precedent for promoter groups. The Grasim-L&T deal is not very different. (See related story on Page 7 in the `In Focus' column.)

Such deals may be within the letter of the law, but are they in line with its spirit and spirit? Essentially, what these two cases have shown is the scope for one set of investors to benefit in a big way.

The Tatas in ACC and Reliance in L&T have extracted fancy prices. But other shareholders have not been able to participate in a manner that will befit the market for corporate control.

Acquirers of stakes in such deals now need to just wait for three years in order to rise to the status of promoters. After that they can pretty much do what they want and also use creeping acquisition limits to push up their stake.

The only silver-lining from the market's point of view for corporate control is that there are very few companies of the ACC/L&T kind with low promoter holding, and without an identifiable promoter group.

Lack of disclosure: This deal also showcases the manner in which companies prefer to be economical about important issues that could concern the shareholders. First Grasim. Shareholders will understand its silence on plans for L&T. It will not do or say anything that could invite the `change in control' trigger. If that happens and leads to an open offer requirement, it could prove expensive for Grasim.

But shareholders are entitled to know how the company plans to bankroll the deal. Will this deal mean more debt? If so, the implications for profitability? And are there plans to replace the debt with equity? These are two price-sensitive issues. The company will not have much to lose by detailing this aspect of the deal.

As for Reliance Industries, the management has indicated two key aspects: One, how the group has built its own project management skills and sees no need to involve L&T in its scheme of things. Two, the view that the stake in L&T has been sold to unlock value in investments made by the company in the interest of maximising shareholder value.

But the company has been silent on more relevant aspects for the shareholders: What will it do with the huge one-time cash inflow? Will it be returned to shareholders by way of a one-time special dividend? Or, does the company plan to re-invest in its own business and if so, can it at least deliver returns a shareholder can manage in his own capacity? Has the stake sale been triggered by the need to shore up cash resources, what will the company making major investment plans for IT and telecom?

But both Grasim and Reliance have preferred to remain silent on all these issues. This is in keeping with the general trend in India Inc where there are only a few exceptions as far as quality and breadth of disclosures go.