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S. Vaidya Nathan

WILL the Securities and Exchange Board of India (SEBI) order Gujarat Ambuja to make an open offer at Rs 370 per share for ACC? It well may do so. But it may not have the last word, as Gujarat Ambuja may contest in higher legal forums any order directing an open offer.

The current review by SEBI of its original decision — that there was no change in `control' and, therefore, no need for an open offer — was triggered by a stinging directive by the Securities Appellate Tribunal (SAT) to this effect. SEBI as well as the Gujarat Ambuja group, the Tata Group and ACC have relied on narrow technical grounds in taking the view that there was no change in control.

An added dimension that has enhanced the importance of the SEBI review is the likelihood that the ruling in this case will have a direct bearing on the Grasim-L&T case (see related story on page 8 in the column `Eye on the market').

Go for open offer

Here are ten reasons why SEBI should order an open offer on the trigger of `change in control' and fight the battle in higher legal forums if needed:

For all the points made by the Tatas/Ambujas that the Tatas did not have control over ACC (and, therefore, the Ambujas cannot be in a superior position to what the Tatas themselves enjoyed), the ground reality has been different. ACC may be a professionally managed company but the Tatas did have a say in its policy-making.

Witness the diversification of businesses by ACC, and one cannot miss the Tata hand. They ventured into tyres and glass — totally unrelated businesses for ACC — when joined with other Tata group companies in a joint venture involving Bridgestone and Floatglass. The coming together of ACC with Tata group companies would seem to suggest that this is a case of co-ordinated group behaviour rather than just coincidence.

On the day Gujarat Ambuja took the initial 7.2 per cent stake of the Tatas at Rs 370 per share, Mr Anil Singhvi, Executive Director (Finance), Gujarat Ambuja, had said "... over a period of time, ACC shall be focussing on cement alone" (meaning it would gradually exit other businesses, which it is doing).

Significantly, till this ownership change came about, there was no talk of ACC getting out of non-core businesses. If the Gujarat Ambuja group did not expect to have a controlling say over ACC's affairs, how could it have indicated its plans on clear policy matters of ACC.

In the price range of Rs 130-150, within which ACC has traded for a long time now, the stock is overvalued on fundamentals. When Gujarat Ambuja took over the Tata stake, ACC's fundamentals were shakier. To pay a price of Rs 370 per share in such a context was irrational if Gujarat Ambuja did not have an eye on control. Here, too, what Mr Singhvi said on the day of the deal is significant.

Queried whether the valuation of Rs 6,000 per annum tonne was against Gujarat Ambuja's view of Rs 2,000-2,500 per annum tonne, his response was: "That (benchmark) does not hold good when it is for a 12 million tonne company.

At one go we will have a presence in the entire country". Note the "we".

The `strategic alliance' posture adopted by the two is clearly a façade to avoid the `change in control' trigger.

The SAT has made a telling point that if the Ambujas and Tatas wanted a strategic alliance between Gujarat Ambuja and ACC, they could push through the proposal only if they had decisive control over the boards of the respective companies.

The thrust of the strategy since Gujarat Ambuja picked up the first tranche of its 14.4 per cent stake from the Tatas in December 1999 seems to be to allow a three-year period to run out. This would happen sometime in mid-2003. Once this happens, the SEBI Takeover Code does not prohibit a shareholder in the position of Gujarat Ambuja from taking the `position' of promoter.

Then other options, such as creeping acquisitions and market price linked open offers, would be possible, and stake can be shored up at a much lower price than the Rs 370 per share paid to the Tatas. Of course, one can expect Gujarat Ambuja to deny any such designs. But rational behaviour and the prohibitive cost of the open offer at Rs 370 per share are aspects SEBI cannot ignore.

The presence on the board of two Ambuja group directors (including its promoter) also cannot be ignored as it offers Gujarat Ambuja an opportunity to know, and even spike, any efforts hostile to its interests.

ACC and Gujarat Ambuja have long held that there is no impact at the operational level. But ACC's aggressive marketing approach, the sharp rise in volumes ahead of industry levels (it used to lag earlier) and the steady improvement in operating efficiency are all approaches that Gujarat Ambuja has been renowned for. SEBI should look into how the two work at the ground level.

SEBI could also draw on the fact that, in the Grasim-L&T case, the L&T cement de-merger proposal (pursued actively by L&T) was given a quiet burial once Grasim picked up the Reliance stake. This also shows how the dynamics of such deals work at the ground level and it is not any different in the ACC-Gujarat case.

No investor who pumps in Rs 910 crore in a company that was the leading competitor till the other day would adopt a hands-off approach. To believe that this could be for the sake of a `strategic alliance' also goes against the trends in the cement industry, where consolidation has been the name of the game for the last five years.

Strategic alliances also need not involve such large sums of money. That this huge investment would have no pay-off for Gujarat Ambuja unless there is eventual control is something SEBI cannot ignore.

In its order, SEBI has taken the view that one can be a promoter and yet not have control. But SEBI has not explained how this is applicable in the instant case. In various documents over the years, where ACC was required to describe its evolution, it had described itself as having been promoted by the Tatas.

Nowhere in these documents have the Tatas ever said that they were just promoters and did not control the management of the company. So the effective status, passed on to the Ambujas, is one of `promoters' with control.

SEBI should boldly press ahead, even if it means its order, though well-based on ground realities, is rejected in higher legal forums on narrow technical grounds. At least, a strong message would go that the regulator is willing to take a broad view that is backed by reality and act in the interests of investors.

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