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S. Vaidya Nathan

AS the drama unfolds with each passing week, the fate of the cement business of Larsen and Toubro appears to be increasingly getting uncertain. For a company that has been planning this de-merger for almost three years now, passing the buck to a credit rating agency for evaluation now appears to be an exercise in futility.

Surely one has reason to expect L&T's professional management to know the right kind of price at which stakes in the de-merged cement company have to be offered to the strategic investor. Nor are the two divergent proposals from Commonwealth Development Corporation (CDC) and Grasim before the board (refer related article in this column in the edition dated February 9) complicated to evaluate and take a decision that would maximise the interests of all shareholders.

But ICRA is now to study the proposals of CDC and Grasim. The CDC proposal is to invest in convertible instruments of the de-merged company and get a 6.8 per cent share in the equity 18 months later. This has been before the L&T board for around eight months now. Grasim's proposal is for a demerger, in which the entire equity stake in the new company would be distributed to all the extant L&T shareholders. This would definitely enable Grasim walk away with control in the de-merged cement business at a low price. Quite clearly, a demerger of the cement business and the use of competitive bidding for the controlling (or the proposed strategic 37.5 per cent) stake appears to be best way out.

What additional insight — that could make a significant difference to the route that maximises value for shareholders — would be brought to table by ICRA is difficult to fathom. It may at best offer an external basis for a particular choice between the two offers on hand (when the two are not exactly among the top options).

The only party which would be happy with this denouement is Grasim. Even if ICRA takes at least one-two months, Grasim may be well-served.

By then SEBI's decision on the now-stalled open offer may become clear. In fact, in the past week, the SEBI Chairman, Mr G. N. Bajpai, has indicated that a decision is soon likely on this issue. Once the open offer is through, Grasim would be even more powerfully placed to call the shots with a stake of around 36 per cent.

Then whatever limited, independent clout the financial institutions have may not count much. Nor would the professional management of L&T be able to do much to counter any active Grasim proposals regarding the cement business — foremost of which may be to stall the demerger and offer a stake to a strategic investor.

The indications of differences of opinion in the board about the nitty-grittys of the two proposals are not surprising. But what is indeed so is the hesitation to proceed with the demerger and the offer of strategic stake through competitive bidding. Since there would be no violation of target company obligations under the Takeover Code, the lack of a concrete decision cannot but be viewed with disappointment by the shareholders.

This is the second major instance of a professionally-run company and its board failing to stand by shareholder interests. The first was BSES, where the Reliance group got through with two open offers to up its stake to 58 per cent almost without paying any premium for control. The BSES board, at no point, deemed it fit to come out and say objectively what it thought of the pricing of the open offer.

The L&T board too has failed in this regard as far Grasim's open offer at Rs 190 per share goes. By placing shareholder interests in jeopardy by dilly-dallying on the demerger of the cement business, it has added another negative element to the manner in which the takeover threat is being handled.

Sure enough, if the board takes a concrete stance on these two issues — the unattractiveness of the open offer and attractiveness of the demerger and strategic sale — L&T's credibility can only take a positive turn. This would be so even if it means opposition from the two Birla group nominees on the board.

If the L&T board takes such a stance in public, the ball will squarely be in Grasim's court. Having taken such a position, there is also reason to indicate to shareholders that Grasim taking control of the cement business is not a bad proposition at all from a long-term perspective.

The only caveat: The price should be much higher with due premium for control. Here, if the financial institutions, with their stake of around 36 per cent, collectively see themselves in a position "akin to promoters'', they may get a good deal for all the shareholders. In a fairly straightforward situation, the reference to ICRA may only serve to strengthen Grasim's hand at the expense of L&T shareholders.

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