Won't help investors

Kumaramangalam Birla's long-awaited decision to restructure his companies has been kicked off by the transfer of Indian Rayon's cement operations to Grasim Industries. Shareholders in Indian Rayon will be alloted shares in Grasim as compensation for parting with the cement division. Investors, particularly foreign institutional investors, had for long said that the lack of focus of the Birla companies was a stumbling block for investors, resulting in a lower discounting on the bourses. The theory behind that is investors wanting to invest in a particular industry, say cement, do not like the idea of being forced to invest in other industries, say VSF, as well. Received wisdom says that this is the reason why conglomerates get a lower discounting. Add to that prevailing theories of core competencies, and the rage is all for focused companies. How far this translates into practice is another matter, and companies like GE, with their excellent management, have proved to be exceptions. Nevertheless, while thevaluation of Indian Rayon's cement operations will obviously be a critical factor, clearly the group has tried to accomodate investor sentiment. Will the move lead to greater efficiency? That is doubtful, since the group already has a management structure in place under which particular managers oversee particular industries. Cement units have to cater to regional markets, and consequently economies of scale are also not available here. Given the depressed status of the cement industry, shareholders may not benefit immediately from the restructuring. In any case, shareholders have for long known that in India, investing in companies actually means investing in groups. Nevertheless, there is no doubt that the markets are finally forcing a change in the way corporate India operates, a change which will force companies to utilise capital more efficiently.

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