Takeover codeThe takeover code, notified a year ago, has so far stood the test remarkably well. Sterlite's bid raised some questions about the minimum offer, but that has been taken care of by the Sebi clarification on the minimum at 20 per cent. Reports now say that Sebi will soon be introducing changes in the takeover code explicitly stating that a 20 per cent minimum offer is necessary, even when the holding goes beyond 51 per cent as a result of the offer. In other words, suppose a promoter has 41 per cent holding, he will be required to make an open offer for 20 per cent, rather than only for 10 per cent--it doesn't matter that, as a result, his holdings will go beyond 51 per cent. The problem with such an approach is that promoters can now increase their holdings via a preferential offer by the S. 81(1)(A) route. There is no minimum offer if a promoter wants to go by the preferential route. Clearly, the minimum 20 per cent rule discriminates in favour of preferential offers. Further,preferential offers can be made to any group, and the person buying the shares through this route realises his objective of acquiring a stake in the business without being forced to make an open offer. The logical solution to the entire issue, while protecting shareholders' interests, is to ban preferential issues.
While the Sebi initiative to allow promoters to increase their stake when they already hold 51 per cent without making an open offer is all right, it should be ensured that this acquisition is made at market-related prices, so that no shareholder is penalised. But so far as inter-promoter transfer of shares is concerned, there may be a case for leaving them alone rather than interfere in the pricing for such deals. This is because promoters have taken the risks involved in starting up the business, and getting a higher than market price for relinquishing control could be one way of rewarding entrepreneurship.
The other point which Sebi needs to think about is rules about stakes being increasedas a result of buy-back of shares. Once buy-back is allowed, one way of increasing stake will be through this route. Rules about when open offers will be triggered in such cases need to be framed.
VSNL: Project Oxygen
Considering that India has assured WTO (World Trade Organisation) of more or less opening up international telephone services by 2004 for private sector participation, it is no surprise that VSNL (Videsh Sanchar Nigam Ltd) is gearing up to take on international competition. Reports indicate that VSNL is actively considering investing close to Rs 1,000 crore (over a period of six years) in the US-based CTR Group's $14 billion Project Oxygen.
This project is a `super Internet' based on a complex 3,20,000 km fibre-optic submarine cable network, scheduled to connect 175 countries through 265 landing points. VSNL (landing party) would terminate and originate traffic coming in and out of India through DoT (Department of Telecommunication) and its own existing network. When completed in2003, VSNL would benefit because the network will support voice and data transmission at super speeds ranging from 320 Gbps (giga bytes per second) to 1 terabit per second.
Sceptics might argue on the wisdom of investing such huge amounts in the above project. But as on date VSNL uses point-to-point submarine cables, with satellites used as backup. Assuming that VSNL would be spending a similar sum in the next six years acquiring capacity on submarine cables, it makes sense to go in for Project Oxygen, which would provide higher magnitudes of bandwidth. Moreover it will also offer total flexibility in routing traffic around the world. At present scouting for additional capacity on submarine cables has become a problem for players like VSNL. This is because the larger players have been consistently muscling out the smaller carriers. If VSNL opts for Project Oxygen it would easily be able to increase its capacity on reaching its bandwith limit.
The project in the future would provide opportunities forhigh bandwidth users like Internet Service Providers (ISPs) and software companies. They can very well start operations on the coastline were the cable will land. This in effect would put to rest, the problems arising out of local transmission problems.
To take on global competition, VSNL would have to transform into a multi-media company in the next decade. This in effect would require higher bandwiths, therefore opting for Project Oxygen would be in its best interests.
Telco
The dilution of its stake in the Mercedes Benz joint venture was in all probability a forced decision for Telco. The fact of the matter is that Telco is currently operating under serious financial constraints. That Telco is strapped for cash is already a well established fact. One only need look at Telco's negative cash generation from operations to understand the precarious financial position.
Further, the period from April-January 1998 has had absolutely no respite for the commercial vehicle segment which has borne thebrunt of the slowdown in offtakes. Telco, as the market leader, has been hit the hardest, with market shares dipping from 50.96 per cent last year to 42 per cent for the nine months to end-December this fiscal. Telco's inventory of finished goods as on September 1997 stood at 19,969 units which is in stark contrast to the figure for September 1996, which was a mere 6658, which simply means that on period to period basis, inventory levels had increased by 300 percent. More importantly though the "Mint"-the small car, unveiled recently still continues to be the largest grey area affecting future profitabilities.
Emcee (with contributions from AG Krishnan and Percy Dubash)
Copyright(c)1998 Indian Express Newspapers (Bombay) Ltd.
