Mumbai, March 22: A high-powered industry lobby plans to approach company affairs minister K Ramamurthy over introduction of shares' buyback to protect promoters, say sources.There is a strong lobby, comprising individual entrepreneurs close to the ruling party and industry-chamber top-notchers, which seeks to immediately introduce buyback of shares so that promoters are protected from huge open- offer bids against their managements.
It is believed that the recent spate of mergers and acquisitions has alarmed the promoters of long standing, who have been itching to get protective legislation on the issue pushed through.
It is believed that these industrialists have already got in touch with the finance-ministry bureaucrats and informally convinced them of the immediate need to introduce buyback as a counter-point to the takeover code.
A number of the industralists are believed to be close to the BJP, and have already been in touch with the party leadership on the issue. It is believed that they havealso been discussing the issue with former finance ministers Manmohan Singh and P Chidambaram.
Draft legislation on the subject is already available, it has been pointed out by the industrialists, because detailed provisions for buyback have already been incorporated in the Companies (Amendment) Bill, 1997.
Corporate circles are sizzling with a new debate on promoters' use of company money. Forever free: that is what the local promoters would like to be, with the help of their respective companies' shareholders funds.
The crucial issue that has emerged from the rush of mergers and acquisitions as well as recent intra-corporate group manouevers is whether and to what extent the country's law allows the perpetuation of promoters' control through the use of company money, and whether it is possible to extend this law further to allow promoters more flexible use of company funds in their defence.
The issue has risen like a phoenix above the more micro-debates about the specific issues of financialvalidity of the huge India Cements open offer at Rs 300 per Raasi Cements' share, the whole issue of insider trading in case of HLL, or the propriety of the Tatas charging royalty for a brand that has grown with the respective Tata companies anyway.
The following cases are being discussed in the course of the raging debate on the extent to which promoters can use funding muscle of their company to defend their position as chief shareholders of the company:
The India Cements open offer on Raasi Cements and the consequent battle of Raasi Cements against the takeover code itself. The Tatas charging of royalty from Tata companies to strengthen the Tata brand name. Hindustan Lever choosing to buy Bond Lipton shares a month before a merger announcement and extinguishing those shares afterwards, in the process maintaining 51 per cent control of common parent Unilever Plc in the merged entity.The problem that is sought to be addressed through this debate is that in the process of usingcompany funds the promoters will use the funds that actually belong to other shareholders to perpetuate their control.
The India Cements open offer for 20 per cent of Raasi Cements stake: In this case, Raasi Cements promoter has thrown open a wider debate by challenging the validity of the takeover code itself in the absence of a buyback mechanism that in international capital markets allows companies to buy back their company's shares once their board agrees to do this, thereby reducing the floating stock that can be mopped up by a raider.
Raasi has gone to the extent of taking the Securities & Exchange Board of India and the union finance ministry to court over the issue.
In the Hindustan Lever case, the directors have been sought to be penalised for a share transaction with knowledge of unpublished price-sensitive information, which used the company's money to perpetuate the 51 per cent control of Unilever Plc over the merged entity formed by the merger of HLL and Brooke Bond Lipton IndiaLtd.
Company sources have pointed out in the past that although the company's money was used to buy eight lakh BBLIL shares by HLL, at least 51 per cent of this money, in proportion with its shareholding in the company, did belong to Unilever. The fact that the acquired shares were extinguished later shrunk the equity base of the company, thereby increase net asset value per share and earnings per share not only of the HLL shares held by Unilever, but also those held by other shareholders.
The most interesting case is that of the Tata brand equity fund, and the recent issues of equity shares to group companies on a rights basis by the Tata group holding company, Tata Sons.
The case is most interesting, say experts, because without any direct trading in shares, funds of group companies are being held to strengthen the Tata name, and therefore the standing and position of the promoters. This in no way contravenes the law, but probably provides a route to local promoters on how to use shareholders fundsfor strengthening promoters hands within the law, say experts.
It is interesting to note that the Tatas hold very low stakes in key group companies. For example, in group steel flagship Tata Steel, the Tatas hold a mere 15 per cent equity directly. Yet, by dint of this small stake, the group holding company has drawn upon the fund reserves of the company through rights subscriptions to Tisco's own holdings in the group company, and proposes to further tap this reserve through brand royalties against use of the Tata name.
The basic debate, of course, is expected to be over as soon as Ramamurthy manages to pass the Companies (Amendment) Bill, 1997, which can accommodate buyback, or institute it first-up through an ordinance. In that case, companies will have automatic access to shareholders' funds to defend the positions of promoters: not quite the same thing as promoters themselves having access to the funds to protect themselves, but close enough.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
