The move may be controversial as it comes in the midst of an open offer from the Patels-controlled Autoriders. Apart from a legal challenge by Autoriders, the Bombay Stock Exchange may take up the question of whether full disclosure requirements were complied with.

A 5 per cent-plus stake each has also been issued on a preferential basis to FL Smidth and an offshore fund, Industrialisation Fund for Developing Countries. The two have been issued 19,05,300 shares each.

The fresh issue of shares was made after the company’s board of directors cleared the preferential allotment onMarch 11, just a week before the Autoriders group formally made an open offer for a 20 per cent stake in Saurashtra Cement at Rs 70 per share. (The Mehtas’ earlier refrain used to be that they held a 50 per cent stake in Saurashtra Cement, which marketmen were sceptical of. However, after the preferential issue, the Mehtas’ stake must have gone up overwhelmingly, sources say.) Although the company has informed the Bombay Stock Exchange about the equity placement to the overseas investors on Tuesday (April 7), the exchange was not yet very clear on whether full information had been intimated about the preferential allotment of the bulk of the new shares to the promoters, BSE insiders said.

The predators, Autoriders Industries, have cried foul. When contacted, merchant bankers of the company said that the share allotment was in gross violation of norms and procedures. “Autoriders had purchased 9.5 per cent of Saurashtra’s equity on March 2, and Sebi was duly informed about the deal the same day. Reportsabout a possible open-offer appeared soon thereafter. The chronology of events clearly suggests that a preferential allotment at this juncture was a fraudulent transaction violating the spirit of corporate governance, said sources close to the Autoriders group.

Saurashtra Cement has, however, claimed that the company has adhered to all necessary regulations but refused to divulge more details on the preferential allotment as the matter was sub judice. BSE has been informed as per the disclosure norms in the takeover guidelines. However, in view of the ongoing legal proceedings, the company does not consider it prudent to share information when the matter in pending before the Hon’ble High Court,” sources close to the company said.

The company also said that “the equity offering was in pursuance of the authority delegated by the shareholders to the board at the company’s annual general meeting last December.

As per clause 30 of the listing agreement with the stock exchanges, not informing the exchangeabout such developments would mean violation of the agreement. This could lead to suspension of the company in the first place and later delisting in the extreme case if the company fails to provide a satisfactory reply to the exchange's queries.A similar violation would also be presumed if it is found that the company has not informed the exchange in adequate detail about the hike in the promoters' stake as well.

Merchant banking sources said: "It is not proper for a company to pass an omnibus resolution seeking permission of shareholders to make any addition to the share capital, and then simply going ahead with issue of such new shares. For a preferential allotment names of the persons to whom the allotment is being made have to be revealed to the exchange and therefore to the investors." It is believed that such information has also to be given to the securities watchdog.Moreover, according to the exchange's agreement, the company after having issued preferential shares, needs to approach the exchangefor the listing of the same. Under the given conditions where the company has failed to comply with the listing requirements the exchange would refer the matter to Sebi for its views on the same.According to sources, the first step would be to hold back the application made for listing of the new equity shares and later acting in accordance with the Sebi stand on the same.

Saurashtra Cement has a financial institutions' stake of around 15 per cent. Merchant banking sources said it would be interesting to know what stand the institutions have taken on the preferential allotment, because as a matter of policy the institutions have consistently opposed promoters seeking to hike their stakes in companies through this route (for example, the target of another takeover bid, Alcan, the single largest shareholder of Indal, has not been allowed by the institutions in the past to hike its stake through preferential allotments).

This is the first time that a foreign company that stepped into the fracas that hasbroken out in India's cement sector in the course of what is turning out to be an extended M&A boom.

FL Smidth has a long tradition of contacts with India. It was with the active participation of engineers from FL Smidth that more than 82 disparate cement enterprises in India were brought under the single umbrella of Associated Cement Companies in the 1930s.