After preaching corporate governance and not even complying with the requirements of Schedule VI of the Companies Act (the manner in which P&L account and the balance-sheet of the company is drawn up), ICICI has taken a very firm step to impose good management practice -- in this case on Lalbhai group.

The swap ratio for Anagram Finance has been fixed at 15:1 (for every share of ICICI, 15 shares of Anagram Finance). The pre-condition for the merger is that certain identified investment companies of Lalbhai group would bring in Rs 125 crore. In ITC Classic deal, ITC subscribed to preference shares worth Rs 350 crore. Though the coupon was very nominal but preference shares have to be redeemed that is on redemption the funds will be returned to ITC. No such option is available to investment companies of Lalbhai group. Why is it so? Worse (for Lalbhai group), any potential loss in retail portfolio of Anagram to the tune of Rs 100 crore will have to be funded by Lalbhai group.

Doesit mean that no concurrent audit to arrive at a true worth of assets has been done or the future of Anagram was so bleak that the group was willing to pump in Rs 225 crore to get rid of the company? The first point can't be correct because the swap ratio will build in any asset-liability mismatch. The desperation, if at all, could be the result of lease portfolio which accounted for 35 per cent of balance sheet as on March, 1997. The government securities account for 7.3 per cent (Rs 69.7 crore). But again, the prospects must have been built in the swap ratio.

According to an official communique, the Lalbhai family has proposed that the shareholders of Anagram Finance should be given an option of opting for swap ratio or their holding will be purchased at Rs 18 per share by the investment companies of the group. The logical conclusion is that no shareholder will exercise the option of swap. Coming from the group, which was forced by FIIs in none too recent past to drop a merger between Arvind Mills andArvind Polycot and diluted equity frequently on which return is yet to generated, this is surprising. The possible reason could be that the group desperately needs investor friendly image and the proposed move will hardly cost anything -- not more than Rs 4.5 crore.

Another point which needs to be noted is that infusion of funds is to cover in part for conservative estimated provision for non-performing and potential non-performing assets. The auditors report for 1996-97 does not have a single material qualification. The best conclusion that can be arrived from auditors report is that profit for the year was overstated to the tune of Rs 1.46 crore. It is impossible to believe that the situation has worsened between July, 1997 and May, 1998 to such an extent as to require funds infusion of Rs 125 crore and a potential pump in of another Rs 100 crore. The director's report for 1996-97 informs the shareholders that the management has made adequate provisions. The conclusion is clear, the shareholders werebeing misled. Worse, even according to auditors the "true and fair view" of the state of affairs was presented. The standard excuse is that statutory audit is not concurrent audit.

For ICICI, the deal could not have been better. It will get a tax benefit in the range of Rs 50-75 crore plus retail network at zero cost. For Lalbhais also it is a good deal as infusing Rs 225 crore (in worst case scenario) is better than pumping funds endlessly (otherwise why sell on such terms?). Unlike ITC Classic shareholders, the Anagram shareholders will get slightly more than what market is willing to pay.

The bottomline is clear. The swap ratio is not the function of only market price. The highest weightage has to be given to discounted cash flow. Hence, when a merger with a stronger company is proposed, simply sell. Everybody can't be an Anagram shareholder.

Cellular licences

News paper reports indicate that DoT has decided not to provide any immediate relief to the cellular operators, in the form ofextension of licence period or moratorium on payment of licence fees. It is logical that the issue regarding the two-year moratorium of licence fees might be sidelined as it would have lead to a revenue loss of Rs 4,000 crore, based on annual estimates. Moreover, the outstanding from both basic and cellular operators during 1997-98 is close to Rs 1,400 crore. Since the government is mulling over the prospect of reducing the fiscal deficit, this issue might be put on the backburner.

But any decision to not provide extensions in licence fee period to 15 years could prove to be detrimental. This is because the seven year maturity loans to telecom projects exerts tremendous pressure on the cellular operators to meet their licence fee obligations. As the licence fee payable is fixed it is apparent that lenders to these projects would be wary. This in effect has put tremendous pressure on the cellular operators to fund their operating losses for the initial four to five years.

Logically, the fixed cost persubscriber is inversely proportional to the number of subscribers. In this scenario, the lenders would have been hard pressed to reschedule a repayment within three years. In the event of the extension not being granted most of the operators would have to wind up. Which again reiterates the fact that the future could well see a spate of trades in telecom licences, quite similar to the Hutchison Max deal.

Emcee (With contributions from Urmik Chhaya and AG Krishnan)