SEBI's order directing Sterlite Industries to pay a sum of Rs 221 per share in cash to Indal shareholders who had lodged their shares with the bidder appears to be faulty not only on the basis of its own guidelines but also in content.

SEBI wants payment to be made in cash but Sterlite's offer was not in cash but a combination of optionally convertible preference shares (OCPS) and cash. Hence, there appears to be no basis for the order to make payment in cash.

Another point to be considered is that the guidelines issued by SEBI in 1994 on preferential allotment of shares u/s 81(1A) of the Companies Act clearly state that a specific resolution, and not an enabling resolution, is required for preferential allotment. The same disclosures are required to be made under Regulation 3(1)(c)(ii) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

Sterlite had taken a blanket resolution for preferential allotment and in fact had sought Clarence from SEBI to waivethe requirement of specific resolution which was not granted. When the offer was revised by Sterlite and the mode of payment changed, it had no backing of a specific resolution. The offer was revised after the EGM notice was issued and it was for blanket permission.

Regulation 25(6) provides the option of revising the offer upwards in respect to the price and the number of shares to be acquired. It also specifically states that the acquirer shall not have the option to change any other terms and conditions of their offer.

By changing the mode of payment, Sterlite had violated the regulation and reportedly a similar view taken by Indal was rejected by SEBI. Having rejected it once, SEBI obviously can't take shelter under it. It would, however, be interesting to know as to how regulation 25(6) was complied with by Sterlite.

According to Sterlite management, the offer was revised in terms of price and number of shares to be acquired but yet it does not explain how a company can get away by revising themode of payment when regulation clearly states that acquirer has no option to change any terms and conditions other than price and number of shares to be acquired unless changing mode of payment is not akin to changing terms of offer.

Sterlite does not appear to have had the authority for issue of preference shares as laid down by guidelines of SEBI. Hence, it was perfectly correct in rejecting Indal shares lodged with it.

Titan Industries

The half yearly results for the period ended September, 1998, reflect that Titan has finally arrested the downward slide in profits. Thanks in no small measure to a strong second quarter where net profits stood at Rs 8.63 crore, compared to a first quarter loss of Rs 0.92 crore. One of the truly great Indian success stories appears to be back on track.

Investors would remember the questionable premium brand positionings, diversifications into the branded jewellery business with long gestation periods, huge capital investments and the high cost of funds, allof which had eroded Titan's profitability in the past.

Compared to a negative earnings growth in previous years, net profits at Rs 7.71 crore were up 16.64 per cent. Interestingly, this was achieved despite a dip in the other income component and a higher wage burden. How then has Titan managed this performance?

While a stagnant depreciation charge at Rs 9.93 crore (Rs 9.30 crore) has helped. It is the reduction of the interest burden, which has actually dipped 11.42 per cent to Rs 24.91 crore (Rs 28.12 crore last year), which has helped buoy earnings. But considering, that the company's inventories and receivables management in recent years had left and lot to be desired and also the fact that Titan's borrowing spree in recent years has led to the debt-equity ratio increasing from 1.24:1 to 2:1. How then did Titan accomplish this feat? A logical explanation for this is possibly Titan's reduction in its inventory levels.

But this aside the company's performance on the operational front has also beenimpressive, despite the margins still being pressurised. Sales have improved 10.83 per cent from Rs 185.43 crore to Rs 205.51 crore. Thanks largely to a volume growth in domestic watch sales, aided to some extent by titan's re-entry into the low priced segments with the Sonata and Fastrack brands. Analysts state, that jewellery sales have also displayed a positive growth trend after the company shifted from 18 carat to 22 carat gold jewellery.

However any benefits of low gold prices, were offset against a negative impact on exports. Firstly, due to the SE Asian crisis which robbed the company of a major marketplace. A reassessment of the company's strategy in Europe (which had come in for heavy criticism) also temporarily affected exports. However, a disproportionate increase in expenses created due to the heavy expenditure on marketing and sales promotions, and maintaining and opening new exclusive retail outlets, has created a drain on margins. A fact clearly accentuated by the drop in the operatingprofit margins from 23.87 per cent to 20.47 per cent.

However Titan's return to the profitable ways, is mirrored by a buoyant stock price which had jumped up to the Rs 51 levels. However for the company's trials are far from over, what with the repositioning exercise for its Tanishq jewellery range and its foray into the European watch market yet to yield dividends. More importantly, the analog watch for the lower end of the price spectrum, could also take close to another two years to perfect. Thus in the interim, Titan would have depend of deistical volume growth, while margins could remain squeezed.

With contributions from Urmik Chhaya and Percy Dubash