The Companies (Amendment) Bill, provides for a company buying back its shares, the ratio of debt owed by the company should not be more than twice the capital and free reserves after such buy-back. Sebi wanted the ceiling to be lowered and this has not been conceded by the three ministers' group. However, there are two issues which are not considered but needs to be clarified. One, `free reserve' has been defined to mean those reserevs which, as per latest audited balance-sheet of the company, are free for distribution as dividend and shall include balance to the credit of the securities premium account but shall not include share application money. The question is that since dividend can be declared out of profit can the balance to the credit of P&L account be considered as free reserve? If one goes by the definition, it is certainly the case but the established legal and accounting position is that P&L credit balance is not free reserve. Thus the definition of `free reserves' needs tobe amended.

Secondly the term `debt' has not been defined. The interpretation so far is that the debt-equity ratio should not exceed 2:1 but the term used in ordinance is `debt' and even current liabilities can be covered under the definition of debt. What seems to be intended is debt-equity ratio of 2:1 but it needs to be properly defined. The requirement is that after the buy-back, the ratio of debt owed by the company should not be more than twice the capital and its free reserves. The point is for what period? The ratio of 2:1 is to be maintained for one day after the buy-back or one year after the buy-back. The time limit needs to be clearly mentioned.

Hotel industry

The Asian crisis and consequent depreciation of their currencies, could not have come at a more inopportune time for the already reeling hotel industry. International tourists have started opting for decidedly cheaper holiday options in SE Asia, a fact which is clearly reflected in the dwindling tourist arrivals. In facttourist arrivals during the period for April-October 1997-98, has actually dipped 0.03 per cent, against a 3 per cent growth recorded during the same period of the previous fiscal year.

No wonder then, that the PM's advisory council of trade and industry, has decided to give some sops to the beleagured industry. The council has mooted industry status to the hotel and toursim industry and allotment of government land at concessional rates. But, perhaps the most significant proposal of the council is the consideration to abolish or reduce (as the state government might find fit) the luxury tax.

If implemented, it would take care of a factor, which has been the main bone of contention for the hotel industry. Especially since the 1980's, hotels have had to contend with an expenditure tax on all services provided by the hotel, be it a mere telephone call or a haircut. This although lowered by Dr Manmohan Singh, was followed up with a `luxury tax' levied by some of the state governments. All of which only ledto inflate the final bill of the guest. Thus while taxes across Asian countries vary in the region of 3 to 6 per cent, Indian hotels charge a seemingly obscene 40 per cent to their guests. All of which has only worked to further remove the sheen from India toursim and consequently the hotel industry.

In this regard the abolishment or reduction of the luxury tax would definitely help. In fact this coupled, together with the bestowment of a core sector status which would bring along the subsequent income tax benefits, should undoubtedly help.

Mahindra Ugine

After much speculation, Mahindra Ugine (MUSCO) is finally in talks to hive off its steel division into a seperate joint venture with Spain's largest alloy steel manufacturer Sidenor. MUSCO, like most of the companies in the alloy steel industry has been hit by the recession in automobile industry. Alloy steel is normally used in manufacture of crankshafts, axles, connecting rods, gears, etc.

Rather than a complete sell off of the division, ashas been the market expectation, the company is now planning a 50:50 joint venture. There is very little that the shareholders stand to gain from the deal. The steel division was the main reason for mounting losses of the company and needed to be completely removed. A joint venture would mean that the MUSCO will either have to give its assests as part of the equity, or will have to contribute by way of cash payment for equity. The balance-sheet size will not shrink as holding in JV will be reflected as investment which is unlikely to earn returns. The only advantage is that loss will be lower.

Around 70 per cent of the company's turnover is from the steel division, while the remaining comes from the stamping unit acquired from M&M. The company recorded an operating loss for the first half of the current fiscal. By hiving off the division to the joint venture, only the stamping division will remain, which serves the automobile segment. The company will have lower overheads in the stamping unit, however, itsreturns too will be lower. In such case servicing the huge equity will be the main problem, which in any case the company is not able to do.

Tailpiece:

The cheaper option for Tatas to hike the stake to 20 per cent (from 17.33 per cent post-rights and preferencial issue) is to pick up rights renunciations (in all probability the option would be exercised) is to pick up rights renunciations. The renunciation price will have to be lower than the difference between market price and rights price. This will be the cheapest way to hike the stake through creeping acquisition route.

Emcee (With contributions from Urmik Chhaya, Percy Dubash and Shishir Asthana)