Against the spirit of the Code and good governance

Against the spirit of the Code and good governance
Sucheta Dalal

Corporate governance may have been the Indian corporate sectors’ theme song for the last few years, but even the best of our companies do not seem to grasp its nuances. The acquisition of over 11 per cent stake in ACC byGujarat Ambuja Cement is an example.

Good corporate governance is not about the technicalities which may haveallowed Gujarat Ambuja not to make an open offer to buy a 20 per cent ofthe ACC stock from minority shareholders. It is about respecting the spiritof the regulation and protecting the interests of small investors.

Forget the official claims; every investors, stakeholders, supplier,distributor and lender will tell you that Gujarat Ambuja will eventuallycontrol ACC. If the Securities and Exchange Board of India (SEBI), armedwith a legal opinion from Solicitor General Soli Sorabjee sifted throughtechnicalities to declare that it is not a takeover, then there is something wrong the takeover legislation. But that is stating the obvious.

SEBI’s takeover code is a downright embarrassment. The Takeover Committee headed by Justice Bhagwati has become a more or less permanent body, which interprets every new takeover attempt afresh with new loopholes emerging or being plugged every time. One columnist puts it most succinctly when he says, "Since neither the framer of the code nor the implementor is clear on the issue, how can the user be expected to be clear? That is ture, but the ‘spirit’ of the open offer clause is clear. It is provide the exit opportunity as the promoter to the minority shareholders and not promoters to enrich themselves at the cost of thesmall guys.

SEBI’s application of the takeover code has been most patchy and erratic.For instance, the Kishore Chabbria-Vijay Mallya tussle for control overHerbertsons is languishing because neither side is in a hurry to find asolution. In Saurashtra Cement SEBI hurt investors by demanding an openoffer to be made at Rs 30 when the Autoriders Industries bid was at Rs 75.In the bid for Indal it discovered another loophole and looked for a plug.Now there is ACC. SEBI first referred the ACC issue to the Bhagwaticommittee, had it tossed back to it and then went off to the SolicitorGeneral. Soli Sorabjee said that Gujarat Ambuja (GACL) acquisition did notamount to a management takeover. At that time GACL had acquired 7.2 percent of the Tata stake but was committed take its holding upto 14.8 percent. The shares were acquired at Rs 370 each (Rs 455 crore for 7.2 percent) last December. As against this, the ACC share price was Rs112.60 lastFriday, and has never crossed Rs 303 in the last 52 weeks.

If GACL had been asked to make a 20 per cent open offer to ACC’s minorityshareholders at the same price of Rs 370, it would have to fork out anotherRs 1264 crore making the acquisition prohibitive and may have scuttled thepurchase. Hence the need to find a loophole.

Gujarat Ambuja was helped by the fact that the Tatas had created plenty ofconfusion over the status of ACC in the last five years. They had claimedACC as a Tata group company (when they wanted to collect brand equitycharges from it) but ACC’s former Chairman and legal luminary NaniPalkhivala hotly and publicly contested it. He insisted that ACC was anindependent professionally managed company. Gujarat Ambuja has latched onto his claim and used the Tatas inability to push through preferentialoffer to themselves as proof that it was not a Tata controlled company.That is hair splitting. The preferential offer was blocked by FinancialInstitutions (FIs) because it was seen as the Tatas enriching themselves atthe cost of minority shareholders and themselves.

According to SEBI sources, Sorabjee’s opinion stated that GACL’s 7.2 percent acquisition did not amount to a takeover, but that if there is achange in the facts and circumstances of the case, it would have to berevisited and examined afresh. This crucial little detail seems to havebeen ignored.

Within days of the SEBI green signal not to make an open offer GACLacquired another four per cent from the Tatas at the same Rs 370 a share (Rs 253 crores). The sufferers are FIs and retail investors who had oncesubscribed to an ACC rights issue a few years ago at Rs 2000 a share andstill waiting for a revival.

The FIs did make some noises about GACL’s acquisition this time, but havebeen silenced by SEBI. Only Unit Trust of India (UTI) has gone public toendorse the SEBI decision. This is the same UTI which, under pressure fromSEBI, demanded compensation from Hindustan Lever in the alleged Insidertrading case. Also, was UTI influenced by Gujarat Ambuja’s NarottamSeksaria’s presence on its Board of Trustees? Maybe not, but UTI’s publicstatement does give cause for speculation.

Also, when Sorabjee opined that Gujarat Ambuja’s acquisition does notamount to a takeover, ACC’s Chairman was still Shapoorji Pallonji Mistry, asubstantial shareholder of the company and perceived as a Tata man.Immediately after SEBI’s verdict, Tarun Das, the force behind theConfederation of Indian Industry (CII), replaced Mistry. Tarun Das’sappointment is another wonderful irony, because the CII has been floggingthe corporate governance theme for almost four years.

SEBI says that the open offer clause is not triggered in the ACC casebecause the acquisition is under 15 per cent and that GACL is not in aposition to appoint a maximum number of directors. But take at look atother views. After the ACC share acquisition the combined productioncapacity of ACC and GACL at 22 Mln. tonnes makes it largest cementproducing combine in the country.

Writing in the Business Standard Urmik Chhaya says -"Through its audaciouspresentation to the financial institutions, Gujarat Ambuja has almostsought the FIs' blessings to a virtual buyout of ACC". He adds, " Byfactoring in the production capacities of ACC into its own calculations --and, thereby claiming market leadership everywhere -- Gujarat Ambuja hasalmost sought the FIs' blessings to a virtual takeover of ACC". But SEBIthinks differently.

The clever interpretation of the Takeover rules, has again allowed SEBI toignore the very basis of its existence – to protect the interests of investors. Within the year, GACL will have acquired the remaining Tata stake and taken charge of ACC and even the fiction of professional management will slowly vanish. But minority shareholders will remain the losers.

This is one case, where investors can forget about a sympathetic hearingfrom the government as well. After all, the government itself hasreportedly sought a blanket exemption from the operation of the takeovercode when it sells bulk holdings in Public Sector Undertakings to theprivate sector.

Author's email: suchetadalal@yahoo.com