The Hindu : Grasim's bid to consolidate and SEBI's take-over code

Online edition of India's National Newspaper
Wednesday, Oct 16, 2002

Business

Business - News Analysis

Grasim's bid to consolidate and SEBI's take-over code

By C. R. L. Narasimhan

The take-over code, which has been undergoing periodic revisions to meet the emerging challenges of the market place, has once again been in the news recently. On Sunday October 13, Grasim of the AV Birla group announced its decision to consolidate its shareholding in L&T through an open offer to mop up another 20 per cent of its shares. The announcement was expected and the move straightforward, well within the existing guidelines. However, given the recent history of L&T's shareholding and the fact that the AV Birla group became its major shareholder only in November last year when it bought from Reliance a sizable chunk (10 per cent) of L&T's equity, the latest development will receive greater interest than what a run of the mill acquisition would get.

Needless to add, the following milestones in the shareholding pattern of L&T will be revisited if only to get a proper perspective. More than a decade ago, Reliance's bid to acquire L&T was stalled by the financial institutions. (There was no regulation then, certainly nothing to guide take-overs. Aspects of that enormously controversial move of Reliance were decided by the Supreme Court). L&T, although not coming under any industrial group did have two Reliance nominees on its board until last year when the AV Birla group picked up their 10 per cent plus stake in a pure stock market operation. The Reliance nominees, the Dhirubhai brothers stepped down and Kumaramangalam Birla and Rajsree Birla took their place. L& T continued to be professionally managed, a status which is likely to remain if the indications from the AV Birla group, post-offer are a guide.

However, neither the enormous synergies that the AV Birla Group stands to reap after getting a firmer control over L&T nor for that matter any possible qualitative change in the latter's management that are material to the current discussion on the efficacy of the take-over code in protecting small investors.

What matters are (1) through the current open offer the AV Birla group hopes to increase its shareholding to 34.48 per cent from the present 14.48 per cent (held by Grasim).The open offer is mandatory under the SEBI rules as Grasim's shareholding will cross 15 per cent (the trigger point).

(2) Grasim is paying Rs.190 per share, a price that satisfies the SEBI's formula of 26 weeks high-low and the recently added criterion of the average of share prices for two weeks preceding the date of public announcement. If the offer is fully subscribed the outgo will be Rs.945 crores.

(3) It is in comparing the price which Grasim had paid earlier when it acquired the chunk from Reliance and the balance 4 per cent plus from the market that certain issues crop up.

Grasim paid Rs.306.50 for each share from Reliance last November, Rs.766 crores in all for the 10 per cent stake. According to analysts the cost of acquiring the relatively small chunk from the market has been close to Rs. 195 crores.

(4) The whole point is that Grasim was under no obligation to make an open offer when it became, after acquiring Reliance's shares, a major shareholder. The price paid to Reliance represented a premium for having access to a chunk. Until May this year that price would have been the benchmark: Grasim would have been obliged to make the offer at Rs.306.50 per share. So not only did the company keep its shareholding below the 15 per cent trigger but also ensured that its timing of the open offer was perfect.

(5) Is Grasim achieving its objectives cheaply? Certainly the weak stock market has been a clincher in going for the open offer. The AV Birla group, however, is an excellent company: many MNCs have bought out the domestic shareholders; many have delisted taking advantage of the low stock prices. For the same reason many Indian companies undertook buybacks.

The open offer for L&T is unlikely to lead to a delisting. Hence smaller shareholders who hope for a better price can probably stay on for a possible surge in the stock, which will now be more fully identified with the AV Birla tag. Large institutional shareholders, the LIC (17.42 per cent stake) and UTI (10.34 per cent) do not have such easy options.

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Grasim's bid to consolidate and SEBI's take-over code