The VST imbroglio: more smoke still

By C. R. L. Narasimhan

The takeover battle for a substantial chunk of VST's equity might has been slowed down by the litigation in two high courts. The Hyderabad High Court has granted a stay. But the active players in the takeover drama, Bright Star Investment, Russel Credit (of the ITC), their advisers and the target company have not won any respite. With Bright Star's bid topping Russel Credit's by a substantial margin, it did look that the battle was drawing to a close. However, fresh developments have complicated the issue. British American Tobacco (BAT), the largest single shareholder in VST, has announced its intention to hike its stake further. The VST board has accepted the proposal. However, government norms on fresh overseas investments in the tobacco industry may stymie those moves. Interestingly, BAT is a major shareholder in ITC also but the relation between the two is such that the latter will not countenance an easy entry for BAT. Assuming, of course, that the Government allows it.

Another, for now, hypothetical question: If at all BAT is allowed to invest, in what form will it park its funds? A preferential issue by VST? Or more intriguingly will it buy out Bright Star at a price to be negotiated but unlikely to be below the investment firm's last bid. If that happens, it will be akin to green mail. Note that Bright Star would have acquired VST's shares at a substantially lower average cost even as its hostile bid and counter bid pushed the VST scrips to its present levels.

The takeover code, of course, is being tested. Whatever happens next will be precedent setting. The role of other significant shareholders - financial institutions and the Andhra Pradesh Government - has come in to sharp focus. The representatives of both took a neutral position when the VST board voted on BAT's proposal. That luxury may not be available to them in the future. Interestingly, all India financial institutions presided over the fortunes of India's No. 1 tobacco company ITC. They may have a less high profile but equally crucial role here.

Any case all financial institutions have played a large but silent role in many blue chip companies. Now that their development character seems diminishing (at least in perception), they can probably think of generating value on investments like these. Urgent ground rules are needed if they have to act fairly. The takeover games, with financial institutions holding crucial if not deciding stakes, will become common.

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Section  : Business
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