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The corporate transformation
THE RECENT TRANSFER of a 10 per cent stake in Larsen and Toubro (L&T) from Reliance to a company belonging to the A.V. Birla group has been remarkably free from the bitterness that visited Reliance's controversial acquisition of those shares more than a decade ago. At that time the Indian financial institutions who were - and still are - the principal shareholders of L&T joined hands to prevent the Ambanis from taking control of the professionally managed company with no identifiable promoter group behind it. The A.V. Birla group says it is forming only a strategic alliance with L&T to exploit the synergies from their common activities, notably in cement. For Reliance, which has booked a large capital gain, striving for a larger control over L&T might have less appeal today than it did a decade ago.
Explanations such as the above are valid and find acceptance today only because the Indian corporate environment has been undergoing a profound transformation. The liberalising influences of the reform era have been felt in areas such as corporate law and capital market regulation. A takeover code to legally address merger, amalgamation and takeover issues, was put in place in the mid-1990s. Radical changes in investment rules both for domestic companies and overseas investors (of different kinds) have accompanied changes in the relevant macro-economic policy framework. There has been, for instance, considerable relaxation in the stock market and foreign exchange rules to accommodate the new capital flows from abroad. Obviously, the transformation is by no means final. But even at this stage the important message is that there is a relentless and unprecedented challenge to the forces upholding the status quo. It follows that the near axioms on which the Indian corporate edifice has been built are no longer sacrosanct.
Control over a corporate is one of the basic if key areas awaiting a redefinition. Historically, most industrial groups have owed their success to the regimented economy, with the ability to secure a licence being more important than managing an enterprise. In a capital-scarce economy, the development financial institutions liberally sanctioned loans to promoters who often could set up large projects with low equity stakes. Even specific requirements such as the stock exchange listing rules encouraged promoters to hold only a minority stake. Although having more than a hundred years of stock market tradition, there never was any need for policy to regulate or stimulate the markets for capital formation.
Along with the start of the reforms came the recognition of the stock markets by both policy-makersand investors alike. The challenge to promoters with less than majority stake which came sporadically in the early 1990s has since accelerated. And as the L&T share transfers show, there can be a happy denouement as well. Delivering shareholder value, a key tenet of corporate governance in the West, flows from control and is entering the Indian mainstream too. Note, for instance, how corporate raiders of VST, GESCO and Bombay Dyeing fashioned their sales pitch in their open offers to the non-committed shareholders of these companies. The same logic is behind the race to acquire Forbes Gokak. A relatively unknown Mr. Pawankumar Sanwarmal has taken on the might of Shapoorji Pallonji. In the next phase, there could be manifestations of shareholder activism which in the U.S. has ousted the CEOs of top companies, such as Coca Cola and Lucent. Promoter groups, however, have found sustenance in some Government measures. Share buyback, creeping acquisition and permission to hold substantially higher stakes at the inception stage itself are all in the rule book. Ultimately, it is not a question of just rules but how to adapt to the larger environment.
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