Reports say that India Cements has taken a view that by transferring the 39.49 per cent stake owned by Raasi Cement (RCL) in Sri Vishnu Cements to the nine companies promoted by BV Raju, RCL has violated the Companies Act and the Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

India Cements' contention that the companies act has been violated is hard to understand. The issue in all probability is that shareholders' consent vide an ordinary resolution required under section 293(1)(a) was not sought. Points out chartered accountant Jayant Thakur that in the Brooke Bond India Ltd v UB Ltd (1994) 79 Comp. Cas. 346 (Bombay), it was held that sale of shares in a company, even if amounting to a controlling interest, would not mean that it is a sale of an undertaking, or a part thereof, and consequently, no approval of general meeting is required under section 293(1)(a).

In PS Offshore Inter Land Services (P) Ltd vs Bombay Offshore Suppliers and Services Ltd,it was laid down that the test to be applied to determine the authority of the board to dispose of the capital asset without the authority of the general body would be to see whether the business of the company could be carried on effectively even after the disposal of the assets in question, or whether the mere husk of the undertaking would remain after the disposal of assets. The cost of investment accounts for less than 7 per cent of total capital employed and is hardly substantial.

If the statement attributed to "sources close to Sri Vishnu Cements" is to be believed that the open offer is a safe method to acquire shares from persons acting in concert (PAIC), it by itself may be a violation of Sebi regulations. Regulation 10 clearly provides that when the holding of an acquirer together with PAIC with him exceeds 10 per cent, an open offer has to be made. The penalty laid down for violation of the regulations may include criminal prosecution (imprisonment for a term which may extend to one year or fineor both), monetary penalty not exceeding Rs 5 lakh or directives issued under the provisions of section 11B of the Sebi Act.The issue has also raised an interesting question.

Thakur asks, can the transaction in violation of the takeover code be treated as void transaction as is the case for the violation of section 372 of the Companies Act?. The basic point being contended is the price at which shares were transferred. The book value is probably the worst criteria to determine the price. Though not exactly identical, reliance could be made on the BoB v Mahindra Ugine Steel Co Ltd that the material on the basis of which valuation was done should be placed on record of the court and also brought to the notice of shareholders.

Thakur points out that the court will not disturb the valuation on the ground that some other method of valuation should have been used, or some other expert has given a different value, as long as the method of valuation is a recognised one, and has the overwhelming approval of theshareholders. However, allowances must be made for the fact that in the instant case, BV Raju was an interested party on both the sides.

IPCL

IPCL's operating margins have dipped below 10 per cent in the first quarter, down from 22 per cent in fiscal 1997-98 and 31 per cent in 1996-97. The 23 per cent volume increase in the first quarter could not offset the 35 per cent drop in prices, and the company went into the red for the first time in the last five years. Of course, the full effect of the volume increase would be known after the first quarter of 1999-2000, when most of the ongoing expansions in Gandhar and Nagothane would be complete. But with prices falling and no signs of revival, the only measure is cost cutting. Banking on the reduced prices of naphtha, the company expects to save Rs 90 crore this fiscal.

This option was not available last year, as the company's jetty was not ready, and because of the demmurage charges used to offset the cost of lower imports.

The reduction in thecost of naphtha, which is used in cracker in the two old complexes and for power generation in the caustic-soda plant, would help the company in improving the margins in both polymers and caustic soda. In caustic soda alone, the savings in operating cost would be in the range of 10-12 per cent. In polymers, the parity between IPCL and Reliance over the use of naphtha would be restored, and IPCL would be able to match Reliance's margins.

In addition, the shortfall in the company's gas supply in Gandhar from ONGC being restored, the firm would now find operating margins from the new plant quite impressive. Being designed for natural gas, the shortfall in gas supply had made it mandatory for the company to use C3-C5, which is at least four times costlier than natural gas. The timing of the supply has come at the right time, as the ethylene cracker is expected to be commissioned this quarter.

Moreover, this quarter would see all the plants running at full capacity. The last quarter saw a loss of 35,000 tonnesof production, corresponding to around Rs 90 crore in sales, due to a shutdown at the nagothane plant. Hence, there would be a rise in operating margins because of lower cost of feedstock and higher plant utilisation. But whether the company comes out of red in the third quarter still depends on the price of the final product, because interest and depreciation costs have risen with the commissioning of new plants.