In exchange, Indian Rayon shareholders will be given Grasim shares instead of a cash-down payment in an innovative transaction.

Indian Rayon, in which Grasim holds more than 50 per cent stake, is now left with its viscose-staple fibre, insulators and carbon black businesses, which together accounted for a turnover of around Rs 1,000 crore in 1997-98. Its portland, white and clinker cement businesses had contributed Rs 821 crore.

Grasim will now emerge as among the three largest cement industry players with a capacity of 10.65 million tonnes. This marks the achievement of a professed strategy of Kumar Mangalam Birla of industry leadership in every business the group is in.

Birla, often criticised before his recentbout of takeovers on account of perceived postponement of a group recast, has chosen an innovative route to close the deal. Based on the value of Indian Rayon's cement assets, the shareholders and GDR holders of Indian Rayon will be issued shares and GDRs of Grasim of an equivalent amount. A "fair" ratio will be decided after the two boards meet on September 21 to decide on the matter.

Operationally, the cement business had already virtually been consolidated; all that it required was for the Indian Rayon division, which has an installed capacity of 3.3 million tonnes per annum, to be demerged and sold to Grasim. Grasim's equity base is expected to widen substantially following the issue of new shares to Indian Rayon shareholders from its present size of Rs 72.3 crore. Indian Rayon's profitability has traditionally been higher than that of Grasim: in 1997-98, its net margin was 0.12 compared with 0.05 of Grasim.

Officials of the group did not disclose the value of these assets, or whether the valuationincludes the cement brands of Indian Rayon.

With the consolidation, Grasim will emerge as a 10.65-million-tonne cement powerhouse, with a turnover of around Rs 1,800 crore, producing both grey cement and white cement, and presence in another core business -- textile and viscose staple fibre (VSF), a textile intermediary.

In terms of capacity, Grasim, along with Larsen & Toubro, will be second to Associated Cement Companies, which has a capacity of 11 million tonnes. In white cement, Indian Rayon is already the country's largest player.

Indian Rayon, on the other hand, will henceforth focus on three core areas -- viscose filament yarn (VFY), insulators and carbon black. Cement has been Indian Rayon's core business so far and contributed around Rs 800 crore to its Rs 1,817-crore turnover.

While insulators is a low-turnover business, carbon black is susceptible to the downturn that has affected tyre industry. It is believed that the VFY business, which is a major foreign exchange earner for the company,has not been faring well during the current fiscal. This, however, could not be confirmed with the company.

The restructuring will be subject to approvals from financials institutions and banks, shareholders, Courts and other regulatory authorities. Aditya Birla group officials said that the demerger of Indian Rayon's cement business will be a win-win situation for both Grasim and Indian Rayon.

"Indian Rayon shareholders will have shares of both Indian Rayon and Grasim, and hence they will be the biggest gainers," an official spokesperson claimed. However, over the last six weeks, both Grasim and Indian Rayon have touched new 52-week lows at least six times each.

However, an analyst said that since the transfer of assets requires just an ordinary resolution, shareholders of Indian Rayon, even if they wish to, may not be able to block the demerger unless supported by financial institutions. Indian Rayon shareholders are losers

The cement operations of Indian Rayon are in the south and hence itsrealisation has been better than Grasim's, whose plants are located in central and north India, which faces the problem of overcapacity. Cement accounted for 22 per cent of Indian Rayon's sales, and its cement division had substantially better margins than Grasim's cement division.

Instead of cash generated by the division, Indian Rayon will get dividend on Grasim shares. Birlas' holding will not be affected due to additional cross-holding. Grasim will also have a major equity dilution but will have substantially improved cash flows. Indian Rayon shareholders must book profit immediately. The market has already halved the price of Indian Rayon in the past six months. The fate of Grasim is even worse. The price is down by more than 50 per cent compared with its July price. Section 293(1)(A) of the Companies Act requires an ordinary resolution so there is hardly any possibility of blocking the transaction.

Double deal for Grasim?

The deal throws up a crucial question: can Grasim subscribe to Grasimshares, which, under the terms of transaction, it is entitled to? The answer, according to the Companies Act, is an unequivocal `no'. Is the result, then, a double deal for Grasim.

Which means the company gets the cement assets, and pays out less than the full estimated value of those assets?

Grasim holds equity worth Rs 38.10 crore in Indian Rayon's equity of Rs 67.48 crore. This accounts for more than a 60 per cent holding. Under the terms of the transaction proposed, Indian Rayon shareholders will be given Grasim shares at a "fair" exchange rate to be arrived at after the crucial board meetings on September 21. Can Grasim shares be issued to Grasim -- or since they cannot be, can the amount payable reduce to that extent? If it does, it will, by implication, be an inflow into the company, in addition to the proposed transfer of cement division assets. Does this load the deal too heavily in favour of Grasim?

As of now, with Grasim and Indian Rayon executives staying tightlipped, the group has notanswered this crucial question in its press release.