The appellate authority in the finance ministry has upheld the Sebi order directing the five Mehta group companies to make an open offer to acquire at least 20 per cent of Saurashtra Cement's voting capital in accordance with regulations. The appellate body has done nothing to clear the confusion created by Sebi order. In fact, it raises two important questions.

First, is 20 per cent of voting capital to be calculated post the preferential allotments (one more preferential allotment complying with Sebi guidelines was made after the first one which did not comply)? Second, at what price must the offer be made - Rs 30, the price at which first preferential allotment was made or Rs 75 - the price that was offered by the unsuccessful bidder?

Another issue is, can the route taken by the SCL management be used as a takeover defence? In other words, can companies use an enabling resolution for preferential allotment (without complying with Sebi guidelines), dilute the equity by opting for astaggered payment for the preferential allotment (on allotment and in one or more calls)? In the order, the Sebi chairman has stated that the issue of whether the preferential allotment made under Section 81 (1A) of the Companies Act can be declared as void and non est can be dealt with by the competent authority under the Companies Act, 1956. Sebi undoubtedly has no jurisdiction in this regard. This is fine. But what prevented it from moving the DCA in the "interests of the shareholders of SCL and the interest of securities market" for nullification of the preferential allotment. In any case, how will non-management shareholders benefit because of an open offer made at Rs 30 per share (assuming that the open offer will be made at the price at which preferential allotment was made) instead of Rs 75 per share?

Will Sebi use the same defence of "no jurisdiction over preferential allotment" if, as a defensive measure, the target company exercises the option of preferential allotment after three months fromthe date of passing of the resolution? As per Sebi guidelines, the validity of a resolution authorising preferential allotment is three months. It is possible that this might happen since the penalty for not complying with Sebi guidelines (the first preferential allotment did not have the identity of the allottees, price at which allotment was proposed and the change in the shareholding pattern, post allotment) is that an open offer at the price at which preferential allotment was made. The management of SCL has acted in its own interest, can the same be said of Sebi also?

Rolta India

With an impressive client list including international players like US West Telecommunications, British Telecom, Hong Kong Telecom, Daton Power, Enerco New Zealand and domestic players like BHEL, HMT, Reliance, Tata Chem and L&T, it is no surprise that Rolta India has been consistently posting high growth rates. Not only does the company have a virtual monopoly in CAD/CAM products in the domestic market, it also hasthe exclusive marketing rights for Intergraph machines.

For the year ended December 1998, the company recorded a topline growth of 20 per cent and a bottomline growth of 48 per cent. Performance for the quarter ended March 1999 has been just as impressive. Income from operations has grown 46 per cent to Rs 40.55 crore. Total expenditure has also risen commensurately to Rs 21.14 crore and the company has posted an operating profit of Rs 19.41 crore. Operating margins continue to be an impressive 47 per cent thanks largely to the fact that the company enjoys the lowest manpower costs prevalent in the industry. High receivables have, however, had an adverse impact on the cash flows and commensurately interest outgo has been 50 per cent higher at Rs 3 crore. Nevertheless, cash margins continue to be high at 40 per cent.

The company is in the midst of a capital expansion plan of about Rs 80 crore for providing Internet services and developing new systems. As these investments will bear fruit only at the end oftwo years from now, the company's interest outgo is likely to continue to rise.

However, Rolta has acquired an expertise in converting telephone-exchange records into Unix/Oracle and its mapping and data-conversion business has begun to yield good profits. In fact, it is this business that has resulted in huge orders from telecom majors like British Telecom, Hong Kong Telecom and the government of Saudi Arabia. As long as the order book keeps ringing, which appears to be the least of Rolta's problems at the moment, the company will continue to grow at a steady pace.

Birla Advantage Fund

News reports indicate that the Birla Asset Management Company has decided to levy a 1.5 per cent entry load on its equity scheme, the Birla Advantage Fund. This means that if an investor wishes to invest Rs 985 into the fund, he would have to shell out Rs 1,000. As the fund has for long been a no-load one (at least for investors with a long term view) one is hard pressed to understand the rationale behind thisdecision. Those that have been closely following recent developments may point out that the rationale is perhaps to be found in the finance minister's budget proposal to exempt unit-holders' dividend income from income tax.

While it is true that in the absence of a load, dividend-paying open-ended equity funds could witness large-scale dividend stripping, it is worth noting that Birla Advantage Fund has so far not declared any dividends. Even if it does decide to do so, only those investors who have opted for the dividend scheme will receive dividends. So why subject investors in the growth scheme to the entry load?

Besides, the fund already has an exit load in place for those investors who leave it before the completion of a year. If the purpose was merely to discourage short-term profiteering, it would have easily been achieved merely by hiking the existing exit load.

Whatever the rationale, the move is likely to result in additional revenues for the AMC as the entry load is unlikely to deterpotential investors. Perhaps the load should be construed as a well-deserved premium for the superior performance of the fund. Needless to say, if Birla Asset Management continues to exploit good profit opportunities, it would bring cheers to the shareholders of its parent, Birla Global Finance.

Emcee (with contributions from Urmik Chhaya & Sarad Saraf)