Having scrapped its earlier greenfield project, the aluminium major - Hindalco Industries has chosen the option of a brownfield expansion of its existing aluminium smelting capacity. Newsreports suggest that Hindalco is planning to invest between Rs 2,000 and Rs 2,300 crore for increasing its smelting capacity at Renukoot by an additional one lakh tonnes per annum. Now this option makes a lot more sense for Hindalco, as for starters it is a much cheaper route than the proposed greenfield project. Exemplifying which is the fact that the greenfield project would have entailed an investment of Rs 9,000 crore, compared to the Rs 2,300 crore estimation for the brownfield expansion.

More important is the fact that the company has ruled out any form of equity dilution, while insisting that the expansion will be funded through internal accruals and short-term debt. Although it will have to raise debt, Hindalco's low gearing of 0.2 times on a networth (excluding revaluation reserves) ofRs 2,982 crore puts the company in a very comfortable position.

This aside, the timing of the expansion is also quite opportune, largely because the expansion will take mere 30 months to complete from the zero date. Thus, the completion will also coincide well with the pricing cyclicality of the white metal which has been resurgent. In fact, aluminium prices on the LME have been on a major upswing trading at $1481 per tonnes, a far cry from the seven-year lows of last year, when prices of the white metal had crashed to the $1060 levels during April-June 1998. More importantly, given that a commodity business cycle generally lasts for a 3-year timeframe, Hindalco's expanded capacities might well start bearing fruit almost immediately.

Meanwhile in the interim, Hindalco should definitely be able to maintain its margins due to its clever mix of downstream value-added products which provide the company with higher realisations. Additionally, one cannot also discount the fact that Hindalco is currently amongthe lowest cost producers of the white metal in the world thanks to its integrated operations. All of which will only improve once the brownfield expansion goes on stream. Lastly, the firming up of aluminium prices on the LME should also give the company the leverage required to hike prices. Thus proving that the Aditya Birla Group company is currently on a steady wicket. A fact reflected in the improving investor sentiment for the company's stock, which at Rs 928 is trading very close to its 52-week high of Rs 1,005 pierced only in July 1999.

Indian Rayon

The annual report of Indian Rayon for 1998-99 contains an interesting treatment for the de-merger of the cement division to Grasim. It is the share premium account of Indian Rayon that has been adjusted (debited) by Rs 240.64 crore. Sec 78(2) of Companies Act, 1956 (the Act), prescribes that the share premium account can be applied only for four specific purposes. One, to issue bonus shares, two, to write off preliminary and pre-operativeexpenses, three, to write off the expenses of, or commission or discount allowed on any issue of shares/debentures of the company and four, to provide for premium payable on redemption of any preference shares or of any debentures of the company. As is clear, de-merger is not one of the purposes for which the share premium (SP) account can be utilised.

However, Sec 78(1) of the Act specifies that if the SP is put to any use other than those specified, it is tantamount to reduction of capital which is dealt with under Sec 100 to 104 of the Act. Thus the question is, does a company have the option of not opting for Sec 100-104 route, if it complies with procedure prescribed u/s 391 to 394 of the Act. According to Ernst & Young principal, tax and strategic investment consultant Rajesh Kadakia, in such circumstances, if there is compliance with the procedure prescribed under Section 100-102, it is sufficient. This opinion is on the basis of the judgment in Vasant Investment Corporation Ltd vs OfficialLiquidator, Colaba Land & Mills Ltd (1981) 51 Comp Cas 20 and in Re Maneckchowk and Ahmedabad Mfg Co Ltd, (1970) 40 Com Cases 819 (Guj) in which it is held that the substantial compliance with the procedure prescribed under Sec 100-102 is sufficient for the purpose of Rule 85 of the Companies (Court) Rules, 1959. The rule provides that the reduction of share capital must be done in the manner set out in Sec 100 to 104.

Section 391 is a complete code by itself. Once a scheme of compromise and arrangement falls squarely within the four corners of the section, it can be sanctioned, even if it involves doing acts (including reduction of capital) for which the procedure is specified in other sections of the Act. (Source: Guide to the Companies Act by A Ramaiya)

Thus in conclusion, where the reduction of capital is part of a scheme of arrangement, the requirements of the Companies Act as regards reduction of capital are not applicable.

With contributions from Percy Dubash and Urmik Chhaya