An Important Benchmark

Updated: Jan 23 2003, 05:30am hrs
The handing over of management control in power utility BSES Ltd to the Reliance group has set a crucial benchmark for Corporate India to follow in the future, even as corporate mergers and acquisitions (M&As) intensify. The BSES case has set up many firsts which will serve as important pointers to the manner in which corporates go about M&As in the coming days. For the first time in recent memory, a professionally managed company for want of a better term has seen a change in control without any bloodletting. The financial institutions (FIs), which together hold a sizeable 36 per cent in BSES, have also quietly put in place a convention following the BSES case that any acquirer who seeks to gain management control must do so after making a transparent bid by way of a second open offer, even if he has a sizeable holding in the company. While Reliance had made its first open offer in year 2000 and ended up then with a 27 per cent stake, it still did not get management control in the company. Even after its stake went way beyond the FIs at 44 per cent Reliance had only two non-executive seats on BSES board. Only when it made a subsequent open offer for another 20 per cent and explicitly stated that it wanted management control of BSES, did the change take place.

The BSES example then makes it clear that while the first open offer would be necessary owing to regulations being in place, management control would only come through in such companies when a second open offer is made to make the situation amply transparent. This would make it plain to all classes of shareholders that management control was being sought, and would give them a clear exit option if so desired. The other important precedent set by BSES is that the acquirer would also be required to have a higher stake than the FIs in order to gain management control in professionally run companies. While Reliance had 44 per cent and legal opinion saying an open offer wasnt necessary, it did go ahead and make a second offer to avoid any confrontation with FIs. The management of BSES, in sharp contrast to cases like Larsen & Toubro, has also backed the Reliance bid strongly and publicly, making it clear that Reliance and the outgoing management team were talking the same language. Trade unions have also supported the change in management at the power utility. At a time when Corporate India is in a state of churning, and professionally managed companies at odds with promoter groups seeking control of some of them, the BSES case serves as an important example for both institutions and corporate groups that change is not always accompanied with unnecessary sabre-rattling and posturing.