Test For Regulator

Updated: Nov 30 2002, 05:30am hrs
The Securities Appellate Tribunal (SAT) order upholding the Securities and Exchange Board of India (Sebi) stay on the open offer by Grasim Industries for 20 per cent of Larsen & Toubro (L&T) has generated a major debate on the issue of corporate governance, control and the future of mergers and acquisitions in India. The order specifies that granting a stay on the Sebi move would be tantamount to staying an investor protection measure. But the issues go much deeper. The real issue is whether or not Grasim, which currently holds just over 15 per cent in L&T, has effectively got control over the company as the law defines it. If it has, then it is only logical that the company pays the ordinary shareholders in L&T the same price, Rs 306.60, which it paid to Reliance Industries when it first bought the 10.05 per cent stake which allowed it entry into L&T late last year. Having got SAT to agree with its view that its decision to stall the Grasim open offer was not incorrect, Sebi will now have to dig up whatever evidence it can gather to prove that Grasim does have control over L&T. Thats not going to be a cakewalk.

With two seats on the 17-member L&T board, and an L&T management thats taking its own decisions including bringing back the mothballed cement demerger proposal on the frontburner Sebi will have to find clinching evidence to prove that Grasim wields enough day-to-day clout in L&Ts boardroom to call the shots. In a situation where financial institutions (FIs) together have close to 40 per cent stake, whether a group with just 15 per cent stake can wield such backdoor control without meeting stiff resistance from several classes of shareholders is another point Sebi will have to ponder on. Grasim had also proposed cross-branding of its cement with L&T, but the move did not take off. A marketing arrangement is also in place between Grasim and Cement Corporation of India. Do marketing or branding arrangements translate into management control Sebi must answer this as well, besides ascertaining the FIs view on the issue of control by Grasim. While few can question Sebis right to investigate the matter following investor complaints, the regulator should also be careful in not getting drawn into the matter of pricing of the offer per se. Sebis focus should be on ascertaining whether or not Grasim had acquired control in L&T when it bought into the company. If it had not, then a price arrived at under the regulations should be allowed to be the open offer price. SAT, in its order, has also said that no real urgency has been stated for the public offer, and has not agreed with the contention that the Sebi order does irreparable injury to Grasim. However, Sebis probe must necessarily be time-bound and come up with clear, unambiguous proof on the issue of control. If it fails to do so, irreparable injury could be caused to the regulators reputation and public faith in it.