The recent decision by the Securities Appellate Tribunal (SAT) upholding the Securities and Exchange Board of India (Sebi) move stalling Grasim?s open offer for another 20 per cent of L&T has added several new dimensions to the issue of takeovers. Grasim is offering Rs 190 a share to L&T shareholders, much less than what it paid Reliance ? a hefty Rs 306.60 per share ? a year ago. Looking at it from an L&T shareholder?s viewpoint, it?s a deal which Grasim is seeking to sew up very cheap. The shareholder in L&T is bound to ask the question: if the Birlas could cough up as much as Rs 306.60 per share to Reliance when they bought 10.05 per cent, why should they not pay the ordinary shareholder the same price for getting a firm footing in the company with the additional 20 per cent?
The question seems fair. But it?s not half as simple. There are, in the Sebi takeover regulations, clear-cut norms governing open offer pricing, and the Grasim price of Rs 190 would appear to have been arrived at after following all the norms. Besides, if Grasim is to be believed, then the Rs 306.60 per share paid to Reliance also factored in the issue of getting a group with enormous muscle to exit ? indeed, stay away from ? L&T and also keep out cement multinationals. So Grasim paid a price for getting Reliance out, and entering a company which has obvious synergies with its key line of business: cement. At this point, some important questions crop up.
If the financial institutions are not happy with the Rs 190 per share open offer price, why did these institutions, which hold a substantial stake in Grasim, allow the price of Rs 306.60 to be paid? Did they seek a detailed explanation on the price paid to Reliance? Importantly, investor bodies had even a year ago raised questions about the deal. Why did Sebi not mount an investigation at that time? At that point, the regulator did not find anything wrong with the deal.
This brings us to the main issue which Sebi is now investigating: whether Grasim has got backdoor control of L&T through the acquisition of stake. As a regulator, Sebi should have no business fixing open offer prices. It has set out detailed regulations for that, and offerors must follow the norms or face action. That?s the rule. And that will have to be followed. The SAT order on the ACC-Gujarat Ambuja case, which has asked Sebi to review the deal, obviously weighed on Sebi when it stalled Grasim?s offer and began a probe into the issue of control over L&T. Though one can question Sebi?s delay in probing this issue on its own, none can question its right to do so even now.
The relevant issue is, having stalled the offer, Sebi now has to come up with evidence that Grasim indeed controls L&T, even with a 15 per cent stake. If it is able to do that, then investors will rightly demand a price of at least Rs 306.60 for the open offer. But a price higher than Rs 190 cannot be paid merely because L&T shareholders want it that way. Grasim?s shareholders are shareholders too!
And proving control is likely to be tough. The Birla group has two directors on a 17-member board, with the institutions holding around 40 per cent stake. The L&T management hardly toes the Birla line. The Birlas haven?t managed to get a co-marketing agreement in cement off the ground with L&T, even after a year of buying into the company. They also had no clue that the cement demerger proposal was being revived, and were virtually stumped at the October 29 board meeting where this came up. Establishing that the Birlas control L&T in such a scenario will need some doing.
There are, however, many pluses as a consequence of the Grasim-L&T affair. Small investors have made their presence felt and Sebi has begun taking them seriously. Companies will have to factor shareholder aspirations into future decisions. But most important, a decision on the issue of control, one way or other, will set a major precedent for takeover activity in India in the coming days.