It is a battle between old India and new – between a fiercely nationalist old guard and reformists who want to throw open India to foreign investment. It involves a well-run family business called Asian Paints which for most of the summer has been at the centre of controversy. The country’s largest paints company is vocally resisting the attentions of UK-based multinational ICI, which has purchased a 9.1% stake in the company.
With its impish mascot Gattu, a young Indian boy holding a paintbrush, the company is a source of national pride. Meanwhile ICI’s association with the British empire raises the spectre of India’s colonial past.
Already, reputations have been smeared, contracts annulled, and incredible assertions made. Thanks to Indian law, ICI’s stake in Asian Paints is locked in a peculiarly Indian limbo; by comparison, western poison pills look mild. The situation is proving a test case for India’s fledgling takeover code, and will set precedents that everyone, including the government, is aware will have far-reaching consequences. It looks almost certain that hostile takeovers by foreign businesses will remain strictly off-limits.
The Bombay Club, an influential but informal group of Indian businessmen, says ICI should quit its takeover campaign. But for its part ICI denies even that it intends to acquire Asian Paints.
The $400 million company, formed by four Indian families in 1942, is a minnow compared with ICI, the world leader in paint manufacture. But Asian Paints controls 33% of the paints market in India compared with ICI’s 9%. It is also one of India’s best-run companies, well regarded for its outstanding corporate governance. A member of the National Stock Exchange’s nifty-fifty index, it has twice won awards from the Harvard Business School for having the best management in India, and it has started to expand to other Asian countries. Its world-class inventory management systems and extensive distribution network have formed the basis of its success. Bankers usually list it as one of India’s few candidates, alongside, for example, Reliance Industries, to become a multinational in its own right .
Atul Choksey, who is featured in the company’s annual report receiving awards, and his father, Champaklal Choksey, had appeared to be the driving force behind the success of Asian Paints in their respective positions as managing director and chairman.
Certainly, no-one suspected that infighting between the Chokseys and the three other family owners, the Vakils, the Choksis and the Danis, would provoke the former to sell out. But that is what happened. The surprise was compounded when it emerged that the eventual buyer of the Chokseys’ 9.1% stake was ICI. It is this holding that the other families are now refusing to let the company register in ICI’s name. ICI is lobbying the government to overrule them.
Nothing is settled yet, but the events of the summer will not be easily forgotten. This is not simply the story of a feud between old family friends. In a country that has never experienced a hostile takeover, Asian Paints has dragged the government into a bitter war of words between economic nationalists and those in favour of foreign investment.
The story begins in April when ICI India’s chairman, Ashok Ganguly, received a phone call at his London home. It was a Sunday morning and the last person he expected to hear from was 45-year-old Atul Choksey, the managing director of his company’s biggest rival. Choksey mysteriously asked for a secret meeting a week later in Bombay on a matter he could not discuss over the telephone.
“My father knows you and trusts you,” he told the former chairman of Hindustan Lever when they met. “And what I am about to say will shock you. My father wants to sell our stake.”
The news was indeed shocking. It was well known that Asian Paints patriarch Champaklal Choksey hated multinationals, and ICI more than most. He had built Asian Paints from a backyard operation, and as the last surviving founding partner had suffered often enough at the hands of ICI to make the approach appear all the more unlikely.
But disagreements had arisen between the company’s four families over a range of subjects. For example, the Chokseys’ abortive bid to issue a global depositary receipt to finance a more aggressive expansion plan had provoked animosity. But perhaps the most divisive question was the allocation of board seats. Champaklal Choksey wanted all three of his sons to be directors. This contradicted an original formula that gave each family just one seat. What is more, the Chokseys held a substantially smaller stake than the other families, which each owned nearly 4% more.
Ganguly gave Atul Choksey a cautious reply. He told him he was interested, but that he would have to discuss the offer with ICI’s main board in the UK, since ICI India did not have the £25 million ($16 million) needed to acquire the Chokseys’ shares. But by the end of May, the deal had gained the necessary approval and due diligence was ordered.
Events took an unexpected turn in July. Rather than selling the block of shares to ICI, Asian Paints’ house broker DSP Merrill Lynch sold the stake to two of India’s biggest foreign institutional investors – Capital International and Morgan Stanley – for Rs357 ($9.81) a share. But this about-turn was less astonishing than what happened next.
The Economics Times of India detonated the story at the beginning of August when it revealed that the shares sold were the Chokseys’ entire stake in Asian Paints. Both fund managers had thought the block comprised small chunks of each of the families’ shareholdings and were stunned to find out that they were buying out the family most closely associated with Asian Paints’ management.
Although contracts had already been signed, both fund managers asked for the deal to be cancelled on the grounds that they had not been told that it was the Chokseys’ stake, and that this constituted a material omission.
The paint hits the fan
The Indian press went wild. None of India’s 400 or so registered foreign institutional investors had ever broken a contract before, and Capital International and Morgan Stanley were among the biggest, with Morgan Stanley’s various Indian funds managing around $2.3 billion between them.
Asian Paints stock crashed and hit a low of Rs310. A tense week followed. There were few signs of compromise and it was announced that Champaklal Choksey had died only hours after the contract had been signed. The company’s AGM on August 8 could not have been more timely. Atul Choksey, who continued to be managing director in spite of the sale, kept quiet for the most part, but was eventually compelled to speak.
“I and my family are deeply touched,” he began, in reference to the despair that hung over the room at their decision to sell. “This is what our father had wanted. He said he was the happiest man on earth. Maybe that’s why we lost him.”
On August 12 the brinkmanship came to an end. The deal with Morgan Stanley and Capital International was called off, and Choksey did not, as he had earlier threatened, force DSP Merrill Lynch to take all the Choksey’s stock. That would have left it facing a very substantial loss given the share-price collapse. The 130-year-old firm run by Hemendra Kothari, in which Merrill Lynch has a 40% stake, emerged unscathed financially but somewhat embarrassed – especially since Capital Corporation is a close client of Merrill Lynch
Choksey later commented that DSP Merrill “assumed that the shares on offer were from all four promoter [family] groups”. It seems reasonable to suppose he did nothing to correct this assumption, putting Merrill’s Kothari, who had a 40-year association with Asian Paints and was a personal friend, in probably the toughest position of his long and successful career.
Soon it became clear that the Chokseys and the other three families could not work together. But it emerged that there was no agreement between the families that would have given the others first right of refusal if one decided to sell out.
Re-enter ICI
It was at this point that ICI returned to the fray. A new deal was brokered by DSP Merrill Lynch’s strongest competitor in the local market, Kotak Mahindra, a firm 28% owned by Goldman Sachs. The US investment bank is one of ICI’s top advisers and is currently advising it on acquisitions in the UK.
India was slowly coming to a standstill for the long weekend in which it would celebrate 50 years of independence from British rule. While others gave way to lethargy, beer and coconut fenny, Kotak Mahindra began working around the clock to bring Atul Choksey and ICI together. A secret deal was struck at Rs347.5 a share – less than the fund managers had been willing to pay. Kotak Mahindra would buy the stock from Choksey and sell it on to ICI at Rs351. “It was pretty obvious that Atul Choksey was a willing seller,” says Uday Kotak, the savvy 38-year-old boss of Kotak Mahindra. “There was a broken deal in the market and we saw the opportunity.”
On Wednesday, August 13, just one day after the DSP Merrill deal was annulled, Kotak approached the Reserve Bank of India with an application to receive an interest-free advance from ICI of the UK to purchase the stock. The next afternoon the central bank gave its approval. That evening the money was remitted and on August 16, the day after the independence celebrations, Citibank prepared the cheques to pay the Choksey family members for their stock.
On Sunday evening the bankers and lawyers descended on Atul Choksey’s house in Bombay to transfer the shares that had been held by the family for 55 years. There was no champagne, just 135 agreements to be laboriously signed through the night.
At 7am the next morning, Kotak entered into an agreement to sell the shares to ICI. This was no ordinary deal: ICI would shoulder all the risk, and should anything go wrong Kotak would receive its brokerage fee regardless. This turned out to be an astute move by Uday Kotak and his 12-year-old firm. At 9am letters of information were sent to the National Stock Exchange, and the deal became public.
ICI’s entry into the fracas was totally unexpected. The normally gossipy Indian market had received no word of its earlier overtures and was completely unaware of Kotak’s stealthy negotiations. One possible source of a leak was the central bank. But the bureaucrats’ swift departure for a conference in the coastal resort of Goa may have prevented loose talk.
The deal was deliberately structured with Kotak Mahindra in the middle. This allowed Choksey to state for the record: “We have not sold shares directly to any multinational. We have sold them to Kotak Mahindra who in turn have sold them to ICI plc. We have no control over what Kotak does after we have divested our holdings.”
Choksey then quietly resigned his post as managing director. His contract still had 20 months to run, and his family retains a 0.4% stake. He keeps an office at the company and, owing to the absence of a termination clause in his employment contract, Asian Paints has been forced to hire him as a consultant. But with his other business interests to manage such as Apcotex Lattices, the Asian Paints saga is well and truly over for Atul Choksey.
For ICI it is only beginning. The three remaining families made their opposition known from the first. They immediately moved to thwart any divide-and-conquer policy on the part of ICI by hammering out an agreement that none of them should sell their equity to outside parties. Then they refused to acknowledge the physical transfer of shares from the Chokseys to the British buyer. This refusal to register ICI’s shares was accompanied by a management statement that ICI’s position was in “breach of several laws of the land, and is not in the interests of the company, and will not be welcome”.
At the end of August rumours began to circulate that Asian Paints would launch a preferential share issue. This would take the three families’ holdings from 40% to 51%, but would benefit minority shareholders less. The issue never took place, however. It is known that one of the company’s biggest shareholders, the Unit Trust of India, which holds 9% of Asian Paints as part of its $19 billion portfolio, was opposed to this strategy.
And so the families were forced to adopt a more straightforward approach to keep ICI at arm’s length: they offered to buy the company’s stake. But ICI’s reaction to the offer was far from enthusiastic. It responded with an aide mémoire explaining its position: “There is no takeover of Asian Paints by ICI plc involved in this deal. The agreement to buy a 9.1% shareholding does not automatically entitle ICI plc to a seat on the board of Asian Paints. ICI plc has already met the other three promoters [families] and shareholders of Asian Paints to explain its position and sought to forge a friendly relationship with the promoters and shareholders of Asian Paints and explore a future alliance between its operations in India and those of Asian Paints to the benefit of customers, employees and shareholders of both companies.”
Asian Paints gave this short shrift. Its vice-chairman, Ashwin Dani, spoke to Euromoney at the company’s headquarters in Bombay: “Let’s look at this from a common-sense approach,” he says. “There is a 1.5% return from the dividend – which is hardly the best use of £25 million. ICI’s track record over the past 10 years has been to grow by acquisition. They bought a company in Vietnam recently, and have bought heavily in Latin America. So we consider the purchase of 9.1% of Asian Paints to be the prelude to hostile intentions.”
Dani’s suspicions
The 55-year-old Dani, whose family, like the Choksis and the Vakils, still holds 13.5% of the company, notes that ICI chairman Charles Miller Smith has a target of being number one in India by 2005. He thinks that Asian Paints’ shareholders will derive no benefit from a takeover. “It must give added value to shareholders,” he says. “We don’t see any synergies.” He points out that the company is well run, and that in the one area where technology transfer was required – to make paints for automobiles and white goods – a joint venture was formed with PPG Industries of the US.
But if the families are offering to buy back the block now, why did they not do so in the eight days between ICI’s entry and Morgan Stanley/
Capital International’s pulling out? “In India there is a 13-day mourning period,” explains Dani, referring to Champaklal Choksey’s death. He says that it was not appropriate to intervene during this period out of respect.
He says the families made ready to approach Choksey after the independence weekend. But by then it was too late, ICI had already stepped in. He admits, however, that there was also an element of miscalculation. “It’s typical of any Indian businessman to like to control a company with the least amount. Some thought 40% was fine, and that institutions would continue to support a well-run company like ours. Personally, frankly, I think we should have bought it at that time.”
Luckily for the three defending families, Indian law appears to be on their side. They are also fortunate that Asian Paints’ company lawyer is RA Shah, a man who helped draft India’s new takeover code and is one of the country’s leading interpreters of company law.
The letter of the law
Shah, a partner at Crawford Bayley, explains the situation meticulously: “We have 60 industries, paints included, where a foreign entity can get automatic approval to purchase 51% of a company. That means you go to the Reserve Bank of India and get approvals two weeks later. However this only applies to new share issues.
“If you want to buy shares for existing listed companies [in the secondary market], it requires the approval of the Foreign Investment Promotion Board. Therefore ICI has submitted an application [to the board]. This is the first case of its kind where a hostile foreign investment has been proposed. So it is going to be a test case of the government’s policy.”
However, he adds: “The Foreign Investment Promotion Board’s guidelines were amended in January. The application must be accompanied by a resolution of the board supporting the share purchase. The guidelines indicate that without such approval foreign investment is not likely to be approved.” The clause in question is 8(e). It asks whether there is a “resolution of the board of directors supporting the said induction/enlargement of foreign equity”.
At the moment the government looks to be favouring its domestic star over the supposed predator. Industry minister Murasoli Maran said in mid-September: “We want to protect Indian industry and ICI’s move is perceived to be somewhat hostile.” This implies that the government will not overrule the Foreign Investment Promotion Board’s guideline. So unless Asian Paints’ board approves ICI’s stake – as it surely will not – ICI will not be allowed to register its shares. This will leave ICI’s 9.1% ownership of Asian Paints in a legal limbo.
Shah says there is a need to protect India’s industry. “Our European and US rivals can borrow money at 5%. Our Indian promoter families have to pay 15%. So there is an imbalance and a danger that Indian industries may get swamped. This is one of India’s best-managed companies. What ICI has not been able to achieve in the market they are trying to do with deep pockets and money power. Whether that should be allowed or whether some degree of protection should be given to Indian industries is the crucial question.” For good measure he adds a sharp warning: “Normally I would not advise a foreign company to bring money of such magnitude into India with all the attendant convertibility risk without being assured of approval from the Foreign Investment Promotion Board and the board of Asian Paints. I would first have ascertained what my chances are of getting approval, this being a fundamental, elementary part of due diligence.”
Shah says that even if the FIPB gave its approval, the Asian Paints’ board would still have a fallback position. The lawyer says India’s recently-amended company law allows the board “the discretion to refuse the transfer of shares if it believes there is sufficient cause”. He adds: “There is a plethora of judicial announcements saying that a competitor seeking registration of shares in a competing company can be refused registration by the board as sufficient cause.”
The stumbling block for ICI is its status as a company. If it were a fund its purchase would be defined as portfolio investment. Morgan Stanley and Capital International, for example, could have bought up to 30% of Asian Paints unimpeded. Portfolio investors do not need to go to the FIPB, and they do not need to gain board approval for the purchase beforehand. Only companies must do this.
So hostile takeovers by foreign companies may be impossible. ICI’s Ganguly has seen it all before. “It’s very Indian,” he says. “I’ve been looking up ‘hostile’ in the dictionary. It says something about unwelcome attention.”
India’s regulations state that when a company acquires 10% of another company, it must make a bid for the whole of it. But ICI’s 9.1% stake does not reach this threshold, and Ganguly offers a host of reasons why it should not be blocked. “Legally we cannot be denied registration. We are not hostile. We do not seek beyond 9.1%, we have no thought of a takeover and we haven’t asked for a seat on the board. This is a simple corporate transaction; there is a buyer and a seller. There was an above-board exchange at terms which were mutually acceptable, so why are we jumping up and down about it? It was an investment by us to pre-empt a competitor buying it.”
He continues: “ICI intends to invest in greenfield projects, strategic alliances and acquisition. This is part of a bigger picture.” ICI has one trump card – the lure of $400 million or so of new investments. “Are we going to enrich lawyers, or shareholders?” Ganguly asks. “Do we get down to serious business, or do we continue to offer ourselves as public entertainment?”
There’s no doubt where India’s business press stands on the issue. The Economic Times of India said: “When it comes to hostile takeovers, we recognize that foreigners can raise enormous sums for takeovers whereas Indians cannot, and that is a grossly uneven situation.”
Among Bombay’s financial community opinion is divided. “I wouldn’t make a value judgement whether the situation is good or bad,” says ICICI securities boss Kishor Chaukar. “It is amusing at best. At worst it is naivety. I don’t think it is representative as a case, however. But I wouldn’t be surprised if it avalanches into one. I’m sure there will be a lot of Asian Paints sympathizers – some genuine, some with an axe to grind. But one thing no-one has spoken about is shareholder value.”
CSFB’s Indian head, KR Bharat, says: “There will come a time when hostile takeovers are the norm. My interpretation of this as an Indian citizen and as someone who believes we should open up as quickly as possible is this is no big deal. We should not as a government send out the wrong signals.”
On the other hand, the chairman of one of India’s oldest brokerages JM Financial can see why companies like Asian Paints need defending. “The government is saying, if you want to take over any company, negotiate with the company and then come to us,” says Nimesh Kampani. “You can’t have competition between two unequals or else all of India’s industry will be bought by foreigners.”
“This will be won and lost by political lobbying,” concludes Amar Bindra, Citibank’s corporate banking chief in India. “But it would be sad if people drew negative conclusions about the government’s overall attitudes to foreign investment from it.”
The government is not opposed to foreign takeovers as long as they are friendly. This was evident in July when BZW advised British Gas on the acquisition of Gujurat Gas. It had the company on side so approvals were swift.
The FIPB has yet to give its verdict. Should things go against ICI, it could just sit on its stake, failing to draw its dividends. That would achieve its stated objective of preventing competitors from owning the block.
It might prove a very Indian solution to a very Indian problem.
