Indian companies lack predatory instincts. But in March they discovered a mean streak. A rash of hostile takeover bids – the worst in India – has perked up a dull stock market. These events will, in the coming weeks, test the new takeover code put in place by the Securities Exchange Board of India (SEBI) in February even as the code itself is being challenged in Indian courts.
Says SEBI chairman DR Mehta: “The new takeover rules have put a transparent mechanism in place. We want to administer them in as minimal a manner as possible.”
As hostile activity picks up, his resolve is likely to be severely tested. In mid-February, cable company Sterlite startled the stock market by making an open offer to buy a 10% stake in Indian Aluminium (Indal), a 60-year-old company whose core shareholder is Canadian company Alcan.
Even as a bemused market and excited press puzzled over whether this was a hostile bid or not, Sterlite, on SEBI’s directions, doubled its offer to 20% (the regulations require that the minimum public offer must be for 20%). Alcan spurned Sterlite’s offer of partnership, put in a higher bid of Rs105 ($2.60) per share and threatened to pull out of Indal if Sterlite went ahead with its offer. A determined Sterlite has increased its offer to Rs115 per share.
A second jolt came in early March when India Cements announced that it had acquired a total of 18% in Raasi Cement and was making a public offer for a further 20% stake. An enraged Raasi hauled India Cements and SEBI to court to challenge the new takeover rules. At the time of going to press the court was hearing this case.
Meanwhile an automobile retailer, Autorider, has bid for another cement company and several others seem ready to follow suit. Rumours of possible takeover targets have sent the market into a spin. Indian financial institutions, which hold large stakes in Indian companies, have gone into a huddle and core shareholders are holding hurried meetings to chalk out defensive strategies. Corporate India, lulled into complacency by past protectionism, is being rudely awakened to the threat of hostile takeovers.
Corporate executives such as Anil Singhvi, treasurer of Gujarat Ambuja Cements, feel that while new takeover regulations and low market valuations have made hostile takeovers possible, even attractive, such activity is essentially driven by economic liberalization, which is forcing Indian companies to restructure their businesses.
“Competition is forcing companies with inferior managements to the brink and is pushing others towards consolidation. It is also forcing large stakeholders like the financial institutions, which have a fiduciary responsibility to their investors, to get bloody with poorly performing managements,” says Singhvi.
The traditional family-owned structure of Indian businesses is beginning to accept that it is management rather than ownership of assets that matters, he says, and it is not surprising that first hostile bids are being made in sectors such as cement where the need for consolidation is greatest.
NJ Jhaveri, vice-president of Kotak Mahindra Capital Company, feels that takeovers offer an exit in a no-exit situation. “There is virtually no mortality for companies in India and badly managed companies have staggered on for years; takeovers are perhaps the only way investors and lenders can hope to improve the quality of their assets. The new regulation makes this possible in a structured manner.”
But even though India has the regulation and cheap buys, it takes companies with deep pockets to make takeovers actually happen. Indian commercial banks have shown little interest in financing even friendly takeovers. Says Jhaveri: “Takeovers need buoyant capital markets and companies which have the capacity to absorb debt, particularly since the cost of funds in India is so high.” Few Indian companies have the cash to finance takeovers themselves. Both Sterlite and India Cements are doing this and it remains to be seen how far this will take them.
The new regulations aim at giving investors, particularly non-core shareholders, the option to exit at an attractive price. Under the rules anyone acquiring 10% of a company’s shares must make a public offer for a further 20%. Buyers without existing stakes making open public offers must make them for 20%.
Indian financial institutions, which are both large investors in and lenders to most Indian companies, are caught in a piquant situation. “For us, it is not just the offer on the table which matters,” says one institutional fund manager. Most of the equity these institutions hold has come to them by way of loan conversions and they would rather be rid of it. But if they take up Sterlite’s offer for Indal’s shares (37% of which are owned by them), they would also be backing its bid to run the company.
“Assuming that Sterlite buys up 20% of our holdings and eventually takes control, we still have to worry over how this will affect the value of our residual holdings and the repayment of loans,” the manager points out. Similarly, while India Cements’ offer for Raasi’s shares is clearly attractive (at a 72% premium over the market price), the institutions, which have a larger investment in India Cements, are worried about the hole it will blow in the company’s pocket. The choice before these financial institutions – which include India’s two insurance companies, its largest mutual fund and its development banks – on how best to protect the value of their assets is a tricky one.
The new rules have been criticized on the grounds that the 20% minimum public offer is too low to protect all shareholders and discourage frivolous bids. In its press release announcing the new takeover rules in January last year, SEBI pointed to the absence of “bank finance or any other external source of finance at present” as the reason why the minimum public offer was restricted to 20% instead of 100%. However, critics point out that this could encourage buyers to destabilize companies without actually taking them over.
Sterlite’s offer to buy 20% of Indal’s shares is technically not a takeover bid since Alcan holds a 35.6% stake. Some observers such as Shaune Browne, chief executive, of HSBC Capital Markets, say that the new rules should cover acquisition of brands, assets and divisions of companies as well as shares.
Legal ambiguities may well thwart hostile takeovers. In its writ before the high court, Raasi has pointed to provisions in the Companies Act that require India Cements to seek clearance from the department of company affairs to acquire its shares. Indian shareholders also have some discretion to block the transfer of shares. Also, hostile bids by foreign companies are clearly off-limits.
Nearly nine months after UK-based ICI bought a 9.1% stake in Asian Paints, it has not received clearance from the foreign investment promotion board for the transfer of its shares. Clearly, while any number of negotiated takeovers will sail through, hostile takeovers will be very difficult. But whichever way the test cases go, investors, who have been dismayed by the shrinking value of their shares over the last two years, have something to cheer about at last. Public offers for both Indal and Raasi will open around mid-April.
In a further testing of new market regulations, the first-ever prosecution on an insider-trading charge ordered against an Indian company – Hindustan Lever, a Unilever subsidiary – by the Indian stock market regulator will be challenged this month. In what is expected to be a contentious battle, Hindustan Lever, announced that it will challenge SEBI’s prosecution of five company directors with the relevant appeal authority, the finance ministry.
SEBI has charged that Hindustan Lever bought 800,000 shares of Brooke Bond Lipton in March 1996 using the knowledge of its impending merger with this company. It has ordered Hindustan Lever to pay Unit Trust of India, a mutual fund which sold the shares, Rs30 million as compensation. Hindustan Lever contends that while the impending merger was known to it and the market, the swap ratio – which was price-sensitive information – had not been finalized at the time it made the purchase. Kala Rao
