ACC rights will wrong investors

It is a group which bristles at the merest mention of impropriety associated with its actions. Yet its attempt to increase its hold over ...

It is a group which bristles at the merest mention of impropriety associated with its actions. Yet its attempt to increase its hold over the Associated Cement Companies (ACC) shows that the Tatas are as willing to give a go by to shareholder interest as anybody else. The facts are as followsACC plans to raise Rs 289 crores by issuing preferential rights and warrants to the Tata group to fund its expansion programme. The issue will increase the Tata holding in ACC from 13 per cent to 17.8 per cent.

The catch is that as recently as January 1995, when ACC made a rights issue at a whopping Rs 4000 a share, it was not a Tata company. The 1995 offer document declared ACC a professionally managed company. We also had repeated assertions by the then chairman and legal luminary Nani Palkhivala that ACC was not a part of the Tata group and should not be treated as such.

The Tatas never contradicted the great Nani. In fact the Tatas enterprises manual endorsed his stand by not including ACC in its list ofcompanies. Even today, press reports say that ACC vice chairman S.Ganguly refuses to comment on Palkhivala’s renewed assertion that ACC is not a Tata company. Ganguly had signed the 1995 letter of offer, is he then guilty of misrepresenting facts?

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Instead of refusing to comment, he needs to explain to shareholders how a two per cent creeping increase in the Tata stake from 11 to 13 per cent suddenly makes ACC a Tata company. Is it a part of some statute that nobody has noticed or is it an internal threshold limit fixed by the Tatas for calling companies part of their group? From the investor point of view, the two per cent increase in the Tata holding is significant When ACC declared itself a professionally managed company in 1995, it meant that the Tata holding did not suffer a three year lock-in; it also meant that the Tatas did not have to acquire 25 per cent of the issue (as required by the SEBI) at the absurdly high premium of Rs 3900.

While the Tatas did not have to buy additional shares then,the three lead managers guaranteed the success of the issue by acquiring the unsubscribed portion of the issue. Thus, Kotak Mahindra Finance, IDBI and SBI Capital Markets are stuck with expensive ACC shares purchased in 1995.

ACC’s high premium issue marked the turning point of the primary market boom and the share never touched anywhere near Rs 4000 again. Shareholders such as IDBI, stuck with the expensive ACC shares are naturally upset. It is immaterial that the Tatas are offering to pay a few hundred rupees more than the market price for the rights . The preferential offer to the Tatas means a dilution of equity in a bad market, which is certain to cause the market price to collapse. This is certainly against the interest of all shareholders.

It could be argued that the ACC price has in fact been moving up in the last few days. But that is merely interested buying, and speculators who are betting that the preferential issue will not be permitted.

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There are other implications to the Tatadecision as well. At a time when business and industry is collectively clamoring for share buyback, why should ACC, whose share price has fallen from its 1995 level of Rs 4000 (we are comparing the ACC price only with the value the company itself fixed on its shares and not the Harshad Mehta boosted Rs 10,000 of 1992) to under Rs 900, want to go in for equity dilution and weaken its share price further.

The Tata move only strengthens the argument of people like me who believe that most companies want share buyback merely as a tool to manipulate stock prices. The Tatas have several alternatives to the preferential issue. They can build on their two per cent increase in shareholding by acquiring another five per cent this year. It would reduce floating stock and increase the share price.

Alternatively, they could make an open offer to buy 10 per cent or more of the shares. The problem with this is that an open offer from the Tatas could attract a competing bid from other companies and would certainlydrive the acquisition price up.

In fact, the willingness of the French company Lafarge S A to pay Rs 550 crore to acquire Tisco’s cement plant, indicates the kind of interest there would be in acquiring even a foothold in ACC. Investment bankers say that if ACC wants to raise money for expansion, it could get a price significantly higher price than the Tata preference issue price for a block of just 10 per cent to a strategic partner.

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In fact, the Tatas themselves have brought in Jardine Matheson as a strategic investor, on similar terms in their holding company. Clearly the preferential offer is detrimental to the interest of ACC shareholders, but guess who is watching developments in ACC with enormous interest . Naturally the Ambanis. Whatever be the route that that Tatas adopt to call ACC a group company, exactly the same will have to be available for the Ambanis to go back to calling Larsen & Toubro a Reliance group company. Or to call BSES Ltd. a part of the Reliance empire. After all the modusoperandi would have been sanctified by what is arguably our most ethically correct industry house.