UltraTech: Apna Maalik Badal Gaya Hai!
UltraTech Cement Ltd made a big splash just last week. Interestingly, the company came into being only two decades back, in July 2004.
 
Its origins, and the history that preceded its formation, may be of interest to readers who had not followed this development contemporaneously and, hence, recounted now.
 
Around the year 1987-88, Manu Chhabria, a corporate raider of those times, accumulated around 1.5% shares in Larsen & Toubro (L&T), a company that had no visible promoter and was mostly held by government financial institutions (GFI).
 
The move caused the then-chairman, Narottam Desai, to look for a white knight. Given that L&T was executing many projects for Reliance Industries Ltd, which was then expanding at a frenetic pace, it was sounded out to step in. 
 
Reliance, over time, acquired a formidable 18.5% in L&T like the proverbial camel that entered the Arab’s tent! 
 
By 1989, the late Dhirubhai Ambani became its chairman, and his two sons, directors.
 
They cast a lustful eye on L&T’s cash reserves and attempted to induce it to buy Reliance shares for about Rs570 crore.
 
Alarm bells rang among the ranks of the GFIs which had over 40% stake. Coupled with a not-too-hospitable political leadership then, the attempt of Reliance was thwarted.
 
The Ambanis backed off and became passive investors for the next decade or so, diluting meanwhile their interest to about 10.5%.
 
In November 2001 when the then MD and CEO, A M Naik, was abroad he was woken up from his sleep and informed that the shares held by Reliance had changed hands. 
 
Within a few minutes, Anil Ambani reached out to Mr Naik and informed that the shares had been sold!
 
Grasim’s Kumar Mangalam Birla, with an ambition to grow its cement business, was attracted to the 17MT (metric tonnes) capacity that L&T had in cement, and bought out the interest of Reliance for about Rs1,050 crore.
 
Mr Birla, having entered with a 10.5% stake, took it dangerously close to the trigger for an open offer, at 14.95%, making his intent clear that he did not invest to get dividends!
 
He was no less a threat to the incumbent management than Reliance was. Effectively, the third raider after Chhabria and the Ambanis!
 
It was then that intermediaries with the right political credentials started to smooth things out for both the parties and worked out a tailor-made arrangement that stands unrivalled to date for a craftily concocted corporate scheme to suit the needs of certain specific stakeholders, but not all!
 
Mr Birla needed just the cement asset, and L&T management led by Mr Naik needed to retain control over the engineering business. 
 
However, Mr Birla had the shares in the main company. Untangling it, and letting him have a majority in the cement business is all about the emergence of UltraTech Cement as a new force in the industry.
 
The scheme had a threefold objective. The first was to create a structure that would allow Mr Birla to get exactly the desired level of control in the cement business.
 
The second was to enable the relinquishment of the interest of Mr Birla in the engineering business. 
 
The third was to minimise the cash cost of the acquisition, to both sides.
 
The key to all of the above was the wholesome support of the GFIs.
 
The cement business was separated from the main company through a step-down structure rather than a clear-cut separation of the two through a straight demerger.
 
L&T set up UltraTech as a step-down subsidiary and effected the separation of the cement business in such a manner that it retained a 20% stake in UltraTech and 80% was distributed pro rata to all the shareholders of L&T. 
 
About 8.5% of the shares held by L&T in UltraTech (out of 20%) was sold to Grasim and Grasim was allowed to acquire additional shares without a formal open offer at a preset price of Rs342.60 per share.   
 
Altogether, Grasim would have a 51% minimum stake in UltraTech when the steps were completed.
 
The acquisition of shares at a pre-fixed price without going through an open offer was perhaps the only such instance that the stock exchanges and the Securities and Exchange Board of India (SEBI) permitted.
 
This aspect was one of the contentious issues before the Bombay High Court (HC), where some of the minority shareholders objected to the scheme. The extract from the court’s order on the non-applicability of the open offer is reproduced for academic interest.
 
 
The primary issue that the HC had to deal with was the pricing for the open offer/ further acquisition by Grasim. The absence of a price discovery was urged before the court, but failed to impress it.
 
The concept succeeded mainly due to the GFIs tendering the shares in big numbers without any demur on the pricing. They were perhaps under instructions to make the scheme succeed.
 
L&T sold only an 8.5% stake out of the 20% it held in UltraTech in the first instance. Logically, it should have offloaded the full quota as the objective was for Grasim to get 51%.
 
One of the reasons cited off the record is that the pricing was not found fair and, hence, they did not! Exactly the point raised by the minority shareholders! 
 
In 2009, L&T sold the balance 11.5% for about Rs1,050 crore which is significantly higher than the earlier price offered to the public shareholders in the open offer. 
 
The other unusual feature of the scheme was that the shares held by Grasim in L&T after the separation of the cement unit were purchased by a staff welfare trust which got funding from the company itself for this purpose. It was almost like the company buying its own share back!
 
The issue was also dealt with in detail by the HC and a relevant extract is placed for reading.
 
 
This was again achieved by a convenient pricing such that the cost did not cut a big hole in L&T’s pocket. The said trust continues to hold such shares (14.37%) to this date and this has gone unquestioned by the public shareholders and the regulators.
 
Some time ago, some of the workers of L&T had questioned this arrangement in the court that little is known of how the trust is administered, who benefits from it, and who effectively controls it. However, nothing further is known about this case.
 
Thus, Grasim got its pound of flesh, and the L&T management its ask of holding L&T shares in a trust which has effectively acted as a bulwark against any further takeover attempts.
 
 
Exactly 20 years have passed, and UltraTech has acquired about 23% in The India Cements Ltd. 
 
The said board meeting (on 27 June 2024) to make a financial investment of Rs1,900 crore commenced at 8.15am and concluded in 30 minutes!
 
(Ranganathan V  is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
Comments
Kamal Garg
2 weeks ago
It is recommended to not write such internal business matters related article in public domain - probably each word stated may not have full authenticity and documentary backup. It relates to intricate and nuance-based dealing between some businesses which would always happen in any case. Similarly what happens behind the doors in the PMO while electing/appointing Lok Sabha Speaker, should remain behind the doors.
sashedawood
2 weeks ago
Brilliant. Proves the adage " you tell me who you are , I will tell you the law". But very interesting.
Meenal Mamdani
2 weeks ago
Thanks to you, Mr Ranganathan, we readers of MLF newsletter, discover the convoluted machinations conducted by high powered individuals to achieve the desired outcome.
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