NEWS & MARKETS
COMMENTARY
INTERVIEWS
CHAT
ARCHIVES

The Rediff Business Special / Takeovers, mergers, acquisitions

'Companies are still treated as family property'

Rediff On The NeT has made arrangements to carry the transcript of the popular television programme, Crossfire. We present the third of the series, which looks at the spate of takeovers, mergers, and acquisitions. The moderator is the well-known economist, Sanjaya Baru.

Sanjaya Baru: Hello, welcome to Crossfire, a programme of debate and discussion. The subject this evening: Takeovers, mergers, and acquisitions. Should the government be intervening to prevent corporate takeovers and not allow the big fish to eat the small fish? Should the takeover code have a defence mechanism against this process or should market forces be allowed to operate?

To discuss these issues, we are joined this evening by Satish Kaura, chairman and managing director, Samtel Group, and Shardul Shroff, an eminent corporate lawyer and a member of the SEBI Takeover Code Committee.

Mr Shroff, are we in a new ball game as far as takeovers, mergers, and acquisitions are concerned?

Shardul Shroff: Certainly! It was triggered off in February 1997 when the SEBI guidelines were announced and has now gathered pace because of a recessionary trend, low prices in the market, and people moving in.

SB: Do you agree that this is a period when big fish are eating the small fish or do you think a general restructuring is going on?

SS: I don't think the big fish are eating the small fish. I think it is a period when people are drawing up their economic comparatives. What does it cost to set up a new undertaking without the pangs of birth, move in if there is a ready undertaking which is undervalued? What does it take to go and buy it?

Satish Kaura: I think they are also looking at comparative pressure building up. In many cases there is a need to consolidate capacities. They haven't had economical size. Companies are trying to see if they can create synergy by adding on facilities. So, you know, in this recession they are getting ready for the next phase to come.

SB: Mr Kaura, in the 1980s, when Swraj Paul descended in India to take over Escorts, the entire Indian corporate sector ganged up. Do you see this gangup taking place again? Or has the Indian corporate sector accepted takeovers as an inevitable trend?

SK: Basically the corporate sector feels that a new world is dawning on us. There will be a need for consolidation, creating more synergies. Some of us would be shedding more activity for more focus. Other would be adding to capacity. And as Shardul is saying, it might be cheaper to a acquire rather than to build on greenfield capacity. So I think people are realising that this is the new way to go.

SS: Except that there is gang-up. Take the ICI-Asian Paints controversy and you have a situation in which hostility will brings the gang-up attitude immediately. I see a Swraj Paul situation recurring.

SB: Yes for instance in the BAT-ITC fight, there was a big drumming up of support on part of the domestic lobby, wasn't there?

SK: The problem we face right now is that though we say it is a level playing field, many of us in the domestic Indian industry have our hands tied up. For instance, if you look at the financial institutions and their policies, they have tied down Indian promoters through various covenants. The muscle power required to acquire is just not available today.

SB: Is that a legitimate complaint?

SS: Not true. Let me explain why the level playing field has to be viewed through comparatives again. The basic thrust of the Takeover Committee or the Takeover Code was increasing shareholder value. I do believe that most efficiently run corporates will go on the theory that market capitalisation of a company reflects its value. So if, recession apart, you are witnessing a trend where since recession occurs the prices are low, indexes are low, it is probably the right time to buy. But for companies which were not performing well, which were targetted, where strategies were involved, there institutions can't go on the theory that they will not lend to old assets. These institutions have a twofold duty. They have got in as equity holders as well as lenders. What they view in their capacity as a lender is not necessarily in tune with what they view in their capacity as a shareholders.

SK: I agree that the institutions where they are equity holders have to look at the value they are creating. But the trouble is that when they are both lenders and equity shareholders, they are most willing to lend on assets that are already on ground. Their attitude has been only to finance assets that have been created, fresh assets or assets that are still productive.

SS: The problem is that we are still following the traditional line that major promoters or corporates access institutional funds, where the latter are semi-government. There is a vast army of NBFC (non-banking finance companies) who are willing to lend money too for takeovers.

SK: Yes, but that is just coming up.

SS: But it is at a price that you are not willing to pay.

SB: You know, Mr Shroff, we were looking at takeovers, but let us look specifically at hostile takeovers. Do you see a resistance to this from the corporate sector?

SS: Yes, because today there is still a feeling of treating companies a family property. Even a technocrat feels that he should be protected. Question is, do we tackle it on competitive principles or do we tackle it in the spirit that the shareholders benefits by competition by jacking the price up. In a sense, what is the model we want to follow?

SB: Are hostile takeovers a part and parcel of corporate India now?

SK: We have to accept hostile takeovers also as part of the game. What I feel is that the financial institutions should not be encouraging financing acquisitions. Unless they strongly feel that the management is not creating value or somebody is going to default.

SS: I beg to differ. Ultimately there is an inbuilt capacity of a banker or an FI (financial institution) as a shareholder and as a lender. As a shareholder I must maximise value, I am also to get best returns. If as a result of an acquisition process, I can make good money why should I not be allowed to do so? After all, it is a commercial proposition!

SK: I have no issue with FIs as equity shareholders trying to enhance their value. I am questioning FIs as lenders, since in many Indian corporates they aren't equity shareholders.

SB: Earlier he was talking about FIs trying to provide more funding, do you agree to that as a solution to the problem?

SS: I agree with the view that shareholder value should be the main concern. If we start with this premise where an FI can get a return as a shareholder, by putting in money in its capacity as a lender, I don't see an issue. There should be no favours. There should be no arbitrariness. I think the policy should come. It creates a pool of assets. Someone who borrows has to return.

SB: Mr Shroff, whose interest should be at the heart of an institution? Shareholders or management.

SS: I think it is a bigger picture. What I am against is the basic premise that management, as long as there is no default, should be supported.

SK: At the end of the day, FIs have to create wealth, value for the nation. They must look at which proposition will create more value.

SB: So far we have been looking at domestic FIs. Let us look at foreign institutional investors. What is the corporate view here?

SK: I personally feel that the financing from foreign institutions should be available to domestic companies.

SS: I think the issue is really the way the government has reacted, the way private enterprise has reacted to the ICI-Asian Paints controversy. They don't want to accept the state where even a minority stake is believed as a takeover. Why so? Because if the main aim of the management is enhancement of wealth, then whether it is Indian wealth or foreign wealth, how does it matter?

SK: The Indian management has worked in one paradigm. It's just that there are lots of foreign companies which have deep pockets and are able to do lot of things which the Indian promoters cannot.

SS: Let them be put in an exception to the rule situation: that when there is threat of a foreign producer you are allowed access to domestic funds? Why say no as a policy?

SK: But the problem is the same. Right now, we do not have such funds anywhere.

SS: But Satish, is the answer to change that rule, that you will not get money?

SK: The point again is that we keep on saying that Indian industry must compete, which makes a lot of sense. But on the other hand when it comes to a level playing field we are doing nothing to create it!

SS: But Satish, consider this. If you have a policy like an Annexe-3, where the foreign direct investment equity is possible in a number of area beyond 51 per cent, what is the justification to say in a paint industry, ICI cannot buy into Asian Paints, because it is treated as hostile?

SK: I agree with you that at the end of the day, from the other side of the table, it does not look very logical. But the fact is that, these are free sectors. What about the other sectors where the equities are lopsided?

SS: Again, the answer is not the license raj, but to change the policy outside the Takeover Code!

SB: Thank you, gentlemen.

EARLIER CROSSFIRE TRANSCRIPTS:
Is the tariff structure hurting Indian industry?
The BJP's national agenda for governance

Kind Courtesy: IN TV

Specials