Sucheta Dalal :Damning Silence Of Institutional Investors (11 November 2002)
Sucheta Dalal

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Damning Silence Of Institutional Investors (11 November 2002)  



For several decades, Indian industrialists have controlled companies with insignificant shareholdings, sometimes as little as 5 per cent. The concerted effort to shore up their stakes began only when the takeover code paved the way for hostile acquisitions and threatened their tenuous control over management.

Corporate India then used generous preferential allotments to increase their stake at a significant discount to their ruling market price. It was only after they (multinational companies led this game) gave themselves an obscene bonanza of Rs 5,000 crore worth of shares/warrants that shareholder protests ended the party.

This was followed by subtle changes in the rules to skew the game against hostile takeovers. The threshold for making an open offer to retail investors was quietly raised from 10 to 15 per cent. This ensured that a bidder had to fund a 35 per cent acquisition in order to make a serious bid and existing promoters could continue to control management with a lower stake. Industrialists also lobbied the central government to double the creeping acquisition limit for promoters to 10 per cent (temporarily) and permit share buybacks without shareholder approval.

All this was possible because Indian financial institutions (FIs), insurance companies and mutual funds have persistently failed to behave like responsible investors and good corporate citizens. As the largest stakeholders in companies, these institutions (who are now seeking a bailout by the taxpayers) have colluded with incumbent management either by their silence or by refusing to support attractive, hostile acquisition bids.

They have never discussed bad and anti-investor corporate decisions openly or added their might to the feeble protests by hapless minority shareholders. The damage caused by their silence becomes more apparent when you consider the successful defeat of Sterlite Industries in its attempt to delist its stock. Despite management control over 67 per cent of the equity, minority investors were able to beat Sterlite only because institutional investors refused to tender their 11 per cent holding.

Contrast this with ACC and Larsen & Toubro (L&T) — in each case, the silence of the institutions allowed companies to take retail investors for a ride. ACC and L&T are particularly absurd because so-called ‘strategic investors’ have virtually gained management control by acquiring relatively minor stakes at a mega premium. The institutions never questioned why a strategic investor would pay a premium when the shares were available in plenty in the open market. They did not prevent board positions from being instantly handed over to such ‘investors’ and were silent when retail investors were not offered the same price through an open offer. Yet, they hold enough of shares to have blocked all these moves.

Let’s look at some details.

Indian banks and institutions along with foreign institutional investors (FIIs) held 45.72 per cent of ACC’s equity at the end of September 2002. Even without the FIIs, they hold a decisive 26 per cent stake while retail investors have another 35 per cent. Together they could have prevented Gujarat Ambuja’s nominees from clambering on to the board or getting in their own chairman in Tarun Das, India’s leading advocate of good governance.

The Securities Appellate Tribunal (SAT) has created another opportunity for investor action by asking the Securities and Exchange Board of India (Sebi) to re-examine the ACC-Gujarat Ambuja deal. But institutions are not yet attempting to force the Seksarias to loosen their hold over the company.

Their attitude gets more curious when you consider that institutions have been the biggest losers in ACC. They subscribed to an ACC rights issue at an absurd Rs 2,000 per share at the height of the Initial Public Offering madness and later blocked the Tatas from giving themselves cheap preferential shares. Yet, when the Tatas sold out their holding in a shady three-tranche deal (at Rs 370 per share against the ruling market price of Rs 112) they remained silent. Is this collusion or plain lethargy? Either way, aren’t they accountable to anybody?

When Gujarat Ambuja acquired the first 7.2 per cent of ACC shares, some institutions had threatened to exit from the company, but they have neither done that nor are they safeguarding their investment.

Now let us look at L&T. Institutions hold 38 per cent of L&T’s equity, yet neither they nor its ‘professional management’ objected when the Birlas walked into the company and on to the board with a 10 per cent holding acquired from Reliance at a 47 per cent premium. Retail investors again hold a hefty 32 per cent of the company while the Birla equity is still under 15 per cent. Here too, the institutions along with retail investors are in a majority and can get the Birlas off the board if they make a determined effort. They needn’t even go through the pretence of hiking their holding, which will only make the Birla position more secure if they don’t act decisively to defeat the open offer at a low Rs 190 per share.

Both in L&T and ACC, the institutions initially made some noises and pretended to flex their muscles. In the case of L&T, they had indicated a willingness to consider a counter offer at an attractive price. But would they have sold if the French cement major Lafarge were to make an attractive counter bid? And wouldn’t the Swadeshi Jagran Manch have jumped up to protest, while it stands by and watches two swadeshi promoters take retail investors for a ride? Most business decisions in India are riddled with such hypocrisy.

Apart from L&T and ACC, the FIs are also substantial shareholders in Grasim (25 per cent) and Gujarat Ambuja Cement (20 per cent). But they don’t seem to have questioned those boards either about the basis of the hefty premium paid for their acquisitions.

What about the regulator? When Grasim acquired the L&T stake, a top Sebi official had been quoted in this paper saying, “Since Grasim has made it clear it is not seeking management control, there is also no real issue of violation of the takeover code.” Now that Grasim has increased its holding to a shade below 15 per cent and is making an open offer, Sebi officials are both silent and inert.

Indian FIs have to be made to change their attitude — especially since tens of thousand crore rupees of taxpayers’ money is being diverted to keep them afloat. One way would be for shareholders and unit holders of the FIs and mutual funds to pressure their management to demonstrate that they are, at all times, acting in the best interests of investors.


-- Sucheta Dalal



 



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