Increasing their stakes now will give them many benefits, with the option of selling profitably later.

By Dilip Maitra

Last fortnight, the Japanese foods giant, Nissin Foods, was desperately preparing a blueprint to shore up its 40 per cent stake in the Bangalore-based Indian joint venture, the Rs 25.02-crore Indo-Nissin Foods. The reason: Keki B. Dadiseth, the ceo of the Rs 7,244.64-crore Hindustan Lever Ltd (HLL) had decided to sell his company's 40 per cent holdings in the joint venture. If Nissin does buy out HLL's stake, that would make it the 27th incidence of a stock buy-out by a promoter in corporate India in less than a year. And these hikes come from promoters who already have a majority stake in their companies. The modus operandi for achieving this objective are varied -- open offers, negotiated deals, or buying out the joint venture partners' holdings. Says Avinash Kalia, 35, associate director, HSBC Capital Markets: ''The trend will be significant even if it doesn't turn into a boom.''

The reasons for the new-found possessiveness on the part of the promoters differ, but the net effect has been a huge consolidation and strengthening of their holdings. For instance, in the case of the Rs 161-crore Sandvik Asia, the foreign promoter, the Sweden-based $3.66-billion Sandvik, already owned a majority 54.59 per cent stake, and increased it to 73 per cent. In companies like the Rs 86.65-crore Birla 3M, the $15-billion US-based 3M Corporation increased its stake to 76 per cent by purchasing a part (25 per cent) of the 32 per cent stake owned by the Rs 800-crore Yashovardhan Birla Group. And, in the Rs 42-crore IIS Infotech, the UK-based software house, F.I. Group, not only purchased the Indian partner's stake but is also increasing its holding from 76 to 100 per cent. BT analyses why promoters are increasing their stakes and provides an insight into the corporate control plans being finalised in India Inc.'s boardrooms.

TOTAL CONTROL. A simplification of the rules has opened up new opportunities for promoters, especially transnationals, who have always believed in absolute control. For, many of them, who were not allowed to own more than 40 per cent in the pre-liberalisation era, and 51 per cent till recently, believe in operating through wholly-owned subsidiaries. For instance, 3M, which set up its joint venture in India a decade ago, and has operations in 40 countries, operates through wholly-owned subsidiaries everywhere in the world except in Japan and India. Explains L.D. DeSimone, 62, global chairman, 3M: ''We are a highly innovation-driven company, and strive to safeguard our technologies. We certainly feel more comfortable when we have 100 per cent control.''

Thus, after buying out the Yashovardhan Birla Group's stake, there is a possibility that the US major will make an open offer to the minority shareholders. Similarly, the US-based $1.30-billion Fuller, which increased its stake in the Rs 101.26-crore Fuller India from 80 to 93 per cent, had stated in its open offer that ''it is the corporate philosophy of the acquirer group to fully own international subsidiaries In view of the secrecy required for proprietary technology, the acquirer wishes to increase its shareholding in Fuller India to 100 per cent '' Similarly, the $65.87-billion Matsushita Electric of Japan has increased its stake in National Panasonic India from 80 to 100 per cent through a negotiated deal. And the $34.71-billion Samsung of Korea, which has already increased its stake in Samsung India Electronics from 51 to 74 per cent, is trying to acquire the remaining stake from the foreign institutional investors.

THE PARTNERS' SMALL POCKETS. In most of the joint ventures, the Indian partners are either being forced to sell their stake, or to freeze their existing investments. And both these measures are leading to an increase in the holdings of the foreign partner at the expense of the Indian counterpart. One major reason for this trend is that the joint venture often needs fresh investments. Thus, the two partners have no option but to pump in fresh equity as the company can neither raise fresh capital from the bourses nor resort to debt.

However, the cash-strapped Indian partner is, unable to contribute his share, is allowing the foreign partner to increase its stake in the company. Consider the case of the Rs 787-crore Whirlpool India, where the US-based $8.52-billion Whirlpool Corporation had a 56 per cent stake. The Indian promoters, J.R. Desai and associates, controlled 15 per cent, and the remaining was held by the public. Since it was operating in a highly competitive, low-margin industry, the joint venture had accumulated losses of Rs 57 crore, in June, 1997.

Despite the problems, Whirlpool pursued its expansion plans and set up a Rs 350-crore frost-free refrigerator unit at Rajnangaon (Maharashtra). But to service the increased debt, the American parent decided to raise money through a rights issue, of which its share would be Rs 100 crore. Desai's inability to bring in his matching share of investment compelled Whirlpool to buy his entire 15 per cent holding.

The Indian partner may also refuse to pump in money into the joint venture due to commitments in other ventures. For instance, the Mumbai-based Rs 3,456-crore Mahindra & Mahindra (M&M) has decided to freeze its equity exposure in Mahindra Ford, its joint venture with the US-based $147-billion Ford Motors. M&M has invested Rs 135 crore in the 50:50 venture. But, since the Mahindras needed resources for their Rs 600-crore integrated design-and-manufacture project, they decided against an additional equity investment in Mahindra Ford even though Ford plans to pump in Rs 220 crore as fresh equity. The result: M&M will soon become a minority (20 per cent) partner.

Similar was the case of Mercedes-Benz India, in which the Rs 32,351-crore Tata Group has reduced its stake from 40 to 18 per cent. In the process, the 51 per cent stake owned by the $62.35-billion Daimler Benz of Germany has gone up to 82 per cent. The reason: the Tata Group refused to part-finance the fresh equity investment of Rs 450 crore required by the company, which sells Mercedes-Benz models in India. Instead, it decided to spend that money on its own small car venture through the Rs 10,074-crore TELCO.

FAMILY VULNERABILITY. After the sell-out by the promoters of the Rs 480-crore Raasi Cement, most family-owned companies are worried. For, as the episode demonstrated, in case the promoters' stake is dispersed among members of the family -- or a group of promoters -- a prowling predator can woo a member and barge into the company's boardroom. Which is just what N. Srinivasan, the CEO of the Rs 743.47-crore India Cements did with Raasi. To prevent an encore, active promoters are desperately seeking a consolidation of their holding.

For instance, the Rs 114-crore Classic Diamonds was jointly promoted by four promoters, led by Chandrakant Bhansali with a 44.87 per cent stake in its Rs 3.50-crore equity base. The other three promoters, one of whom was Jatin Shah, the CEO of the Rs 460-crore Su-Raj Diamonds, together owned another 11.20 per cent, while the remaining is held by the public. To prevent a possible takeover of the company, whose scrip was quoting below par in January, 1998, Bhansali persuaded the co-promoters to sell their stake to him. Armed with a 56.07 per cent stake, he was forced to make an open offer for an additional 20 per cent under the 1994 Takeover Code.

As the Classic Diamonds' case proves, many promoters are merely being forced to increase their stakes because of the new rules of the corporate game. Thus, whenever a promoter buys a strategic stake held by either a co-promoter or a future predator, and his stake crosses the 51-per cent threshold, he is forced to make an open offer.

PRIVATE ATTRACTIONS. The government now allows transnationals to own even 100 per cent in their Indian operations. Says S.K. Shelgikar, 43, the advisor to the Rs 1,724-crore Videocon International: ''The new policies encourage promoters who want total control in their operations to hike their stakes.''

In fact, promoters can now convert a publicly held company to a private one. ''The freedom to do this is a major attraction for many foreign (and Indian) promoters to use the open offer route to increase their holdings by substantial proportions,'' says Jayant Thakur, 32, the owner of the Mumbai-based chartered accountancy firm, Jayant Thakur & Co.. For, once the public holdings fall below 20 per cent, the stock exchanges can delist the company. And, under the New Takeover Code, a company can be delisted if the public holdings drop below 10 per cent due to an open offer.

Delisting also enables the promoters to restructure the company radically without having to obtain permission from the shareholders. For, many of them have realised that institutional shareholders, like the financial institutions, could stall sensitive decisions. That explains why the Rs 295-crore Wockhardt, which purchased a 49.83 per cent stake held by Tata Group in the Rs 134.84-crore Merind, has decided to acquire the entire floating stock. BT learns that Wockhardt wants to restructure Merind's operations by either selling a few divisions, or merging others with Wockhardt. Admits H.F. Khorakiwala, 55, CEO, Wockhardt: ''It is faster and easier to restructure a company if one has a 100 per cent ownership.''

LOW VALUATIONS OF SCRIPS. The sudden rush to increase stakes is also prompted by the fact that this may be the right time to do so, especially since the promoters may be able to offload the shares at a higher price later. For, most scrips, especially the mid-cap ones, are quoting at low prices. Thus, promoters who feel that their scrips are undervalued are buying out shareholders. Agrees Pradeep Dokania, 40, senior vice-president, DSP Merrill Lynch: ''Very low valuation of the stock is a major incentive for consolidation. If one has the money, this is the right time to increase one's stake.''

For instance, consider what happened in the case of Sandvik Asia. At a 26-week average price of Rs 1,583 per share (face value: Rs 100), just before an open offer was made on November 25, 1997, the company's market capitalisation was Rs 294 crore. And that was 21 per cent lower than the average level in 1996. Even at the offer price of Rs 1,800 per share -- 13 per cent higher than the existing scrip price -- the promoters spent 11 per cent less than they would have had to a year ago. The result: the Swedish parent had to spend only Rs 61 crore, compared to Rs 78 crore if the offer had been made at the same premium in 1996, to raise its stake.

Of course, this means that if companies have a high market capitalisation, it may be unviable for the promoter to increase its stake. Thus, the scrip price of Rs 5,000 per share (face value: Rs 1,000), on April 22, 1998, of the Rs 1,373-crore Mico may prove to be a deterrent for the Germany-based Robert Bosch to increase its stake from the existing 51 per cent. For, it will have to spend an enormous Rs 931 crore to shore up its holding to 100 per cent at the existing price.

Buying the shares of their own companies at current low prices also enables the promoters to offload them at a higher price after restructuring. Especially in cases where the promoters feel that the companies' future potential is excellent. For instance, ever since Sunil Mittal, 40, the CEO of the Rs 240-crore Bharti Group, decided to diversify into providing cellular and basic telephone services, he was sure that financing the ventures would be a stumbling block. Agrees Akhil Gupta, 42, the CEO of the Rs 19.90-crore Bharti Tele-Ventures, the holding company for the operating subsidiaries: ''There was no doubt that a mid-sized group like ours would find it difficult to raise money for the telecom ventures.''

So, the Mittals have made an open offer to buy 24.50 per cent of Bharti Telecom's equity to increase their holdings to 100 per cent. That will allow the promoters to delist the company, restructure it, and force future investors to pay a higher price. As Bharti's Gupta points out: ''The current stock prices are undervalued. (Only the group's cellular licence for Delhi has been valued at Rs 1,700 crore, which translates into a scrip price of Rs 402 per share.) By buying our stakes at a premium to the current market price, we are providing an attractive exit route to shareholders, while retaining for ourselves the option of raising fresh capital, or offloading the shares at a higher premium in the near future.''

Although this first phase of the consolidation of holdings has rational reasons, its benefits will accrue only if the second phase, when the promoters offload their shares or the scrip price perks up, is also successful. For investors, it might be a better idea to only partially bite the promoters' bait in phase I to take advantage of the higher offer price, so as to be in a position to also book profits in phase II of the promoters' plan. That would be a 100 per cent solution. 

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