Although SEBI must amend the Takeover Code, re-examining Alcan's reconquest of Indal will be counter-productive.

By George Skaria & Roshni Jayakar

It was a potent indicator of the growing maturity of the M&A game. On June 18, 1998, the committee, chaired by the former Chief Justice of India, P.N. Bhagwati, that drafted the New Takeover Code quietly met at the office of the Securities & Exchange Board of India (SEBI) to discuss the gaping loopholes in it. That had become evident in the light of the dramatic denouement in the takeover tussle between the Rs 1,105-crore Sterlite Industries (Sterlite) and the $7.77-billion Alcan for the Rs 1,163-crore Indian Aluminium Co. (Indal), which ended in June, 1998, when the financial institutions decided to sell their stake.

After the meeting, Bhagwati released a White Paper that listed, among others, the measures to deal with the contradictions brought to the fore by the 105-day bitter battle for Indal. Including:

• Removing the ambiguities in the definitions of a promoter, voting rights, and public shareholding.
• Issuing a more detailed clarification on whether the offer price could be revised due to negotiated deals.
• Taking a decision on whether a negotiated deal should be allowed after an open offer has been made.

While SEBI will, obviously, consider these issues to make takeover bids in the country more transparent, BT learns that its chairman, D.R. Mehta, is even toying with the idea of investigating Alcan's successful attempt to acquire a 20 per cent stake-in addition to the 34.60 per cent it already holds-at Rs 200 per share in Indal.

In this endeavour, Mehta is being encouraged by the vanquished 45-year-old CEO of Sterlite, Anil Agarwal, who claims that he plans to pick up the 2 per cent stake that Indal's shareholders are willing to sell to him at Rs 221 per share (Rs 131 in cash plus Rs 90 by way of optionally convertible preference shares in Sterlite). Behind closed doors, Agarwal-aided by some Foreign Institutional Investors (FIIs)-is desperately trying to reverse the acceptance of Alcan's counter-offer by the financial institutions by questioning its very modus operandi.

Still, an investigation by SEBI could be a non-starter. For one, Bhagwati has opined that the regulator cannot investigate a takeover bid in retrospect. Such a move, he feels, will allow losers in takeover battles to insist on a re-look at the manner in which the successful bids were accepted by the shareholders. And the financial institutions too contend that a re-look at the deal will hurt the interests of the shareholders who have decided to sell their shares to Alcan. In fact, both Alcan and its merchant banker, JM Financial, have threatened to go to court if SEBI decides to re-open the case.

What exactly is the bone of contention between Sterlite and Alcan? In a way, the credit for Alcan's coup should go to JM Financial, which stunned Indal's shareholders by announcing that it had purchased 15,000-odd shares at Rs 200 per share in a negotiated, open-market deal on the day of the closure of Alcan's counter-offer on June 2, 1998. By exploiting the loopholes in the Takeover Code, Alcan managed to raise its counter-offer from the original price of Rs 175 to Rs 200 per share.

While the move may have been smart, Sterlite maintains it was unethical and ''made a mockery'' of SEBI's guidelines. To set the record straight, Alcan's move was not illegal. For, Section 20(4) of the Code states that if the acquirer-or its merchant banker-buys shares either from the open market or through private deals after the announcement of the open offer, all it must do is to offer the same price to other shareholders too. And Section 26 allows an acquirer to hike its price and the number of shares purchased ''at any time upto 7 working days prior to the date of the closure of the offer.''

Clearly, that swung the tide in Alcan's favour as the financial institutions found it more attractive to sell their stake to the promoter than accept Sterlite's offer. While Sterlite's offer price was higher, it had a lower cash component. That, however, worked against the interests of some FIIs since they had already decided to sell their stake to Sterlite. Agrees Jayant Thakur, 31, the CEO of the audit firm Jayant, Thakur & Co.: ''JM Financial's private deal was unfair to the public shareholders, who did not have enough time to respond to the hike in the open offer. The best way to set the Code right is to not allow revisions in (the offer) price, or the purchase of shares in the open market 7 days prior to the closing of the offer.''

Bhagwati, and other legal experts, think otherwise. At the June 18, 1998, meeting, the former judge reiterated that the two clauses had been deliberately included in the Takeover Code to protect the minority shareholder. That is why the Code states that, during the offer period, the price paid in any negotiated deals should also be given to the other investors. In any case, none of the Indal's shareholders will lose anything since Agarwal has agreed to buy the shares offered to Sterlite. Which provides even them a lucrative exit route.

Of course, apart from the stockmarkets, the Alcan-Sterlite battle was also fought in the corridors of the political capital. Not unlike other corporate wars, such as the Rs 14,128-crore Reliance Industries' bid to acquire the Rs 5,559.69-crore Larsen & Toubro (l&t) in 1988. Says N.K. Chowdhury, 54, coo, Indal: ''Our focus on Delhi was critical since a new government had taken charge, and we had not explained our position to it.''

To co-ordinate these lobbying efforts, Indal's ceo, Tapan Mitra, 59, formed an A-Team comprising the Finance Director Partho Dutta, Company Secretary Vijay Sampath, and N.K. Chowdhury. As a first step, Mitra decided to proactively interact with the Foreign Investment Promotion Board (FIPB), and secure its approval to hike Alcan's stake in Indal from 34.60 per cent to 54.60 per cent in lieu of the counter-offer to acquire an additional 20 per cent. The logic: the shareholders were likely to reject the counter-offer unless the FIPB cleared the proposal. Mitra also knew that he could lobby with the FIPB to send the right signals to the government. For instance, he met the FIPB Chairman and Industry Secretary, R. Prasad, and impressed on him the fact that Alcan's move would bring in Rs 200 crore in foreign exchange. In addition, he also hinted that rejecting the Alcan offer could send negative signals to the Canadian government, which has imposed sanctions on India following Pokhran-II.

Another ace that the Canadian major played was its proposed investment in the Rs 4,000-crore Utkal Alumina-the largest alumina project in the world-which has been jointly promoted by Alcan, Indal, Tata Industries, and the $13-billion Norsk Hydro. Not surprisingly, at the peak of the takeover battle, numerous press conferences were held to counter the criticism that Alcan was not interested in the project. Since the Utkal Alumina plant will be set up in Orissa, Indal secured the support of Navin Patnaik, the Union Minister of the nodal Ministry of Steel & Mines, who hails from the state, and has emotional associations with a project that was pushed through by his father, the late Biju Patnaik, when he was the chief minister between 1990 and 1995.

Similar arguments to scuttle Sterlite's efforts were made to the Union Finance Ministry and SEBI. At a macro level, Indal told senior bureaucrats that since the oft-stated official stance has been not to destabilise existing managements, Sterlite's bid should not be entertained by the financial institutions. Consequently, SEBI was asked by North Block to treat Agarwal's offer with caution as the Code had never been put to test. It was also impressed upon SEBI officials that Sterlite did not have the requisite cash to finance the takeover since the company had to redeem Rs 400 crore of Global Depository Receipts in the first quarter of 1999.

As of now, Agarwal has only one option left: use his political clout to stall the deal. Counters Riain Karanjiwala, 42, a Delhi-based corporate lawyer: ''Sterlite seems to have lost the battle because of the inherent advantages that Alcan had of being a substantial stakeholder.'' If SEBI refuses to investigate Alcan's bid, Agarwal will find that his ambition to become a takeover tycoon will have to wait for another day-and another Code.

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