Call it a transnational's takeover attempt. Or the climax of a feud between the promoters of India's largest paints company. Or a saga of frustrated ambition. But all of them tell the real story of the colourful battle for control of the Rs 938-crore Asian Paints. The inside stories.

By Alam Srinivas, Chhaya and Jay Vikram Bakshi

March, 1997: At a meeting between the four promoter families of the Rs 938-crore Asian Paints, chairman Champaklal Choksey, 81, is told that his idea of floating a rights or a preferential issue is not acceptable to anyone else. Champaklal, exasperated after trying for nearly two months to convince his friends, tells his son, managing director Atul Choksey, 48, to forget about Asian Paints.

April, 1997: Atul Choksey goes scouting for a buyer for his family's stake in Asian Paints. Meetings are held with senior executives of the Rs 646-crore ICI, and feelers are also sent to the $7.30-billion Kansei Paints. ICI India's managing director, Aditya Narayan, 45, says he's interested, but insists on a due diligence report--which delays and, ultimately, derails the sale for some time.

August, 1997: Hemendra Kothari, 64, the CEO of dsp Merrill Lynch, fails in his attempt to revive the dying deal between Atul Choksey and two foreign institutional investors (FIIs), Capital International and Morgan Stanley. And Merrill Lynch instructs Kothari to stop behaving like a "broker" and start behaving like the "chairman" of a company.

Replete with intrigue, ingenuity, and infighting, the saga of ICI's attempted takeover--thinly disguised as a strategic investment--of Asian Paints has raised more questions than provided answers. Events unfolded with furious speed last month, encompassing the death of Champaklal Choksey; an abortive bid to sell off the Choksey family's 8.87 per cent stake; a second, successful sale of a slightly higher 9.10 per cent stake; the resignation of Atul Choksey as the CEO of the company; the resistance of the Danis, the Vakils, and the Choksis to the sale of the Chokseys' stake to ICI; the elevation of Ashwin Choksi, 55, to the post of chairman and managing director--and the beginning of a long drawn-out battle for Asian Paints.

The stage for this battle royale was set almost seven years ago, when none of the dramatis personae had any inkling of the finale--bar one. That was when Champaklal Choksey, who died in the midst of the denouement, on July 31, 1997, first realised that the future would not be as kind to Asian Paints as the past had been. That was why he initiated the process of his--and his family's--abrogation from the company that he and three of his friends had founded in 1942. bt reconstructs the inside stories--there are several--of l'affaire Asian Paints.

The Inside Story Of The Promoters' Feud

The root of the differences between the promoters goes back to 1990, when Asian Paints drew up the blue-print of a massive expansion plan which included a 50 per cent hike in capacity--the bill: Rs 90 crore--a Rs 150-crore new joint venture with the $7.20-billion ppg Industries of the US to manufacture industrial paints, and a series of new ventures abroad. The other three promoters of the company insisted that these projects be financed through internal accruals and debt--both domestic and foreign.

However, the Chokseys felt that an issue of Global Depository Receipts (GDRs), or a rights issue, would prove far less expensive than debt. Thus the battle began, with the opposing trio refusing to have their holdings diluted through a gdr issue. Explains a spokesperson of the current management: "It must be noted that the company raises finance to the extent that is needed for the business. If these requirements can be met through internal accruals and debt, there is no case for an issue of equity. We have estimated the post-tax cost of an equity issue at 20 per cent of the amount raised while the post-tax cost of debt has always been lower than this." Atul Choksey gave in, but was vindicated by the company's financial performance: Asian Paints' interest costs have climbed from Rs 10.45 crore in 1993-94 to Rs 21.68 crore in 1996-97.

Other simmering disagreements included those over the company's ventures abroad. Despite the facts that its Australian unit reported accumulated losses of A$692,376 (Rs 1.87 crore), and its units in Tonga and Solomon Islands witnessed a dip in sales in the last fiscal year, the Chokseys wanted to push Asian Paints into new ventures in Oman, South Africa, Vietnam, and the United Arab Emirates (UAE).

The accumulated result: the second generation of the other promoter families--Ashwin Dani, Ashwin Choksi, and Abhay Vakil--developed their own ideas about how to run the company. And both Champaklal and Atul found they could no longer bank on their co-promoters' support. It was in this backdrop that the Rs 37-crore Apcotex Lattices (Apcotex) assumed importance for the Chokseys. It was formed in April, 1990, by spinning off the Apcotex division, which manufactured vinyl pyridine latex and later diversified into styrene butadiene rubber (SBR). Realising that their growing feud with the other promoters would, sooner or later, lead to a face-off, Champaklal and Atul had been quietly nurturing Apcotex as their vehicle of growth in case of a split.

Thus, in December, 1992, they got the other--till then equal--shareholders in Apcotex to renounce their rights in favour of the Chokseys. Soon afterwards, Champaklal showed his hand, asking his partners to help increase his equity stake in Asian Paints from 13.50 per cent--the same volume of holding as owned by them--to 23 per cent.

In exchange, Champaklal promised to help the other promoters of the company set up new ventures like a finance company. But as they refused to consider this, the Chokseys began plotting their exit from the company. According to Mumbai-based marketmen, the Chokseys went on to sell about 4 per cent of their holding in the open market, lowering their stake to 9.50 per cent. Thus, the final withdrawal of the Chokseys became simply a matter of timing.

The Inside Story Of ICI's Involvement

Even as the battle raged within Asian Paints, the Second Act started unfolding at Millbank, the London headquarters of the $16.43-billion ICI PLC. Inducted to ICI PLC's corner-room in 1995, former Unilever director Charles Miller-Smith announced that its Indian subsidiary, ICI India, would go on the offensive with a target of achieving ten-fold growth in 10 years. The 10X Plan, as it was called, envisaged a strategy based on acquisitions, takeovers, and alliances.

On a visit to India in March, 1996, Miller-Smith declared that the Indian company was planning to acquire at least two paints-manufacturing units by the end of 1996. In fact, he personally explored the possibility of a strategic alliance with the Rs 399.07-crore Goodlass Nerolac, a joint venture between the Rs 29,000-crore Tata Group and Kansei Paints of Japan. With these talks breaking down, Asian Paints--with a 20 per cent share of the Indian paints market, versus ICI's 8 per cent--was shortlisted as a lucrative target.

Happily for ICI, the internal battle at Asian Paints reached a decisive stage in January, 1997. Champaklal revived the idea of a Rs 200-crore rights issue to finance a capacity expansion project, aimed at thwarting the growth plans of both ICI and the Rs 277.97-crore Berger Paints, which were setting up units in Mumbai and Pondicherry, respectively. While refusing to accept the suggestion of a rights issue, their partners also stymied the Chokseys' suggestion of a preferential allotment at the prevailing market price of Rs 280 a share, as that would have served Champaklal and Atul's purpose.

So, the Chokseys activated Plan B: selling out of Asian Paints and, if possible, walk out with the company's Ankleshwar unit which manufactures 18,000 tpa of phthalic anhydride. This was crucial, as Asian Paints is the only paints company in India to produce the orthoxylene derivative, and it has gained a competitive edge from this backward integration. ICI India responded with alacrity, starting talks in April, 1997. On the block were 35.58 lakh shares. Or a 8.87 per cent stake.

In May, 1997, Narayan asked for a due diligence report on the company and the Choksey family's holding. But talks with the other promoters did not fructify into a deal, and the price asked by the Chokseys was also perceived to be too high. Even so, on July 24, 1997, ICI India received its shareholders' permission to invest upto Rs 200 crore--versus Rs 75 crore--in the shares of one or more companies.

By now, the Chokseys were in a great hurry, partly because the 81-year-old Champaklal's health was failing. With ICI India putting the brakes on the buy-out plan, the Chokseys decided to explore other avenues for a sale. And a deal was struck with dsp Merrill Lynch which sold the 8.87 per cent equity stake to Capital International and Morgan Stanley, on July 31, 1997. The price tag: Rs 357 per share, or a total of Rs 127 crore. In an ironic twist, Champaklal died the same day, unaware of the fate of his plan.

The Inside Story Of The FII Deal

Perhaps the death of the company's chairman, who had set up Asian Paints in a garage rented for Rs 75 a month, turned the spotlight on the deal. And by August 1, 1997, it was public knowledge that the Chokseys had already offloaded a major portion of their stake. That angered the two buyers, who claimed that they were not aware of the identity of the seller, and would never have invested in Asian Paints had they known that its CEO himself was plotting an exit. Senior executives of Capital International and Morgan Stanley contended that they were under the impression that the shares belonged to all the four promoter families, and not just to the Chokseys.

The two FIIs backed out of the deal on August 7, 1997 as, according to several brokers, the price of the scrip dropped from Rs 375.75 on August 1, 1997, to Rs 328.50 by August 5, 1997, which would have meant a sizeable loss in their books. That left Hemendra Kothari in the lurch. He could not force the FIIs to honour their commitment, nor could he ask his old friend Atul Choksey to take back the shares to bail him out.

Finally, on August 13, 1997, the deal between Atul Choksey and dsp Merrill Lynch was called off. Actually, Atul Choksey had simply decided to revive his talks with the old suitor, ICI India. This time, with financial sharp-shooters Kotak Mahindra Capital--ICI's favoured intermediary--brokering the deal, the sale to the transnational was quickly signed, sealed, and delivered, by August 17, 1997. On paper, Choksey sold his shares to a financial intermediary at Rs 347.50 per share, claiming to be unaware that the latter would sell the block to ICI India at Rs 351. The sale, while not exactly taking the remaining promoters unawares, convinced them that they would have to decide now whether to support or fight ICI's intention of acquiring Asian Paints.

The Inside Story Of Asian Paints' Future

Will ICI's toe-hold in Asian Paints prove to be firm? At the August 22, 1997, board meeting, the Danis, the Vakils, and the Choksis decided that they would not let the board approve the transfer of the shares to ICI. They also signed an agreement between themselves to ensure that none of them sells any shares to ICI, without giving the others the first right to buy them. They are also talking to the financial institutions to stall ICI's entry into the board. Says the company spokesperson: "The board of directors of Asian Paints is of the unanimous view that this represents an attempt by a transnational rival to acquire a foothold in the company." Adds Ashwin Choksi: "We are open to buying Atul Choksey's shares ourselves."

For ICI, that leaves the options of persuading one, or more, of the promoters to change their minds, or to mount a hostile takeover bid. Consider the present shareholding pattern in Asian Paints: while ICI will own 9.10 per cent of the equity, the three promoters and associates will control 41.06 per cent and the financial institutions will hold 11.52 per cent, with the rest being scattered among several small and large shareholders. For ICI to acquire a controlling stake, therefore, it will need an additional 32 per cent, besides, of course, the tactical consent of the Centre, which discussed the issue at a Cabinet meeting on August 23, 1997.

Interestingly, ICI India was clever enough to route the deal through its parent company as the latter requires only the Foreign Investment Promotion Board's clearance while ICI India will need a battery of approvals, including that from the Company Law Board. Instead, ICI PLC simply took Reserve Bank of India's permission to provide a loan of $35.58 million (Rs 128.67 crore) to Kotak Mahindra Capital, which used the money to pay Atul Choksey for the shares.

On his part, Atul Choksey is likely to use his war chest of Rs 127.40 crore to buy into one of the mid-sized paints companies that are looking for buyers. He is also likely to try to buy out his former partners' stakes in Apcotex. Nor can the possibility of his return to Asian Paints in a managerial role--in case ICI acquires control--be ruled out. Meanwhile, as its would-be owners fight the takeover battle, Asian Paints gets an opportunity to prove that the innate strengths that it has built up over the years--a strong distribution and marketing network, and competitive costs--will be sufficient to weather this crisis. Sans colour.