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Mergers of convenience
September, 21st 2006
The practice of putting through private deals in which a third party practically cannot participate should be put an end to forthwith. In the greatest ever division of corporate spoils in Indian history, the two siblings reportedly sat across the table in what was evidently a private deal to disentangle the cross holdings they had in each other's fiefdoms-to-be and put through the transactions through the stock exchange's block transfer mechanism. But surprisingly the manoeuvre got only a passing reference in the media given the fact that by resorting to this, a huge tax saving was sought to be effected exemption from long-term capital gains tax is available only if the transactions is routed through a recognised stock exchange in India which would let the players off with a soft impost called the Securities Transactions Tax (STT). Taking advantage of the law There was an encore of this farce more recently when promoters of a software major did the same while transferring the individual holdings of family members to an investment company. But why begrudge their good fortunes? After all they were only taking advantage of the law as it was and which continues to be what it was. The farce of putting through private deals in which a third party practically cannot participate should be put an end to forthwith. A cement MNC gave a short shrift to small shareholders by paying as much as Rs 15 less per share in its public offer vis--vis the price paid to the promoters of the Indian company whose stake it had purchased, under the disingenuous plea that the difference was towards non-compete fee. Would the non-compete fee have been upped by Rs 15 had one more share been acquired or for that matter reduced by Rs 15 had a share less been acquired? The truth is non-compete fee is either a lumpsum or a percentage of future profit. It simply has no nexus with the share quotation or valuation. But why begrudge the good fortune of the multinational? After all it was only taking advantage of the law as it was and which continues to be what it was. Incumbent managements shaking in their boots resort to buyback in the name of enhancing shareholder wealth whereas in truth it is only a thinly disguised attempt to feather their own nest. By announcing a 20 per cent buyback, the incumbent management with a present 20 per cent control leapfrogs to a 25 per cent stake 20 divided by 80 is 25 per cent by spending not a single rupee but by asking the company to bankroll the exercise. But why again begrudge the good fortune of the promoters. They have not broken any law. After all they are only taking advantage of a law that fails to counter this potential misuse. For the sake of control There is no reason why the public offer requirement of the SEBI Takeover Regulations shouldn't be triggered in such an eventuality. Existing promoters fearing the public offer requirement resort to merger to beef up their control. The stratagem is as disingenuous as buyback. By promoting a small non-listed company inuring solely for the benefit of such promoters, the public offer requirement is cleverly ducked because the Regulations in terms exempt such ingenious schemes from their purview. This can be easily understood with an illustration. Let us say there is a listed company with a share capital of Rs 100 crore comprising 10 crore Rs 10 shares. Let us say in this company the incumbent management has only 20 per cent stake thus giving it sleepless nights. The management's advisers would advise it to promote a small company with a capital as little as Rs 1 lakh divided into 10,000 shares of Rs 10 each. By fixing an exchange ratio of 10 shares in the listed company for every single share in the unlisted private company, the promoters would have obtained one lakh extra shares on a platter in the listed company. This would increase their comfort level in the listed company. And there is no limit to such mergers of convenience. There are also no norms for valuation of business, so much so that courts more often than not appear helpless when a chartered accountant's certificate is flaunted in support of such outlandish valuations. But, then, don't begrudge the good fortune of such promoters. After all what they are doing is take advantage of the exemption in the takeover regime. S. Murlidharan (The author is a Delhi-based chartered accountant.)
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