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For the small investor

Nov 30, 2002

Last week we mentioned that much of the change in sentiment has been led by new reform legislation being passed by the parliament and continuing optimism in global equity markets. With thanksgiving, U.S markets had a shortened trading week. Although closing lower on Friday, U.S markets registered another positive week and are threatening to end 2002 in the black. Since the great depression, U.S markets have not witnessed three straight down years. Consequently, investors could be guided by emotions. Domestic bourses also received a boost with reports suggesting the economy is charting a recovery. After a dip in September '02, core sector registered a growth of 6% in October '02. Among corporate news that is dominating front pages of dailies is the standoff between A.V. Birla group company, Grasim and stock market regulator, SEBI. Recently, Securities Appellate Tribunal (SAT) passed a ruling in favour of SEBI to investigate the Gujarat Ambuja - ACC deal for possibility of change in management control. Gujarat Ambuja had acquired 14.5% stake in ACC from the Tata group in 2000. Either SAT or SEBI seems to be suffering from delayed reactions. However, keeping that aside, the ruling seems to have encouraged SEBI, which has ordered the Grasim offer for additional 20% stake in L&T to be put on hold.

Adding to the chaos in the melee has been the management of L&T, which after sleeping for three years on cement divestment, has decided to push forward the cement sale agenda. Assuming the Grasim offer is not fair, Mr. Naik thought it fit to protect the interest of the small shareholders. With announcement of demerger and the added confusion -- giving speculative opportunity -- the L&T stock, which was trading at Rs 190 levels has crossed Rs 200 levels. Therefore, giving benefit of doubt, one could say Mr. Naik, pushing forward a noble agenda, has seen his actions being endorsed by the market. But the question that begs to be asked is what was Mr. Naik doing for three years, which has seen the L&T stock drop from Rs 650 levels. In all fairness, it would be reasonable to assume that some shareholders are irked with Mr. Naik. The only benefit of doubt one could grant is that having erred once, Mr. Naik is twice shy (hopefully).

Coming back to the regulator, SAT has issued a stay on the suit filed by Grasim, which challenged the order issued by SEBI against the company on the open offer for L&T. We reckon, SEBI being the market regulator, has the locus standi to stall market activity, which may not be fair to the small investor. As per the takeover ruling, on acquisition of 15% or more stake in a company, the acquirer has to make an open offer to the public for an additional 20% stake. The stipulation allows other investors, which are not confident on the new management, to liquidate their shareholding. The question that arises is whether only on acquisition of 15% plus does management control change? Could Gujarat Ambuja and Grasim holding less than 15% stake in ACC and L&T respectively be controlling board decisions?

We reckon, while SEBI has locus standi and has won a stay, it seems difficult to prove whether Grasim had management control of L&T, warranting an open offer price of Rs 306. If Grasim did have control, would they not stop Mr. Naik from obtaining board approval for making the divestment announcement? The confusion has given a good short-term opportunity to investors. Having said that, the situation is fluid with respect to future course of action to be taken by L&T management. If the intentions of L&T management are genuine, investor can look forward to higher reward.

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