»The Honest Truth by Ajit Dayal

Profit reservation: Ranbaxy's patent?
19 JUNE 2008

There is something intriguing about reservations.
In the past civilizations have indulged in racially and morally abusive behaviour against minorities. In modern times, governments have found various ways to apologise to those who were oppressed in the past. Reservations and preferential treatment for the oppressed have become one common way to "apologise".

In the USA the blacks were slaves and led miserable lives. Their great grandchildren have voting rights and far more freedom. Today's generation also has the support from anti-discrimination laws. This allows the current generation of blacks - and other minorities in USA - to seek a college education or better jobs. Minorities in USA benefit from "affirmative action".
And now there is a Presidential nominee from the Democrats who is from the minority community. Maybe we will soon see the first minority President of USA.

Even the vanquished have been treated well.
The "Red Indians" - or "Native American Indians" - have received large tracts of land to live on. In many cases these have been used to build casinos. Tribes have become rich from their ownership of these "sin" businesses.

Japan and Germany were defeated in World War II. Today they stand as global economic powers. This was the result of the funding and support from the victorious Allied Army, led by the USA and UK.

Afghanistan and Iraq, today the hotbeds of passion fanned by an unholy war, may end up as a pillar of modern day economies in the year 2030. The "Coalition of the Willing" may pump billions into rebuilding these countries.

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The India experience.
India is still experimenting with the correct solution for the terrible treatment of our own minorities.

Like any prescription that attempts to unravel hundreds of years of past evils, the issue is complex. The fact that minorities occupy a significant vote bank also makes it a political issue. This adds to the complexity of any solution. The Mandal Commission report or the recent Supreme Court ruling on reservations in education generates emotional outbursts.

When the Supreme Court imposed a 27 per cent quota for socially and educationally backward classes in government-funded institutions of higher education (like IIM, IIT, and AIIMS) the debates began anew. The ‘creamy layer" should not get this benefit, said the courts. The "creamy layer" noted the courts are those minorities that are rich. So, if you are a member of the backward caste (a minority), and if you are rich, the benefit does not apply to you.

This sounds fair to me.
After all, the reservations are to help those who have been denied opportunity.

If you are "creamy", then you have already "made it", so to speak.
And, hence, don’t need any reservation under any special quota.

Someone needs to apply a similar test to the Indian stock markets and the code for takeovers.
Let’s take the recent events surrounding Ranbaxy.

Ranbaxy founders get the cream?
A few disclaimers are in order.
What is true of the events in Ranbaxy is true of many other "corporate actions".
We own shares in Ranbaxy for many of our clients.
I am not an investment banker - in fact, I feel insulted when people refer to me as "investment banker". Not that all "investment bankers" are bad people. I have met a few who will do what is right for the investors. But, then, investment bankers are hired hands of the companies. They earn fees from the companies whose shares or "deals’ they sell.
Investment managers, on the other hand, are paid fees by the investors to manage their investments.

As shareholders in Ranbaxy, we are a "minority".
But not of the "creamy layer"

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A few days ago, the Japanese company, Daiichi Sankyo, and the founders of Ranbaxy agreed that Daiichi Sankyo would:

  1. buy about 130 million shares from Mr. Malvinder Singh and his family at Rs 737/share

  2. buy 46.26 million new shares from the company, Ranbaxy, at Rs 737/share

  3. buy 23.83 million options that could be converted into shares at Rs 737/share sometime in the next 6 to 18 months

  4. make an open offer to the general public at a price of Rs 737 per share for up to 20% of the emerging capital (the original 373.2 m + preferential issue of 46.3 m shares + 34.7 m shares based on the FCCB conversion + 8.4 million shares of ESOP = a total of 462.6 m shares), as per the SEBI regulations. This would mean that 92.5 million shares of the emerging capital of 462.6 million shares

That is interesting.
Mr Malvinder Singh and his family get to sell all their shares at Rs 737.
All the other shareholders get to sell only 1 out of 3 shares they own at Rs 737.
And the balance 2 out of 3 shares that we own in Ranbaxy are with us based on a market price of Rs 570. The share price may increase or decrease in value over the next few months and years.

The negatives of being a minority.
Again, to clarify, Mr Singh, Daiichi Sankyo, nor the investment bankers are doing anything wrong in this "deal".
Ranbaxy may have reverse engineered this "shoot-the-minority" drug, but it is not the first company to use this "shot". As such any claim by Ranbaxy to file a patent for this misuse against minorities will, alas, be turned down.

This misuse, unintentionally, has the blessings of the current regulations and practices in place under the SEBI.

In the old days we had the practice of making an untouchable ring a bell before he entered any village in India. This policy had the blessing of the kings and high priests. But it was still a wrong policy.

Regulations that are un-democratic or fail to distinguish between the creamy layers and the crumbs need to be reviewed.
Or revolutions will bring them tumbling down.

Mr. Singh and his family have done a wonderful job in creating Ranbaxy. And they deserve to be rewarded.
However, as minority shareholders we have taken equal risk.
That is the democratic nature of being shareholders, of being owners of common stock.

Mr. Singh and his ancestors took the risk of starting the business. But when they listed the company on the stock exchanges, they were rewarded for that risk. Their reward was the offer price they got for their shares at that point in time.
An offer price worked out by investment bankers hired by Ranbaxy.
All shares - since the IPO and the listing - are common shares and are now equal.
With the right to the identical risk, and the identical reward.

It is time that SEBI reviewed the regulations that currently allows one owner of common stock to get a higher share price than the other common shareholders.

In the meantime, if press reports are to be relied upon, Pfizer may be willing to make an offer for Ranbaxy. A newspaper report suggested that the insurance companies may be willing to sell their shareholdings to the highest bidder.

Pfizer may make an offer we cannot refuse.
Or Daiichi Sankyo may be forced to give the minorities a better deal. And secure a patent for "best protection of minority shareholders" in the process.

In any case, SEBI should review this "backward caste" clause that makes minority investors like us ring a bell each time we own shares in a company

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Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.

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