Promoters Or Controllers: Same Difference?

Can a group of individuals or corporate entities hold the single largeststake in a particular company and not control its management? Alternatively,can those who control the management of a company not hold any - or a verysmall proportion -- of that company's equity shares?

The answer to both questions is a resounding "yes" - especially ifone goesby a recent decision of the Securities and Exchange Board of India (SEBI) ina case relating to Associated Cement Companies (ACC), the country's largestcement manufacturing concern.

Six years ago, there had been a much-publicised controversy relating to theUK-based BAT Industries (formerly British American Tobacco) -- which holdsthe biggest chunk of shares in ITC (formerly India Tobacco Company) --unsuccessfully attempting to control the management of its Indian associatethat is dominated by so-called "independent professionals".

BAT had sought to flex its muscles after the then Chairman of ITC, KishanLal Chugh, lost the confidence of the company's biggest shareholder. The UKprincipal wanted Chugh to resign following investigations by auditors intovarious alleged acts of corruption in the company under his tutelage.

Chugh refused to resign on his own and he had to be sacked. Eventually,after a lot of bitter wrangling and washing of dirty linen in public, BATmanaged to have a chief executive of its choice appointed, the current ITCChairman Y. C. Deveshwar.

Earlier, in the mid-1980s, the London-based non-resident Indian (NRI) tycoonSwraj Paul had sought to control the management of two prominent Delhi-basedcompanies, Escorts Limited and DCM (formerly Delhi Cloth Mills) Limited bypicking up their shares from the stock market. Paul apparently made his bidto control these companies with the tacit support of the then Prime MinisterIndira Gandhi.

Paul, who was dubbed a "takeover tycoon" by the media, faced amajorobstacle to his corporate ambitions after government-run financialinstitutions like the Life Insurance Corporation refused to register thetransfer of shares in his name. Moreover, the threatened original promotersof the companies - the Nandas and the Shri Rams - sought to enmesh Paul in aslew of lawsuits.

What made matters worse for the portly NRI was that the country's rulers tooseemed to have changed their position. Indira Gandhi's son Rajiv Gandhi hadbecome Prime Minister and he was evidently reluctant to "de-stabilise"themanagements of "well-run" companies like Escorts and DCM. Paul had toeventually bite the dust and he subsequently complained bitterly about hisexperiences in his published autobiography.

Though Paul failed to fulfil his dream of controlling Escorts and DCM --whose promoters, he claimed, had given ordinary shareholders a raw deal anddid not believe in the basics of corporate democracy  -- he was successfulin highlighting how particular families were able to control the managementof large corporate entities despite holding a minuscule proportion of theconcerned company's shares.

What indeed was "private" about India's private sector companies,thequestion was raised. After all, the controllers of the management of thesefirms held a niggardly portion of the shares while the bulk of the termloans and working capital to run these companies had come fromgovernment-controlled, state-owned financial institutions and nationalisedbanks.

It was jocularly remarked in corporate circles that until not very long ago,members of the Birla family held more shares in the Tata Iron and SteelCompany (TISCO) than the Tata family! Notwithstanding the rather well knowninstances mentioned, the entire issue of the relative roles andresponsibilities of a company's promoters and its controllers has remainedsomewhat fuzzy. This confusion has not been cleared by SEBI's judgement inthe unusual case of ACC's promoters and its controllers.

The Tata group recently sold its stake in ACC to the Gujarat Ambuja groupfor a huge sum of money. Yet, as of now, the Tatas officially remain "incontrol" of ACC while the Gujarat Ambuja group promoted by the Sekhsariasisthe company's "strategic partner" with a representation of two membersonthe company's 16-member board of directors.

In late-July, SEBI decided that the Gujarat Ambuja group had not violatedthe corporate takeover code by acquiring the Tata group's stake in ACC. Thisacquisition had become contentious because the official takeover regulationshave sought to draw a distinction between a company's "promoters" and"persons in control" of a company's management.

The issue of whether or not there had been a change in management control atACC was debated for more than a year and a half, as a matter of fact, eversince the Tata group sold half its 14.4 per cent stake in the company to awholly-owned subsidiary of Gujarat Ambuja Cements Limited (GACL) in December1999 for a price of Rs 455 crore. The rest of the Tata group's stake in ACCwas subsequently acquired by the GACL group.

A group of ACC investors, including a firm called Doshi & Co, approachedthehigh court at Mumbai arguing that the intention of the GACL group to acquirethe shares of ACC without making an open offer to other investors wastantamount to a change in management and hence, violated the provisions ofthe SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,1997, popularly known as the "takeover code".

The court referred the dispute to SEBI stating that the regulator of thecapital markets was the "competent authority" to deal with thedispute. InMarch, SEBI Chairman D R Mehta heard the different petitioners andcomplainants in the case and his quasi-judicial order in the case came inJuly.

According to the definition of the word "promoter" in SEBI'stakeoverregulations, a person not in control of a company can still be considered tobe a promoter if he has been so named and described in the company'soriginal offer document for shares. In case the promoters are not persons incontrol of the management and are holding shares less than the thresholdlimit of 15 per cent of the total equity of the company provided in theregulations, acquisition of shares held by such promoters should not triggeran open offer - namely an offer to all shareholders to purchase their sharesat the price at which such shares were offered to the promoters.

In this instance, GACL had acquired ACC shares from the Tata group at aprice of Rs 370 a share at a time when the market value of the scrip was inthe region of Rs 110. Not surprisingly, certain investors felt aggrievedthat they were deprived of the opportunity of selling their holdings in ACCat such an attractive price.

Over the years, the Tata group has had a blow-hot, blow-cold relationshipwith ACC.  During the days of the licence-control raj in the 1970s and1980s, the Tata group had at one stage sought to formally distance theparent group from the management of ACC. In the 1990s, however, the Tatagroup changed its position and declared that ACC was very much a part of thegroup.

Even after the GACL group acquired 14.4 per cent of the shares of ACC, theTatas claimed it was controlling the company's management although GACL'smanaging director Narottam Sekhsaria and its director A L Kapur had beeninvited to join ACC's board of directors. Sekhsaria, who is ACC'snon-executive vice-chairman, has been quoted as saying there was a"strategic alliance" between GACL and ACC.

In this case, SEBI took the view that since the Tata group was holding lessthan 15 per cent of the shares of ACC, neither had the trigger limit beentouched nor had there been a change in management control. The watchdog ofthe country's capital markets had to nevertheless adjudicate on the disputebecause it was directed to do so by the Mumbai high court.

It is learnt that SEBI sought the opinion of the Attorney General of IndiaSoli Sorabjee in his private capacity as a lawyer on this issue. He is saidto have concurred with the view of the market watchdog that a distinctionshould be drawn between a promoter and a person controlling the managementof a company. Nevertheless, such a fine distinction is not evident to manyobservers of the country's corporate scene, leave alone lay-persons.

(The author is Director, School of Convergence @ International ManagementInstitute, New Delhi and a journalist with over 24 years of experience inthe print, radio, internet and television media.)