The Wolf And The Fatted Calf

COULD two men be more different from each other? The westernised patrician jetsetter and the traditional Marwari trader. Yet they are alike. Both are streetfighters.

Nusli Wadia and Arun Bajoria. Their confrontation has thrown in sharp relief the paradoxes inherent in Indian business.

The story so far. Jute baron Bajoria (he owns 17 per cent of India's total jute production) announced that he and his associates own 14 per cent of Bombay Dyeing, the Wadia flagship. And he is angry with Wadia. His peeved that he had informed Wadia the moment his holdings went above five per cent of the total equity of Bombay Dyeing, as he is required to, by law, and Wadia vehemently denies this. "Instead of being grateful to me for having raised the company's share price," says he, "Wadia complained to SEBI and the Company Law Board (CLB) that I had violated the takeover code. So CLB has frozen the voting rights of my shares for four months although I am permitted to sell and trade in them." The sudden national limelight is also not suiting him well: "I am getting telephone calls and visits from journalists all day. This is eating into my work schedule and my business is going to pot." Wadia's friends, Ratan Tata and Keshub Mahindra, have been pushing his case with the government. Industry body CII too is in Wadia's corner.

But whether Bajoria gets his voting rights or not (he should, if he has not broken any law), or gets a seat on the board (very unlikely), the controversy opens up a whole Pandora's Box.

Look closely at Bombay Dyeing. It's a pale shadow of its once-blue-chip self. In August 1994, the share quoted at Rs 470. In May 1999, when Bajoria started buying, it was languishing at Rs 32. Indeed, without "other income", which is mainly from dividends and moneylending, the company would be in the red; it's losing money in its core business. At the same time, Bombay Dyeing is sitting on free reserves of Rs 490 crore and immense real estate assets (that Bajoria claims are worth Rs 2,000 crore) which have not been revalued since 1879! The share's book value is Rs 163, five times the price at which Bajoria got into the market. In short, it's a juicy takeover target; an inefficient management has eroded shareholder value while the company remains rich in hidden assets.

Of course, there is nothing in Bajoria's history to indicate that he would be interested in taking over or running Bombay Dyeing. Even if he was, Bombay Dyeing shareholders surely deserve better. Essentially a canny trader, he snapped up jute mills dirt cheap in the mid-1980s. He has then used his jute profits to play the sharemarket with great success and also rise to be one of the India's biggest moneylenders. Says Naba Dutta, who heads Nagarik Manch, an ngo which works with the state's 250,000 jute workers: "He is not a serious businessman and has no intention of running anything besides jute." Adds corporate analyst Tamal Majumdar: "Corporate battles are different from running a jute business on liquid cash."

Bajoria has tried this before. Some years ago, he picked up a huge bundle of Tisco shares and rattled the Tatas. This was followed by a similar assault on Hindustan Sanitaryware (the Somanys later repurchased the shares from a third party at thrice the price). On the way, he has also had brushes with the law. In 1997, he avoided going to jail for defaulting on provident fund payments by checking into a nursing home. In 1998, he was back in hospital, on the run from the Enforcement Department for alleged fera violation.

So, never mind his bluster, Bajoria's essential modus operandi is to identify low-share-price companies with hidden assets, take a position on the scrip and sell when the price rises to about three times his average acquisition cost. He is willing to sell his stake to the company's promoters themselves, as long as they pay his asking price. There's a word for this in the US: greenmail, the Wall Street equivalent of blackmail.

Trouble is, Nusli Wadia is hardly a soft target.

Why has Wadia reacted so strongly to Bajoria's 14 per cent stake, which at best gives him some nuisance value? Bajoria needs at least 26 per cent to block special resolutions and get a berth on the board. Wadia is unassailable: directly or indirectly, he controls 40 per cent of the company. Financial institutions hold 15.78 per cent and have said they'll remain neutral.

Obviously, Wadia fears that Bajoria is fronting for a serious raider. But the Ambani-related rumours are unlikely to have any basis. The official Reliance denial apart, a top official told Outlook: "Look, we are far too big now to spend our time thinking about Bombay Dyeing."

However, from the way corporate India has hit the panic button, it is clear that many industrialists see themselves as sitting ducks for takeover artists. Arun Bharat Ram, president, CII, has asked for a change in the takeover code. It specifies that while a non-promoter can acquire 14 per cent of a company's share, the promoters are only allowed a creeping acquisition of five per cent per year. The reformers want SEBI to allow promoters to acquire more. Also when a raider acquires 15 per cent of a company's equity, he has to make an open offer to acquire an additional 20 per cent from the public. The promoter too is allowed to make a counter bid. CII has told SEBI that 20 per cent is too little and this should be raised.

While Wadia and L.M. Thapar-in whose flagship company, Ballarpur Industries, also Bajoria has taken a six per cent stake-are now criticising the takeover code, neither raised promoter's equity by creeping acquisition. Says Lalit Khanna, director, Escorts Mutual Fund: "If Wadia is so tense, he should buy back those shares from the market. The moment you've gone public, you must understand that along with other things, a takeover is a possibility. The idea is to continuously invest in the company, not neglect it. This attracts poachers. That's nothing wrong because for a shareholder, it's the best thing that can happen."

Meanwhile, Bajoria says the average price of his acquisition works out to Rs 65-70. After his acquisition became public knowledge, the share spurted from Rs 99 to Rs 115 on October 14, and touched Rs 139 on October 17, before retreating slightly. But, says Bajoria: "I have the funds and the nerve to hold on. I will sell at Rs 200 plus." But unless he sells his shares as a block, he will not get the best price. The irony is that only Wadia will be interested in buying the shares as a block. And neither side is in a hurry to smoke the peace pipe.

SEBI now has to decide whether Bajoria broke any rules while building his stake. If he did, he must be punished, but if he did not, then Bombay Dyeing must be held guilty of misrepresentation of facts. Also, has Bajoria, with his associates, crossed the 15 per cent threshold? If he has, he must make an open bid for 20 per cent from the public. Wadia is bound to counter this with a better offer. All this should be good news for small shareholders.

In the meantime, hectic government lobbying continues. A senior manager told Outlook: "In such cases, the winner is nearly always he who has greater pull in Delhi. It was this pull which deprived Swraj Paul from acquiring Escorts and dcm and handed over Shaw Wallace and Dunlop to Manu Chhabria. The present issue must be dealt with in the best interests of the small shareholder." The basic point is whether inefficient managements should be protected from predators, and the answer is no. Wadia has himself done it when he wrested control of Britannia from Rajan Pillai in the mid-1990s.

Indeed, with neither of the two protagonists worthy of much sympathy, what's at stake is the transparency of the Indian financial system.