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Paranjoy Guha Thakurta

Promoters Or Controllers: Same Difference?

The case of the recent change in the shareholding pattern of Associated Cement Companies (ACC) has raised a number of questions about the role and relative responsibilities of a company's controllers and its promoters.

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

The answer to both questions is a resounding "yes" - especially if one goes by a recent decision of the Securities and Exchange Board of India (SEBI) in a case relating to Associated Cement Companies (ACC), the country's largest cement manufacturing concern.

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

BAT had sought to flex its muscles after the then Chairman of ITC, Kishan Lal Chugh, lost the confidence of the company's biggest shareholder. The UK principal wanted Chugh to resign following investigations by auditors into various 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, BAT managed to have a chief executive of its choice appointed, the current ITC Chairman Y. C. Deveshwar.

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

Paul, who was dubbed a "takeover tycoon" by the media, faced a major obstacle to his corporate ambitions after government-run financial institutions like the Life Insurance Corporation refused to register the transfer of shares in his name.

Moreover, the threatened original promoters of the companies - the Nandas and the Shri Rams - sought to enmesh Paul in a slew of lawsuits.

What made matters worse for the portly NRI was that the country's rulers too seemed to have changed their position. Indira Gandhi's son Rajiv Gandhi had become Prime Minister and he was evidently reluctant to "de-stabilise" the managements of "well-run" companies like Escorts and DCM. Paul had to eventually bite the dust and he subsequently complained bitterly about his experiences 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 and did not believe in the basics of corporate democracy -- he was successful in highlighting how particular families were able to control the management of large corporate entities despite holding a minuscule proportion of the concerned company's shares.

What indeed was "private" about India's private sector companies, the question was raised. After all, the controllers of the management of these firms held a niggardly portion of the shares while the bulk of the term loans and working capital to run these companies had come from government-controlled, state-owned financial institutions and nationalised banks.

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 Steel Company (TISCO) than the Tata family! Notwithstanding the rather well known instances mentioned, the entire issue of the relative roles and responsibilities of a company's promoters and its controllers has remained somewhat fuzzy. This confusion has not been cleared by SEBI's judgement in the unusual case of ACC's promoters and its controllers.

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

In late-July, SEBI decided that the Gujarat Ambuja group had not violated the corporate takeover code by acquiring the Tata group's stake in ACC. This acquisition had become contentious because the official takeover regulations have 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 at ACC was debated for more than a year and a half, as a matter of fact, ever since the Tata group sold half its 14.4 per cent stake in the company to a wholly-owned subsidiary of Gujarat Ambuja Cements Limited (GACL) in December 1999 for a price of Rs 455 crore.

The rest of the Tata group's stake in ACC was subsequently acquired by the GACL group.

A group of ACC investors, including a firm called Doshi & Co, approached the high court at Mumbai arguing that the intention of the GACL group to acquire the shares of ACC without making an open offer to other investors was tantamount to a change in management and hence, violated the provisions of the 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 the capital markets was the "competent authority" to deal with the dispute. In March, SEBI Chairman D R Mehta heard the different petitioners and complainants in the case and his quasi-judicial order in the case came in July.

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

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

Over the years, the Tata group has had a blow-hot, blow-cold relationship with ACC. During the days of the licence-control raj in the 1970s and 1980s, the Tata group had at one stage sought to formally distance the parent group from the management of ACC. In the 1990s, however, the Tata group changed its position and declared that ACC was very much a part of the group.

Even after the GACL group acquired 14.4 per cent of the shares of ACC, the Tatas claimed it was controlling the company's management although GACL's managing director Narottam Sekhsaria and its director A L Kapur had been invited to join ACC's board of directors. Sekhsaria, who is ACC's non-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 less than 15 per cent of the shares of ACC, neither had the trigger limit been touched nor had there been a change in management control. The watchdog of the country's capital markets had to nevertheless adjudicate on the dispute because it was directed to do so by the Mumbai high court.

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

Date posted: September 16, 2014Last modified: September 16, 2014Posted byParanjoy Guha Thakurta