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INVESTIGATION Money, Politics & The Plot The inside story of how Bharatiya (Janata Party) politicians fought over helping a videshi BAT to acquire a swadeshi ITC. An exclusive tale of a covert takeover bid which was a big-money power-play that proved to be abortive. By A BT Team Investigation "I was consistently warned, time and again, not to
get entangled in the matter of the Unit Trust of India selling off its equity holdings in
ITC to BAT Industries." Why? By whom? Was anything offered in the bargain? He doesn't say. But, suddenly, the abrupt dismissal last month of Mohan Guruswamy, the 50-year-old Advisor to Union Finance Minister Yashwant Sinha, seems to have something to do with post-liberalisation India's longest-running takeover tussle. In three-letter words, BAT v/s ITC. Instead of giving up its plans to acquire the Indian tobacco company, as it has publicly projected, BAT Industries--and its local allies--appear to be clandestinely pursuing an ingenious strategy by which the British transnational can raise its equity stake in ITC from 35 to 51 per cent. This time, the videshi behemoth's abortive attempt to acquire the swadeshi giant even appears to have been quietly endorsed by some politicians in the Bharatiya Janata Party and the A.B. Vajpayee Administration. Big-money takeovers, obviously, make for strange ideological bedfellows. This strange high-stakes game of intrigue, arm-twisting, and machinations may have, to some extent, claimed a victim in Guruswamy, who was forced to resign on January 27, 1999. Having gained access to government documents and private testimonies, and after conducting extensive conversations with some of the participants in the politico-corporate drama--although neither BAT nor ITC responded to our questions--BT recreates the untold account of a backdoor bid, and the role of politicians, bureaucrats, and, perhaps, money in the plot of 1999. It was Guruswamy's opposition that short-circuited BAT's gameplan--orchestrated, they say, by the transnational's powerful lobbyist in Delhi and an old friend of Guruswamy--to grab ITC. His objections came in the form of an explosive written note to Finance Minister Sinha, presenting his arguments against a deal being struck between BAT and the Unit Trust of India (UTI), which would have enabled the former to buy the latter's 16 per cent shareholding in ITC--including the 5.46 per cent held by the beleaguered us-64 scheme. "The political ramifications of allowing one of the largest Indian corporates to be taken over by its MNC associate cannot be computed. But if we feel that we can afford the political cost, the economic price must be right," concluded the 3-page document. With the uncalled-for disapproval of the Finance Minister's Advisor on the record, the move, obviously, had to be scuttled. However, since this meant a loss of a commodity more valuable than face to the powerful, it may have hastened Guruswamy's exit--not, however, before a Mumbai-based friend had tried to induce him to stay out of the picture. True, his scandalous misadventure over l'affaire Essar Steel, and the embarrassment it caused the Vajpayee Administration, made it impossible for him to continue any way. However, by nipping BAT's plan in the bud, Guruswamy offended too many people to survive, or even be given an honourable exit. His political mentor was, after all, the other power-centre in the BJP-led government, Union Home Minister L.K. Advani. Embroiled as the issue became with power-plays in the government, the latest twist in this saga has taken on wider ramifications than a corporate battle would normally warrant. In an exclusive conversation with BT, all that Guruswamy would say was: "The Essar issue was just a smokescreen. All the fire was caused by proposals related to the cigarette industry, like Rothmans' and Philip Morris' proposals to set up fully-owned subsidiaries in India. And the BAT issue was the last straw." Perhaps. How It Began In the second half of 1998, it did seem as though BAT and ITC were smoking the peace-pipe. First, ITC dictated and signed a 30-year licensing-agreement with BAT to manufacture and market the latter's premium brands--555 and Benson & Hedges--in India. Then, ITC's vision for the New Millennium, presented by CEO Y.C. Deveshwar, clearly portrayed BAT as an ally--not an adversary. And when BAT announced its global merger with Rothmans International in January, 1999, ITC seemed to be on top of the world since the move eliminated the possibility of Rothmans of Pall Mall entering the county with its own premium brands--its application was even then pending with the Foreign Investment Promotion Board (FIPB)--to challenge the Indian company. Secretly, BAT still harboured its desire to take over ITC, and was even then pushing its case with the ruling party. Of course, the Vajpayee Administration's Swadeshinomics ruled out the possibility of a transnational being allowed--or helped--to take over a top-performing Indian company. So, BAT needed an opportunity to strike--differently. Which presented itself in the form of the public disclosure of the debacle in the us-64 scheme of the UTI in October, 1998. Reasoned the BAT think-tank in India, the us-64 could now be forced to sell some of the high-performing stocks in its portfolio to pay out dividends. So, why not float the idea of the sale of its ITC holdings? After all, us-64 had purchased its shares in the company at an average cost of Rs 182 per share compared to the October, 1998, market-price of Rs 636. Even if it sold only at that price, us-64 would be able to generate a cool Rs 612 crore. As a person close to the proposal explains it: "The deal between the UTI and BAT was all about dollars and sense, not cents and emotions. It envisaged an inflow of $1 billion, which no country can afford to turn down." An informal offer was immediately made to the UTI for its holdings in ITC--which was turned down, just as promptly, by the Union Finance Ministry when it was asked for its opinion. One of the prime movers behind the opposition was Guruswamy, who had earlier written another note to Sinha, objecting to the idea of allowing 100 per cent-owned subsidiaries in the cigarettes business, arguing that the tacit approval of the global majors to the "contraband trade" deprived them of that right. He followed that up with other notes, which stated that cigarette-production should not be encouraged for health reasons, and that the manufacturing capacity in the business should be capped. Significantly, soon afterwards, the FIPB repeatedly postponed its decision on Rothmans' proposal to set up a fully-owned subsidiary in the country despite the Industry Ministry's clearance. Realising that its UTI strategy would need the backing of the Vajpayee Administration and the ruling party, BAT got down to influencing those in both who appeared amenable to logical persuasion. As part of the process, 40 Members of Parliament signed a petition, significantly addressing it to the Prime Minister's Office (PMO)--and not North Block--demanding that the UTI be permitted to liquidate any of its equity holdings it wanted to whenever it wanted to. Obviously, if, per chance, anyone in the party or the government was favourably disposed to the idea, this petition supported that case. Ironically, even before the merger, Rothmans was lobbying for BAT since this deal would have made it easier to convince the FIPB to clear its own proposal. In fact, both transnationals were represented by the same lobbyist-firm in the capital. How Guruswamy Got Involved At this stage, the proposal--by now augmented in its scope to include not just the UTI, but also the other financial institutions, technically amounting to a holding of 38 per cent in ITC--made its way to Guruswamy. And, on January 20, 1999, he wrote his missive to Sinha, presenting a strong case against the UTI and the other institutions closing a deal with BAT. The thrust of his arguments, supported by figures, was that the ITC scrip was likely to yield more gains for the UTI in future, and should not be sold. "The price-to-earnings multiple used for arriving at the market price is 33.92 as compared to 55 for Hindustan Lever," he wrote. "Even at this conservative multiple, the present value, discounted at 12 per cent, of ITC's share price is Rs 1,425. If the HLL multiple of 55 is used, this price will be over Rs 3,500." If, nevertheless, Guruswamy's note continued, the scrip did have to be sold, 2 conditions ought to be adhered to: an open offer for sale, as per the Takeover Code. And a selling price that justified not just ITC's valuation, but also the fact that "since the transfer of the FIs' holding would also transfer control of the company, a premium for transfer of control in the range of 35 - 50 per cent would be within conservative international norms. In other words, the minimum price for FIs' shareholding in ITC should not be below a range of Rs 1,900-Rs 2,001 per share." On that day, the market-price of the scrip was Rs 807. At one level, Guruswamy was being true to his, and his mentor's, swadeshi ideals--which may well have been invoked by the astute Deveshwar who was, obviously, well aware of these developments. However, Guruswamy's explanation is different: "I was not against the deal. Nor was I being anti-reforms. All I said was that the institutions should get the right price for the shares." Sinha's response to this note was to pencil in a terse "Let us discuss pl(ease)." But Guruswamy moved quickly thereafter, holding a meeting with the UTI's Chairman, P.S. Subramanyam, the next day on January 21, 1999, to convince him that an open offer and a higher price was a far better option to closing a deal with BAT at a small premium to the market price. Subramanyam, quickly realising that the BJP government was, by no means, united in its plan to have the UTI's shares sold to BAT, fell in line. And Guruswamy scribbled to Sinha: "Mr Subramanyam, Ch(airman), UTI, was here. We discussed this. He agrees with the contents of the note and will not be moving on the proposal." Once again, Sinha only wrote that he wanted to discuss the issue with Guruswamy in person. How It Ended Clearly, there were powerful forces at work, both bigger players and larger stakes. Sinha, obviously, knew more than he was willing to let on to his politically-inexperienced advisor since it was clear that this proposal went squarely against the finance minister's principles. Not even Prime Minister A.B. Vajpayee's pro-liberalisation stand against the counter-reformers in the party could account for his government permitting a transnational to annex a would-be global rival. Logically, therefore, there may have been some interest groups in the party who wanted the process to be completed. And the stakes were obviously high judging by the carrot--and the stick--shown to Guruswamy. However, through his opposition, he not only thwarted these plans, but also brought to the fore the divide within the government. It is, after all, no secret that the hardliner faction within the BJP, represented by, inter alia, Advani, is opposed to the liberalisation that the other group, whose most prominent face is Vajpayee's, has been trying to bring about. With both sides using the imbroglio to score points against one another--even as the pro-BAT lobbyists tried to push their case--Guruswamy's stand induced the UTI to publicly deny that a deal with BAT was in the offing. And the Union Finance Ministry was forced to direct the UTI to go in--if at all it wanted to sell--only for an open offer. That not only put paid to BAT's plans, it also stymied the politicans who had tried to secure an easy passage for it. Naturally, Deveshwar would rather maintain the status quo. Helping his case is the fact that, backed by its super financial performance--net profits jumped from Rs 261.08 crore in 1995-96 to Rs 526.20 crore in 1997-98--ITC's share-prices are zooming: at the January 15, 1999, price of Rs 841.75 for the scrip, the bill for the UTI's holdings has already gone up to Rs 3,308 crore. Of course, BAT isn't giving up. Its champions in the corridors of power are hoping that the Deepak Parekh Committee on salvaging us-64 will recommend that the UTI be empowered to sell its holdings as per the Takeover Code. However, Parekh may suggest sales only to the highest open bidder. Should the UTI thereafter choose to sell its ITC holdings, BAT will have an opportunity to make a bid. But then, it could have competition too. BT learns that its global rival, Philip Morris--which already holds a 36 per cent stake in Godfrey Phillips--may make its own offer for the shares. Such a counter-bid would lead to bitter bidding--and a surge in ITC's share-price--that might force the government to lie low on the issue. What the latest battle in this never-ending war has proved,
though, is that the politicians in the BJP, despite its official ideological position, are
not immune to being persuaded to support causes that contradict that position. When the
stakes are high, principles prove to be less important than opportunism. And, if for that
reason alone, the gun aimed at ITC by BAT will continue to smoke. |
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