Corporate Front: M&A [Will SVC Follow Raasi into Srinivasan's Fold?]

With both SEBI and India Cements taking on CEO B.V. Raju, he could lose control of yet another company.

Within 90 days of losing the Rs 488-crore Raasi Cement (Raasi) to the Rs 927-crore India Cements, the 74-year-old B.V. Raju-Raasi's former promoter-CEO-is under siege again. And he is on the verge of losing a second company-the Rs 166.37-crore Sri Vishnu Cement-to the same raider, N. Srinivasan, the 53-year-old CEO of India Cements.

Yet, both Raju and his advisor, Udayan Bose, 48, the CEO of Lazard CreditCapital, appeared relaxed during their meeting with the officials of the Securities & Exchange Board of India (SEBI) on August 11, 1998. Says Bose: ''It was an informal meeting. And Sri Vishnu Cement was not discussed.''

That is hardly convincing since Raju had been served a show-cause notice by SEBI on August 4, 1998, a week before the meeting. It asked him to explain why no open offer was made to the shareholders of Sri Vishnu Cement-in accordance with the New Takeover Code-when Raasi sold its 39.49 per cent stake in Sri Vishnu Cement to 9 investment companies between September and December, 1997.

To make matters worse, Srinivasan is waiting in the wings to wrest Raasi's stake in Sri Vishnu Cement back. In fact, he is already armed with an interim order from the Hyderabad City Civil Court, directing the 9 investment companies not to sell or transfer their 39.49 per cent stake in Sri Vishnu Cement. But Srinivasan would like to convince the courts, which will hear the case on August 26, 1998, that the shares were sold at a throwaway price of Rs 10. Hence, the deal was detrimental to shareholders' interests under Section 397 of the Companies Act, 1956, which deals with ''prevention of oppression,'' and defines oppression as ''lack of probity and fair dealing in the affairs of a company to the prejudice of its members.''

Srinivasan refuses to comment, saying that ''the matter is sub judice,'' Raju has few exit routes. Therefore, in his reply to SEBI, he is likely to maintain that the 9 investment companies-while 8 of them purchased a 4.64 per cent stake each, the 9th bought 2.37 per cent-do not belong to him. So, the violation of the Takeover Code was not possible since each company picked up less than 5 per cent of the equity. According to a spokesperson for Raju, the investment companies were ''independent'' and, hence, were ''free to buy and sell their portfolio as they deemed fit.''

So, the SEBI case will not prove to be a lasting headache. Even if he is hauled up, SEBI will only insist that he make an open offer for an additional 20 per cent stake in Sri Vishnu Cement. On August 3, 1998, Raju had already announced an open offer to acquire the shares at a price of Rs 25. In a faxed reply, Lazard CreditCapital said: ''The financial institutions required them (the 9 companies) to sign a non-disposal (of shares) undertaking. They have been advised by a (legal) counsel that such an understanding might be construed as acting in concert and, hence, the open offer.''

What has been troubling Raju, however, is the possibility of a legal battle with Srinivasan, who is trying to prove that Raasi's shareholders were short-changed since a greenfield 1-million tonnes per annum (tpa) unit costs Rs 450 crore to set up. So, the cost of a 39.49 per cent stake in the 10-lakh tpa Sri Vishnu Cement should be Rs 200 crore-and not the Rs 9.37 crore that had been paid by the investment companies. States the petition filed by Srinivasan in the Hyderabad Court: ''The consideration agreed to be paid for the sale and transfer of shares (to the investment companies) is totally inadequate... as it had no relation to the actual value of the shares.''

Denies the spokesperson for Raju: ''The sale price was at a 40 per cent premium to the market price. Further, this price was higher than the one recommended by an independent valuer.'' In fact, Raju claims that the deal was perfectly in order. Explains a Lazard CreditCapital's fax: ''The board meetings, which ratified the transactions were attended by the institutional nominees on the board and, as per the Companies Act, no general body meeting is required (to ratify) such a decision. The transactions are, therefore, fait accompli and irreversible.'' However, BT learns that the Industrial Development Bank of India gave its formal approval for the transfer of shares only on June 4, 1998-the day Raju relinquished control over Raasi.

Raju also maintains that Srinivasan was aware of the Sri Vishnu Cement deal. One indicator being that Srinivasan knew that his offer price for Raasi's shares was independent of that company's stake in Sri Vishnu Cement. Then, the 18 agreements between Raju and Srinivasan to sell the former's stake in Raasi took cognisance of the fact that the shares of Sri Vishnu Cement had been transferred to the investment companies. Denies a spokesperson of India Cements: ''The agreements merely mentioned that Raasi's stake in Sri Vishnu Cement had been sold. We were not aware that the sale was prejudicial to the interest of the shareholders of Raasi.''

With Srinivasan and SEBI applying the brakes on Raju's bid to increase his stake in Sri Vishnu Cement, its scrip price has hit the circuit-breaker on the BSE several times in anticipation of a counter-offer by India Cements. But unlike the past, when Raju unexpectedly gave up control of Raasi in 9 months, Srinivasan may find that the takeover tussle for Sri Vishnu Cement may concretise a rivalry between them for years. Evidently, there's life after being taken over too.

THE BONE OF CONTENTION

At the heart of the battle between B.V. Raju and N. Srinivasan is the 10-lakh tonne per annum (TPA) Sri Vishnu Cement. For both, retaining Sri Vishnu Cement is of strategic significance. Having lost control of Raasi Cement, Raju has no other foundation to build his empire on. On the other hand, India Cements can further consolidate its presence in South India if it can wrest control of the unit. With Raasi in its stable, India Cements will produce 7 million tpa of cement annually, and its marketshare in South India will go up from 13.13 per cent to 21.92 per cent.

More important, India Cements, whose Coromandel brand sells at a premium of Rs 15 to Rs 20 per 50-kg bag, can further increase its profitability by selling a part of the produce of Raasi and Sri Vishnu Cement under the same brandname. A higher profitability will, obviously, reflect in a higher scrip price. That will not hurt India Cements, which plans to raise money through a Rs 250-crore rights issue to part-finance the Raasi takeover.

But the history of Sri Vishnu Cement has been chequered. The company, which began production in 1987, went into the red after earning marginal profits in the first 2 years. By 1992-93, Sri Vishnu Cement had accumulated losses of Rs 14 crore, and a negative net worth of Rs 21.45 crore. Improved cement prices in the following year helped Sri Vishnu Cement turn the corner, and in 1993-94, it reported meagre net profits of Rs 23 lakh.

Gradually, its net worth improved and, by 1996-97, it reported a positive net worth of Rs 8.12 crore, and net profits of Rs 10.47 crore. But, by then, there was a raider at Raasi's gate. Cornered, Raju decided to delink the company, and sell the Raasi's 39.49 per cent stake in Sri Vishnu Cement to 9 investment companies to retain control of the company. With Srinivasan threatening to undo the deal, Raju is fighting for much more than mere capacity.