The Hindu Business Line : After the binge, the bill

In all fairness to the shareholders of the investor company, their consent must be taken may when the board of directors sets out to do things of Herculean proportions.

That the wresting of control of the Anglo-Dutch steel major Corus by Tatas could well turn out to be a Pyrrhic victory is secretly conceded even by some of the gung-ho enthusiasts of foreign acquisitions by Indian companies. The thumbs-up to the shares of the rival in the fray, CSN, in the Sao Paulo stock exchange, on the heels of its defeat in the battle for Corus and the concomitant thumbs-down to the victor Tata Steel's shares in the Indian bourses reinforce and reiterate this fear. One earnestly hopes the Tatas' enthusiasm and confidence in going ahead with the deal despite the hefty increase in the cash — from roughly $8 billion to $12 billion-plus — is vindicated sooner than later.

The debt impact

The reason why the Brazilian bourses are delighted is the shareholders of CSN have been spared the crushing impact of the huge debt that any leveraged buyout inevitably entails. This perhaps also explains why the Indian bourses reacted rather negatively to the victory, which had Indian economists and experts without any stakes in the company reaching for the champagne bottle.

The shareholders of Tata Steel may or may not have a reason to be peeved with the deal but they have every reason to be peeved with the Indian law on the subject that effectively marginalises them and takes their support for granted. While Tata Steel has to assiduously comply with the requirements of the takeover regime in the UK, including keeping the shareholders of Corus posted of all the relevant details about the financing of the deal, the Indian shareholders are mandated to be taken into confidence by the company law in India only when the board of directors oversteps the generous limits on inter-corporate investments/loans/guarantees.

To be sure, the stock exchanges — the BSE and the NSE — have been informed of the deal at every stage, as mandated by the Listing Agreement but that is about all. Corus is now going to be a part of the Tata group, more particularly Tata Steel, yet the shareholders of Tata Steel are not mandated to be taken into confidence on the intricacies and minutiae of the deal.

Section 372A of the Companies Act, 1956 brings the shareholders into the picture by asking for their special resolution only when the board of directors set out to exceed the generous limits for inter-company investments/loans/guarantees — 60 per cent of the net worth of the investor company or 100 per cent of its free reserves, whichever is greater.

How fair to shareholders?

In all fairness to the shareholders of the investor company, their consent must be taken come what may when the board of directors sets out to do things of Herculean proportions including entering unchartered territories. It is a sad commentary on our company law that the Tata Steel shareholders in India have to learn from the media that its board of directors has set up a Special Purpose Vehicle (SPV) called Tata Steel, UK for the purpose of raising funds for takeover of Chorus.

They must in all fairness have been told of the quantum and implications of the huge loans taken by Tata Steel UK for the purpose. A seminal event such as this surely cannot be allowed to bypass the shareholders because after the binge always comes the bill — Tata Steel shareholders must be told of the quantum of interest payable on the loans and how much of it would impact the income statement of their company.

The short point is, transparency must be mandated at both the ends — towards the shareholders of the company taken over as well as towards the shareholders of the company taking over.

(The author is a New Delhi-based chartered accountant.)

More Stories on : Mergers & Acquisitions | Steel | Investor Protection | Tata Steel Ltd

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