DCM redux

Among the watershed events in India's corporate history was Swraj Paul's daring double-raid on DCM and Escorts, in 1983.

The London-based Mr Paul calculated that if he managed to buy a level of ownership in the two companies that exceeded those enjoyed by the promoter families, then he would be able to swing a change of control by getting the government-owned financial institutions (major shareholders in both firms) to vote for him in a showdown.

It was an audacious plan and might well have worked -- for the Nandas held barely 7 per cent in Escorts at the time, and the Shriram family about 14 per cent in DCM. However, news of the raid leaked too early and the promoters of the two companies were able to mount an effective defence (alleging violations of foreign exchange rules during Mr Paul's share buying spree, fighting court battles on whether the institutions could vote as they wished, and so on).

But if the raid finally failed, it was because Indira Gandhi (with whom Mr Paul had a special relationship) was assassinated in 1984, and Rajiv Gandhi was friendlier with members of the Shriram and (to a lesser extent) Nanda families, so Mr Paul could no longer count on the institutions voting with him.

He finally sold out, presumably at a profit. While the Paul strategy was based on a combination of old-style government influence and contemporary stock market logic of the kind not commonly accepted even today in an Indian corporate world where promoters enjoy a special status (no hostile raid has succeeded in the 24 years since Mr Paul hit the headlines), the subsequent under-performance of the two companies /groups raided could serve as a cautionary tale on family managements and dynastic succession.

Now history is being repeated. Mr Paul's old broker, Harish Bhasin, is mounting a raid on one of the splinter groups spawned by DCM, and the battle is being fought in the Company Law Board. The issue before the CLB is the fairness of the promoter family seeking to issue itself warrants at a specified share price, without offering the same option to all shareholders.

If Mr Bhasin with his 12 per cent holding in the company was not there to challenge the promoters by making an open offer at a huge premium over the price of the warrants, the scheme would probably have gone through.

Indeed, he has already scored a point in that the promoters have quickly jacked up the price of the warrants by an astonishing 75 per cent, and the date of payment for the warrants has been advanced by 18 months.

Clearly, the promoters knew that their company's shares were worth far more than they were putting down as the price of the warrants, and a pliant board of directors seems to have been willing to do anything the promoters asked of them (including stipulating a payment date by which the market price of the company's shares might well have recovered to cross the price for the warrants).

The board's defence might be that the original pricing would have met all the regulations in place, so no rule was being breached, but it is obvious that the promoters were taking advantage of a phase in the sugar cycle when the share prices of all sugar companies have been depressed. In terms of replacement cost and therefore of intrinsic value, the market price of the shares as well as of the warrants represented a huge discount.

Whatever happens in this battle (and the Company Law Board will decide what is right and wrong), the public issues raised by the episode are two-fold.

First, despite all the talk of corporate governance, have promoter-families learnt to treat minority shareholders fairly or are they still looking for every opportunity to enrich themselves as a special category, with the help of pliant boards? Second, do the rules about the pricing of special offers need a fresh look in the light of this case?