Mumbai: Two of India’s most valuable companies Larsen and Toubro Ltd (L&T) and Grasim Industries Ltd, which have been at each other since the early 2000s over cross-holdings, are facing another contentious issue over L&T’s 11.49% holding in UltraTech Cement Ltd, which is now majority-owned by Grasim.
Tight hold: Larsen & Toubro Ltd headquarters in Mumbai.
L&T, India’s largest engineering and construction company, has to exit its stake in Ultra Tech — the former L&T Ultra Tech Cement Ltd — by December 2009, as per a 2005 agreement.
The agreement gives Grasim, part of the Aditya Birla Group, the first right of refusal. “The right of refusal is not more than 60 minutes after L&T gives us the offer and selling price,” confirms D.D. Rathi, Grasim’s whole-time director and chief financial officer.
And, if Grasim refuses to buy the shares, L&T can only sell its stake in tranches to a scattered group of investors, with each potential investor allowed to own less than 1% of the L&T shares. On top of that, the engineering firm is barred from selling these shares to any cement makers who could compete directly with Grasim.
At Tuesday’s closing price of Rs697.35 on the Bombay Stock Exchange, the current market value of 11.49% of UltraTech shares works out to Rs997.45 crore. While a substantial amount, Ultra Tech shares have almost halved from their 52-week high close of Rs1,165 a share on 15 October.
Now, with a government-imposed freeze on cement prices, a ban on exports and the shift from a deficit to surplus market in a year or so, cement stocks may remain weak, says an industry analyst who has tracked the industry for a decade but didn’t want to be identified.
Ultra Tech, India’s largest exporter of cement primarily to West Asia, is also not a “liquid” stock in the sense that not many shares are traded, making it difficult to sell small tranches of shares, the same analyst said. Last financial year, the Indian cement industry was virtually balanced between demand and supply at 164 million tonnes (mt) and 168.31mt. Around 3.60mt is exported. With fresh supply, the deficit is set to turn into surplus by fiscal 2010.
L&T board member and finance director Y.M. Deosthalee had told Mint earlier that the UltraTech stake did not come from the same transaction that led to Grasim retaining a 0.8% stake in the construction company. Doesthalee and L&T board member J.P. Nayak also sit on the board of UltraTech.
L&T is currently waging a legal battle with Grasim over the shares owned by the Kumaramangalam Birla-controlled company in L&T.
Both companies have been at loggerheads since 2001, when Grasim acquired a 10.45% stake in L&T from Reliance Industries Ltd in a negotiated stock market transaction. Later, the company made an open offer on L&T for an additional 20% stake after it breached its stake beyond 14.9%, the mandated trigger to make such an offer under Sebi takeover guidelines.
In a protracted battle between 2001 and 2005, negotiated by Chennai-based chartered accountant S. Gurumurthy, L&T spun off its 16mt cement business into L&T Ultra Tech before selling a majority stake to Grasim. The deal ended with cross-holdings. L&T officials claim Grasim’s 0.8% stake was to be sold to L&T Employees Welfare Foundation when the latter’s stake gets diluted below 14.9%. Grasim executives deny any such agreement exists. L&T, meanwhile, ended up owning 11.49% stake in Ultra Tech.
L&T took to legal recourse last year when Grasim failed to sell its L&T shares at Rs120 a share, or for Rs22.8 crore. The shares are worth Rs564.59 crore to Grasim at Tuesday’s closing price of Rs2971.50 a share on the Bombay Stock Exchange.
After the Bombay high court rejected its plea, L&T has appealed to a higher bench of the court with a hearing now slated for June.