Bangalore/Mumbai: Bharati Shipyard Ltd owns Great Offshore Ltd, or at least a majority stake in the firm.

But it doesn’t control it.

ABG Shipyard Ltd owns a relatively smaller stake in Great Offshore in which it is no longer interested.

But it could control it if it wants to.

Bharati, India’s second biggest shipbuilder outside state control, fought larger rival ABG Shipyard for six months and spent Rs812.45 crore to buy a 45.88% stake in Great Offshore. Yet, in a unique case that has no parallel in the history of mergers and acquisitions in India, Bharati does not have management control of the Mumbai-based offshore oilfield services firm—because it made its open offer to acquire shares saying it was doing so as a strategic investor, and not as someone wishing to take control of the firm.

Graphics: Yogesh Kumar / Mint

Sanjay Asher, a senior partner with Crawford Bayley and Co., said Bharati could “opt for a special resolution seeking a change in the management structure in such a way that it will have management control...or apply to Sebi for the same".

Prakash Chandra Kapoor, one of the two managing directors of Bharati Shipyard, said he has not taken a decision on a second open offer, and that his firm would only seek appropriate representation on the board of Great Offshore. He did not elaborate on his firm’s strategy with respect to Great Offshore.

Interestingly, Bharati’s rival for Great Offshore, ABG Shipyard did make its open offer saying it wished to take control of the firm.

A day before the open offer began on 3 December, however, ABG sold its 8.27% stake in Great Offshore, that was purchased from the market earlier. By doing so, it announced its intent to exit the race for buying Great Offshore, though its open offer technically remained valid according to the country’s takeover laws.

ABG ended up with a 15.2% stake in Great Offshore in the open offer that ensued.

The company, then, is free to approach Great Offshore for management control but Dhananjay Datar, chief financial officer of ABG, said it wasn’t interested in doing so.

Meanwhile, on Tuesday, Great Offshore said it has appointed Kapoor, Vijay Kumar and Chetan Mehra, as directors. Kumar is also a managing director at Bharati Shipyard.

Bharati did make an attempt to structure the open offer that ran between 3 December and 22 December under Regulation 12 (which allows management control). However, because Bharati had, in May, when it made the open offer, done so under Regulation 10 (no management control), the regulator did not allow it to change the offer midway through an intense takeover battle.

Analysts say Bharati’s original open offer, made under Regulation 10, was a tactical error. Regulation 10 allows a company to buy shares in another as a strategic investment, and not for management control. ABG made its open offer under Regulation 12.

So, Bharati has ended up with no management control, but with voting rights in proportion to the equity shares it owns in Great Offshore.

A 26% stake entitles a shareholder to block special resolutions required to change memorandum, articles and business plans of the company, including borrowing money beyond prescribed limits.

“With a 45.88% stake, Bharati is in a position to prevent any of these types of resolutions from being passed at the shareholder level in Great Offshore," said Akil Hirani, managing partner at Mumbai-based law firm Majmudar and Co.

But for controlling the day-to-day management of a company including removing the chief executive or a director on the board of the firm, a shareholder should have at least 51% stake, according to the Companies Act.

“As a shareholder with 45.88% stake, Bharati has no powers to remove the chief executive or other directors on the board of Great Offshore under the Companies Act," Hirani said over the phone.

“This is the first time such a thing has happened," Hirani said referring to the fact that the largest shareholder in Great Offshore doesn’t have management control of the company.

Interestingly, this makes the firm itself an orphan of sorts.

Great Offshore doesn’t have parents, said Rachna Kothari, a research analyst at Mumbai-based brokerage firm LKP Shares and Securities Ltd, implying that there is no one with management control of the firm.

Still, it could be that Bharati has a reason not to seek management control of Great Offshore, said Sujjain Talwar, partner at Mumbai-based Economic Laws Practice. “It could be, Bharati Shipyard does not want to be identified as promoters."

Great Offshore became a target for an acquisition in May, when promoter Vijay Kantilal Sheth defaulted on loans against which he had pledged his shares in the firm.

Sheth had pledged his shares with the promoters of Bharati Shipyard for a Rs240 crore loan in January last year.

When he failed to repay the loan, the promoters of Bharati invoked the pledge and acquired the 14.89% stake Sheth had pledged with them.

Bharati then announced a public offer to the shareholders of Great Offshore in line with India’s take-over laws. ABG Shipyard entered the take-over battle in June.

On the Bombay Stock Exchange, Bharati has risen 60.27% to Rs333.05 from Rs207.8 on 3 December when the open offer started. The Sensex, the exchange’s bellwether, has dropped 4.01% in that time. ABG Shipyard has risen 57.38% to Rs336.4 and Great Offshore has dropped 16.56% to Rs428.65 in the period.