Why the convoluted structure? There could have been other options. One, they could have had a vertical split in Grasim, with Grasim shareholders getting 100% share in the new cement company and then they could merge it with UltraTech. Two, they could have done what they did when the cement division of Indian Rayon and Industries Ltd was transferred to Grasim in 1998. At that time, shareholders of Indian Rayon were given three shares of Grasim free of cost for every 10 shares of Indian Rayon held by them. In the current deal, that would mean shareholders of Grasim would get shares of UltraTech.

The management says the reason these structures were not considered was because they wanted Grasim to continue to have a stake in the cement business, as Grasim’s cash flows from viscose staple fibre have contributed to the expansion of the cement business and the cement operations may continue to need these cash flows. It wouldn’t really matter to Grasim shareholders, because they would anyway have a stake in cement through both these methods.

Why give only 35% to Grasim shareholders in Samruddhi and not 100%? The management says that’s because Grasim holds 55% of UltraTech and so when the merger with Grasim takes place, Grasim will hold between 55% and 65% of the new company. That, they say, will enable them to raise more resources if necessary by selling equity. But the firm does not need to raise money immediately and in any case the debt-equity ratio at the end of June 2009 was as low as 0.37.

So the issue seems to be one of control. A higher direct share to Grasim shareholders in Samruddhi could mean Grasim’s shareholding slipping below 55% in UltraTech when Samruddhi is merged with it. Similarly, directly giving UltraTech shares to Grasim shareholders would mean a lower share for Grasim in UltraTech. Also, it’s worth noting that the promoters hold just 25% of equity in Grasim and the entire promoters’ stake in UltraTech is through Grasim. But at least Grasim shareholders have got a 35% direct share in Samruddhi—the structure could have involved 100% ownership of the subsidiary by Grasim, which, when merged with UltraTech, would have resulted in an even higher share for Grasim in the new firm. Nevertheless, if Grasim shareholders were directly given 100% of Samruddhi, minority shareholders would have got full exposure to the cement assets. Now they will get only 35% of the assets directly and 65% indirectly through their shareholding in Grasim. The firm will, however, have to pay stamp duty twice, first for the demerger and second for the proposed merger of Samruddhi with UltraTech.

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