Indirect acquisitions have been the subject of much conflict in India with the Securities Appellate Tribunal having to intervene several times (Cases such as Ray Ban Sun Optics, Widia, Seamec come to mind). Many issues have got sorted out since, but every new case has a peculiarity. The Zenotech imbroglio has several twists, and the outcome could well become a precedent for many such cases.

"A rising tide should lift all boats, not just one," Chigurupati told BW in one of several telephonic interviews referring to the hefty premium Daiichi paid to buy a controlling stake in Ranbaxy. Daiich ponied up Rs 737 a share, a 31 per cent premium to the then ruling market price.

On 17 January this year Daiichi announced an open offer to Zenotech's minority shareholders for an additional 20 per cent stake at Rs 113.62 based on the average of Zenotech share's weekly closing highs and lows in the 26 weeks prior to the date of public announcement of the open offer to Ranbaxy's shareholders. But Chigurupati, who holds 26 per cent, is adamant on the offer price of Rs 160 per share, a 38 per cent premium to its current market price, and the same price at which Ranbaxy bought 47 per cent in Zenotech from him in November 2007. Ranbaxy's open offer to the minority shareholders at Zenotech was also made at Rs 160 in January 2008.

It was allegedly also agreed that Chigurupati would step down from Zenotech’s board, and be retained as an advisor. It was decided that minority shareholders would get Rs 160 a share in the subsequent open offer. This was okayed in August 2008 by Daiichi, he claims.

The letter goes on to say that on 20 December 2008, Daiichi director Tsutomu Une on a visit to Hyderabad withdrew the offer of a control premium and agreed to pay Rs 160 a share to buy out Chigurupati’s entire 26 per cent. The entrepreneur agreed. Then on 15 January, shortly before Daiichi was to present the proposal before its board, Chigurupati alleges he was told that the deal was off. When contacted by BW about Chigurupati’s latest allegations, Daiichi declined to comment. ICICI Securities, which is managing the open offer, was also unavailable for comment. Ranbaxy did not respond to an email within BW’s deadline.

Tilting The Scales
Chigurupati’s disclosures could strengthen the hands of Zenotech’s minority shareholders. As things stand, their opposition to Zenotech’s offer price is based on alleged violation of Sebi’s rules. Shareholders say that Daiichi has erred in law by not making its open offer earlier.

Under Sebi rules, an open offer has to be announced not later than “four working days of entering into an agreement for acquisition of shares or voting rights or deciding to ac quire shares or voting rights...”

One complainant, N. Narayanan of Karaikudi in Tamil Nadu, who holds 50,000 Zenotech shares, told BW on telephone that the decision to acquire Zenotech was taken when Daiichi announced it would acquire Ranbaxy on 11 June.

Another shareholder, Unifi Financial, has written to Sebi that Ranbaxy and Daiichi should be seen as “acting in concert” under the law, and so the price that Ranbaxy paid for Zenotech shares in January — which falls within the 26-week window has to be the final offer price as per the law.

Chigurupati himself alleges that “Daiichi postponed the open offer till recently only with a view to getting over the stipulation with regard to the 26 weeks’ period.” If it had made the open offer earlier, the offer price would have to be Rs 160, he says.

But Jayant Thakur, a securities law expert in Mumbai says that since Daiichi’s acquisition of Zenotech qualifies as an “indirect acquisition” Sebi’s rules allow for a three-month window after the acquisition of the holding firm (in this case Ranbaxy) is completed before an open offer to the target company’s shareholders is announced.

The original intent of this law was to allow the acquirer to get clearances for the acquisition of the holding firm from foreign regulators in case the acquirer and the holding firm were both based abroad. In this case, the holding company — Ranbaxy — is based in India. However, going strictly by the letter of the law, since Daiichi completed the Ranbaxy deal including the open offer by November, its public announcement of the offer on 17 January was within three months of taking control of Ranbaxy.

But, “This is about the spirit of the law, and not just its letter,” counters Narayanan.

Given this background Chigurupati’s disclosures has come at an opportune time for Zenotec’s shareholders “...based on the information provided by BW, there is this premium that Daiichi appears to have been willing to pay the promoter,” observes Akil Hirani, managing partner at Mumbai-based law firm Majmudar & Co. “The question is should the other shareholders be entitled to that or not.”

Hirani says there is an argument to be made in favour of shareholders on the grounds of equity. But he warns that the fact that Daiichi did not finally act on the alleged contract to buy out Chigurupati, “weakens the case” of the minority shareholders. Chigurupati, for his part, is ready to go to court to force Daiichi to buy him out. All eyes will be on the evidence he puts on the table.

gauri dot kamath at abp dot in

(Businessworld Issue 03-09 Feb 2009)