Hindalco: Flawed logic

Hindalco has been asked by the Securities and Exchange Board of India (Sebi) to make an open offer for the shares of Bihar Caustic and Chemicals (BCCL).

Sebi says Hindalco raising its stake in BCCL from 20 per cent to 54.57 per cent, through a rights issue, tantamounts to a change in management control.

This triggers provisions of Regulation 11(1) of the Sebi (Substantial Acquisition of Shares and Takeovers) Regulations 1997 under which Hindalco was under an obligation to make a public announcement to acquire a minimum 20 per cent of the shares.

Sebi's contention is that with Bihar State Industrial Development Corporation Ltd's stake going down to 8.63 per cent, it had lost the right to nominate the chairman and directors and the "acquirers (Hindalco) were in a position to acquire control by having/continuing their own directors" Thus, since there was a prima facie, "change in the right to control of management" the exemptions in respect of the regulations, for making an open offer, would not have been available to them.

The order can have far reaching implications since much of India Inc is owned by financial institutions, and in many instances they may not have the resources to participate in rights issues.

The issue here, according to experts, is that since it was a joint venture, both partners were in control. In any case, it is not the job of financial institutions to control companies; they are merely catalysts for promoting investments in industry.

Even if the partner had not been a financial institution, there is an exemption for rights issues. However, that again is valid only if there is no change in control and there is an inter-promoter sale. In this case, the shares have not been transferred from one promoter to another.

As Jayant Thakur, Company Law expert, pointed out Sebi could perhaps have interpreted the exemption for an inter-promoter transfer of shares under regulation 3(10(e) on a more substantive basis, rather than relying on technicalities.

Perhaps Hindalco too could have been more careful. It could have called an AGM and passed a resolution regarding the change in control.

It's important that these issues are resolved at an early date, otherwise there could be much uncertainty in companies where institutions have stakes.

A shift in asset allocation

Data from the Emerging Portfolio Fund Research show that inflows into dedicated India equity funds have been attracting very large amounts of money in the last few weeks, easily eclipsing Taiwan and China funds.

For the week ended February 16, inflows into India funds amounted to $92.8 million, well above $39.5 million into Taiwan equity funds and $36.5 million into China/Greater China equity funds.

During the previous week, inflows into India funds totalled $92.34 million while China and Greater China Equity Funds pulled in $67.86 million. And there are few signs of any slowdown in the flood of money to emerging markets""""in the week to February 9, emerging market equity funds tracked by Emerging Portfolio Fund Research received $1.33 billion of net inflows - the highest since the research outfit began tracking weekly fund flows in 2000.

It's not only Asian funds that are attracting money. Global and International equity funds as well as emerging market bond funds continue to attract investments. The only asset class that has seen net outflows in 2005 is US equity funds, from which around $2.5 billion has been pulled by investors thus far.

Trim Tabs Research points out that in January this year, fresh weekly inflows have been $100 million in US equity, while global equity funds received $400 million weekly in fresh cash.

Emerging Portfolio Fund Research says that the data shows "an extensive asset allocation shift taking place".

What's especially surprising is that this shift is occurring at a time when the dollar has regained some of its strength, and interest rates in the US continue to move up.

Changing equations in the generics mart

Does Novartis' becoming the largest generic player in the world signal Big Pharma's intention of protecting its flanks from competition from the likes of Ranbaxy and Teva?

Pharma multinationals have been facing scores of litigation cases from generic players, one of the prominent ones being Ranbaxy's challenge for Pfizer's best-selling cholesterol-lowering drug Lipitor.

An adverse decision in such cases could result in billions of lost sales for multinationals, so it is logical for the players to offset such risks by strengthening their generics business. Big companies realise the importance of a generics business as their products come to the end of their patent periods.

For Indian generic export players, consolidation of the global generics business could result in further margin pressures in the key US and European markets.

Meanwhile in the domestic market, to expand top line in a tougher domestic operating environment, it makes sense for pharma multinationals to expand their generics and off-patents drugs business.

For Novartis India, sales of generics amounted to Rs 109.39 crore in calendar 2004 or 21.6 per cent of net sales. GSK India too has indicated its plan to enter the chronic therapeutic segment via drugs that are off patent globally. Other multinationals such as Pfizer too acquired several generic busineses as a result of the earlier Pharmacia takeover.

Net margins in the generics business are much lower than for patenetd products, but the volumes could make up for lower margins. Clearly, even multinationals are now finding generics a viable growth option. That could even mean acquisition of Indian generics companies in the future.

With contributions from Shobhana Subramanian and Amriteshwar Mathur