The Telegraph
Since 1st March, 1999
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Rift within L&T over demerger

Mumbai, Dec. 20: A ginger group of shareholders are opposing Larsen & Toubro’s demerger move which they feel is not in the company’s interest. The investors have cited tough conditions imposed by CDC Capital Partners, apart from the fact that L&T will have to plough in a higher amount, as major reasons for their resistance.

The opposition comes against the backdrop of the December 28 board meeting where the CDC proposal will be discussed. According to the proposal, CDC will pick up a 6.8 per cent stake in L&T’s demerged cement business for Rs 291 crore or $ 60 million.

The shareholders contend that for $ 60 million and a minority stake of 6.8 per cent, CDC with a “debt instrument, would get complete control of the cement entity”. Further, while CDC is believed to have demanded veto rights over a number of crucial decisions, stiff penalties will be levied on L&T if any of the conditions are breached. “L&T would end up paying penal interest of 15 per cent in dollar terms compounded annually on $ 60 million,” sources claimed. It has also been stipulated that the cement entity would have to be created before December 31 next year, failing which a 2 per cent penal interest would have to be paid in dollar terms. This proposal expires on December 31, 2002.

As part of the restructuring exercise, L&T will create a separate cement entity with an equity capital of Rs 170 crore. Subsequently, the new entity will issue 6.25 crore equity shares to existing L&T shareholders in a ratio of 1:4. “L&T would have to plough in Rs 370 crore, which is a net cash outflow of Rs 80 crore over the amount invested by CDC,” they added.

L&T plans to issue fully convertible debentures to CDC. The latter has the option of converting these into 6.8 per cent equity in the proposed cement company until December 2004. If CDC decides against conversion, the bonds will be redeemed in three equal installments between 2004-2007.

Moreover, certain drag-along conditions say if CDC were to divest its holding, it would force L&T to divest up to 44.2 per cent of its stake in the cement division and management control will be transferred to the new buyer who will then hold 51 per cent. On the other hand, if L&T decided to sell its holding, CDC’s stake will tag along with the transaction. Sources aver that CDC has also demanded veto rights over a number of decisions, that will bar L&T from taking any decision in the affairs of the cement entity without CDC’s consent. Its consent is also mandatory for constitution of the board, appointment of directors including nominees, apart from tapping the capital markets, or the acquisition or disposition of any brand.

“The company cannot issue any bonus, right or any form of equity, nor make any declaration of dividend without CDC’s approval. Thus the proposal is heavily tilted in favour of CDC and is not in the interest of shareholders,” sources claimed.

Though senior L&T officials were not available to comment on these issues, sources close to the company, however, termed it as baseless. Interestingly, even as the senior L&T management and financial institutions seem set to approve the CDC proposal, Grasim Industries has offered a “vertical split” where all L&T shareholders would get an equity in the demerged entity proportionate to their holdings in the engineering major.

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