HUNTING WITH THE HOUNDS AND

RUNNING WITH THE HARES

Group -7 Project Report

Ajeesh S 1714005
Neeharika M 1714035
Prasanth M 1714046
Prateek S 1714047
Rohin K1714052
Shikha K 1714061
Introduction:

Reliance Industries: It wanted to acquire L&T within its empire. It purchased L&T shares
from open market with support of government owned financial institutions for which it fell into
legal dispute. It was also charged for insider trading after it became holder for its disclosure
obligations.
Aditya Birla Group: After de-regulation of cement industry it was looking for an acquisition
to be in the top league. It had interest to acquire L&T cements business. As L&Ts cement
unit was not a separate entity, L&T could be acquired as a whole. If AVB group could do that
it would get a leadership position in cement and grand entry into fields they were not
present.

1. Highlight the governance issue in the case?

The following corporate governance issues were identified: -

a) Conflict of interest of board RIL kept increasing its stake in L&T until 10%,
looking to find a suitable exit. During this period, the Ambanis were still on the board
of L&T, tried to buy L&T shares which it later sold to Aditya Birla Group. This is
against the interest of shareholders of L&T.

b) Selection of board membersAfter acquiring a 15% stake in L&T, the ABG

nominated Kumar Mangalam Birla and Ms.Rajashree (ABGs interest holders) for the
board, who later indeed got appointed as the Directors of L&T. The board of directors
are supposed to be neutral agents and these two nominees belong to Grasim, which
is actively looking for a hostile takeover of whole L&T group.

c) Public Offer announcementEven though Grasim purchased 10% stake from RIL
on 18th November 2001 at Rs.306.6 per share, it timed the announcement of its
public offer after the 26 weeks time, so that it does not have to pay Rs.306.6 but
instead just pay the Rs.190 per share as per the market. This is ethically not right, as
there is price discrimination between strong and weak shareholders.

d) Govt. institutions selling shares to Reliance -- It is not legal for the government
institutions such as Life Insurance Corporation to sell their holding to RIL to help RIL
gain a lot of stake.

e) Disclosure concerns/insider trading SEBI held RIL guilty of non-disclosure of the

fact that their stake in L&T crossed 5% (fine of Rs 4,75,000). They were also
accused of insider trading for rapidly increasing their share from 4 to 10%, before
their eventual sale to Birla.

f) Privilege inside information RIL or L&T did not announce that RIL was buying
shares of L&T to the SEBI (asymmetric information). SEBI was also investigating
whether RIL had any managerial control in the decision to sell the shares to Grasim.
 g) SEBI actions there have been questions raised on why SEBI didnt make the RIL-
Grasim transaction null if it saw several issues. There were also reports that their
actions were influenced by BJP MP Kirit Somaiyas high profile.

Role of corporate board and directors-

Duty of loyalty
The most important duty of any board or its directors is loyalty towards stakeholders of the
company. This duty refers to decision makers acting in the interest of the company rather
than their own interests. To comply with this duty, there should not be any engagement in
the conflict of interest. In case conflicts of interest arise, non-interested decision makers
such as non-interested director or non-interested shareholder is engaged.
In the case, Ambani brothers, the two independent directors engaged in conflict of interest
by increasing reliance holding in L&T by market purchases without any disclosure. In 2001,
Reliance suddenly started increasing stake in L & T, once it identified Birla as potential buyer
of their stake in L & T.
Duty of care
Duty of care refers making sensible and good decisions. The doctrine of business judgment
rule applies for this responsibility. There is no reference in the case to this responsibility.
Duty of disclosure
Duty of disclosure refers to complete disclosure to shareholders in case of a vote or conflict-
of-interest case. A good disclosure helps informed voting and deters passage of conflict of
interest transactions.
In the case, Ambanis, in the board of Reliance and L & T, increased their stake in L & T from
4.8 % to 5.32 % in 2001 without disclosing, violating the mandate to disclose holding of 5 %.
SEBI scrutinized the issue and charged a nominal fine.
Duty of extra care when takeover target
Duty of extra care when takeover target refers to board of directors being extra conscious on
decisions involving conflict of interest when company is being acquired. The ideal remedy is
injunction before transaction or an action of damages after completion.
In the case, Birlas were in the board of L & T and Grasim when Grasim pitched to take over
stake in L & T. Though in same board, there was a conflict of interest in among board
members in the L & T board.

Role of other constituents in this case:

1) Government owned financial institutions like the Life Insurance Corporation

and the General Insurance Corporation: They illegally sold their shares to
Reliance, which facilitated Reliance to become block holder and opened way for
Ambanis to become part of L&Ts board of directors.

2) SEBI: SEBI in this case is the government regulating body that is keeping eye on
different moves during this demerger case. First it investigated Reliance for charges
 Insider trading for disclosure obligations. Based on investigation Reliance was
cleared of charges after certain fine. Then, it questions Birlas regarding their open
offer to buy 20% shares from its shareholders as they are require to purchase shares
above 15% from open market. Then there is also an allegation of asset stripping on
Birla group.
3) JMMS: Its major role was to get the deal fixed between AVB Group & Reliance. It
approached Grasim to acquire stake of RIL in L&T as well as to RIL for sale of L&T
shares.

Conclusion

Good governance dictates certain standards, behaviours and ethics. It is important that
board acts in the interest of company and its shareholders. Being the in L & T board,
Ambanis increased their stake. Though, Ambanis were acquitted of insider trading, they
clearly were acting for their own interests instead of acting for company and shareholders
interests. Birla were on the board of Grasim and L & T when Grasim was acquiring stake in L
& T. The members of L & T board drove split of L & T to retain their individual positions of
power. The interest of shareholders was clearly ignored.

References
http://www.frontline.in/static/html/fl2017/stories/20030829004009700.htm
http://investor.sebi.gov.in/Reference%20Material/Guide-Substantial-E.pdf
http://www.rediff.com/money/2002/nov/25paran.htm
Fiduciary duty (Moodle)
Insider trading rules 2015 (Moodle)
Corporate governance hand-out (Moodle)