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Liberalisation demands the govt stay clear of the Asian Paints dispute

The drama surrounding the sale of the Choksey family's sale of 9.1 per cent (of its 9.5 per cent) equity shareholding in Asian Paints Ltd to ICI (India) has been hogging the headlines in India's business media. The controversial sale (on August 17) of a sizeable stake in an entirely indigenous company which has established itself as India's No 1 paints manufacturing major (sales: $260 million, net profit: $21 million in 1996-97) to a subsidiary of the UK-based multinational, has triggered off alarm bells in corporate India.

The sell-out has divided the business community and media pundits as well. On the one hand there are those haunted by the East India Company syndrome who argue that government should utilise its residuary powers to ensure good corporate governance to (legally) stall the deal. On the other there is a growing minority which believes that in this new age of economic liberalisation and deregulation, what's happening in Asian Paints is an inevitable consequence of liberalisation and none of the government's business.

Inevitably, each side has an arguable case. There is something rotten about a rich multinational which has been bested fair and square in the marketplace entering the boardroom of the victory through a backroom clandestine deal. There is also something wrong about the managing director of Asian Paints (APL) suddenly deciding to spring the sale of his promoter-family's stake in this highly successful company without making an offer of sale to members of the three other promoter families who between them own 40 per cent of the equity of Asian Paints and who are executive directors of the company. Common decency demanded that APL Managing Director Atul Choksey gave his fellow promoter-directors in the company the option of first refusal, before allowing a Trojan horse into it.

But before supra-nationalists in government and elsewhere start stabbing the panic button, they should bear in mind that ICI has acquired a mere 9.1 per cent stake in APL. Against this, the remaining three promoter families (Dani, Choksi, and Vakil) between them still own over 40 per cent of the equity 13.5 per cent each) of the company. And they have vowed to stick together and oppose the transfer of management control of APL to ICI.

For ICI to gain management control or have a meaningful say in APL, it will have to emerge as the largest single shareholder in the company with a shareholding of over 24 per cent. Therefore it will have to acquire shares form the marketplace (public shareholding: 29 per cent) or from one of the promoter families, or from both. And once it begins to do so, the price of the equity share of the company which was Rs 309 on August 29 is likely to soar. Which, I need hardly add, is good for the shareholders who are the owners of APL.

And the best judges of what's good for the sharedholders of Asian Paints are the shareholders of Asian Paints. Not politicians in Parliament or bureaucrats in the finance and economic ministries. That's what corporate democracy is all about.

With the three remaining promoter families determined to prevent ICI gaining a foothold in Asian Paints and likely to refuse to register the transfer of the Choksey shareholding in favour of ICI, the latter is likely to appeal to the Company Law Board to compel the APL management to register it as a shareholder. Under the recently amended Companies Act, the Company Law Board can uphold the action of an incumbent management to refuse to register a bona fide purchaser's shareholding only in extraordinary circumstances. No such extraordinary circumstances which would justify refusal to register ICI as a shareholder of APL exist.

Well-meaning nationalists should also bear in mind that it if ICI acquires management control of APL by giving value to shareholders of the company, it may prove unfortunate for APL. But it may be good for Indian industry.

There's no legal impediment against one or more members of the promoter families of APL promoting another paints manufacturing company with the proceeds of the sale of their shares and replicating the APL growth story all over again. Because though the promoter-managers of APL may sell their equity shares to ICI, they still retain their know-how, managerial and marketing expertise, and the goodwill they have earned in the Indian marketplace. When the legendary Lee laccoca was sacked from the Ford Motor Company, USA, he went on to fame and fortune by reviving the ailing Chrysler Motors. Moral of the story: allowing corporate democracy to flourish is always good for industrial growth and development.

Long used to intervening to regulate the minute of corporate governance, the pavlovian reflex impulse of New Delhi will be to intervene and arbitrate in the imminent war between ICI and the incumbent APL management. But this is a temptation it would do well to resist. Government intervention will send out wrong signals about its commitment to economic liberalisation and deregulation not only to foreign investors, but to indigenous industry as well.

Economic liberalization has its rough as well as smooth side. And it is high time that Indian industry is sent a clear message that it has to take the rough with the smooth and that it will have to fight its own battles in future.