L&T and Grasim

1 Cement industry in India

India is ranked as the second largest cement producer in the world after China. Till the
80's, the Indian cement industry was under price and distribution control, apart from
licensing. It was in 1982 that partial decontrol was introduced by which market forces
were allowed to operate, but in a restricted sense. The industry response was encouraging
with investments in expansion and creation of new capacity and upgradation of
technology taking place. These benefits were shared by consumers as for the first time
consumers had a choice of brand while buying cement. This led to complete decontrol in
1989, after which the industry underwent a phenomenal change. As of now there are new
entrants in the form of global players as well as consolidation of market share occurring
through mergers and acquisitions.

1.1 Entry barriers

In general, this is a highly fragmented industry with the top 5 players accounting for 50%
of market share. It is essentially a commodity business with cyclical derived demand
depending on economic growth and infrastructure development. There is significant over-
capacity in the industry and geographic location of plants plays a significant role.
Economies of scale in manufacturing, act as a major entry barrier for new entrants. It is
estimated that for a 10% difference in size, cost of production could differ by 1.4%,
depending on the capacity utilization.
Capital investment is very high for a cement plant and it is one of the major entry
barriers. Only major players in the market are capable of buying and running a cement
plant. Consequently there are very few green-field ventures.

Advanced Corporate Strategy 1 Final report

L&T and Grasim

Figure 3: Cement capacity in India1

1.1.1 Government regulation

The policies of the government have affected the growth of cement plants in India in
various stages. The control on cement for a long time and then partial decontrol and then
total decontrol has contributed to gradual opening up of the market for cement producers.
The stages of growth of the cement industry can be best described as follows:

Figure 4: Capacity vs. Demand

1 Source: CLSA Investor Forum, 2004

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1.1.2 Demand drivers

The key demand drivers of the industry are as follows

Environment: Monsoon plays an important role in the demand for cement. Rural demand
depends on the success of the crop, which depends on the monsoon. This is an indirect
effect and its impact usually takes a few months.

Housing: The government continues to give favourable tax incentives, plan allocation,
credit flows financing for the housing sector. The growth is expected to continue, and this
is a key demand driver. Some of the factors for continued growth are the reduced housing
finance rates, increase in population, promotion of housing finance, etc. Housing is the
most important consumer segment accounting for about 55% of consumption.

Infrastructure: The governments thrust on infrastructure has been a key factor for the
growth in demand of the cement industry. Infrastructure projects accounted for around 40
per cent of the total demand for cement in 2003. Projects such as the Golden
Quadrilateral, North-South-East-West project and the recently introduced Desalination
Plant have contributed largely to the demand in cement.

Commercial structures and corporate projects: This segment accounts for 20 per cent of
the total demand for cement in India. This is expected to grow with corporate India
investing more in large projects.

Pricing: The price outlook depends on bunching of capacities, and there is a consequent
regional variation in terms of pricing. For instance, prices are firm in the South, West,
while they are typically soft in the North and East. The price of a 50 kg cement bag could
be anywhere between Rs. 125 to Rs. 180. Besides, profits move disproportionately with
even small change in prices - raising the price of a bag of cement by just Rs. 20 could add
around Rs. 12 billion to the bottom-line annually.

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1.1.3 Cost drivers

To evaluate the key factors driving supply, it is necessary to consider the various costs
facing the cement industry. The main cost heads are energy costs, freight charges and
limestone costs.

Technology: The technology used in a cement industry has been fairly stable for the past
many years, and there havent been any disruptive innovations as in say, the
semiconductor industry. There is a lot of asset specialization and hence exit barriers are
quite high. Below find a diagrammatic representation2 of the cement manufacturing
technology.
The key implication of the process diagram is the impact on location of a plant. A cement
plant can be located either near the source of raw materials or near the market. Globally,
cement plants are usually located near the market, but in India majority of the plants are
located near the source of raw material (in this case, limestone). Then, freight costs
become a key value driver for the industry.

2 Source: www.cement-manufacture.com

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Figure 7: Process diagram of cement manufacture

Energy costs: These costs include the power and fuel expenses incurred by the cement
companies. The major sources of energy for cement companies are coal and power. Of
the total energy costs, coal accounts for 21 per cent and power, 13 per cent.

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Freight Charges: Among the major cement producers, Gujarat Ambuja had the lowest
freight cost of Rs 233 per tonne of cement, while ACC had the highest cost of Rs 317 per
tonne of cement transported. Cement companies have been trying to reduce their average
lead distance by commissioning grinding units near cement consuming areas and shifting
to road transport. The use of sea as a mode of transport is another option considered.
With the unchanged rail prices as given by the Rail Budget, Grasim should seriously
consider its rail and road options, and possibly enhance its use of road.

Figure 5: Cost Drivers

Raw material costs: Limestone is the main raw material used to manufacture cement. In
2001-02, among the major cement producers, Gujarat Ambuja had the lowest limestone
cost of Rs 60 per tonne of cement, while India Cements incurred the highest cost of Rs
158 per tonne of cement. Plants near limestone deposits involve less transportation cost
than others.

Geographical Distribution of Capacities: The south dominates in capacity with 43% of

total installed capacity. In South, the installed capacity is 43 million tones, however,

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production is only 32 million tones and the consumption is even lower with only 21.72
million tones. The production is much lower than the installed capacity.

In State-wise distribution Madhya Pradesh accounts for 26.03% of the total installed
capacity followed by Andhra Pradesh with 16.7%.

Ownership: Private Sector accounts for 91% of the total installed capacity in the year
1999, which was 7% more than in 1990. Public Sector owns about 9% (as on 1999).

Size: The major factors that govern size of a plant are - Size of the market, the stability
and growth of demand, technology and capital intensity, infrastructure facilities and
labour supply. There are certain economies of scale advantages which arise through multi
plant operations which are being enjoyed by companies like L&T, India Cements, ACC,
Birla and Gujarat Ambuja, etc.

1.2 Competitive scenario

The domestic cement sector is characterised by a high degree of fragmentation which has
created intense competitive pressures on price realisations. In spite of the sector being
highly capital-intensive in nature, smaller players were not deterred from entering the
market. This led to a spurt in unorganized players in a big way. In recent times
consolidation has started taking place, yet the fact is that even today unorganized players
account for 30% of the total market share. Needless to say, this has had a telling effect on
the realizations and hence the bottom-line of the organized players.
The industry was under price and distribution control from 1940-81. The government
announced the partial decontrol over the industry in February 1982, in which Levy quota
was fixed and companies were allowed to sell the rest in free market. Total decontrol was
announced in 1989, which had a positive impact on the industry.
Major players in the Indian cement industry are Birla Group, ACC, L&T, JK Group,
Grasim Industries, Gujarat Ambuja Cements and India Cements. They account for 69.52
million tones out of a total capacity of 106.63 million tones. Major players are expected

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to consolidate their market share by another 10 % within a short span. The key business
groups are given below.

Company Name Business Group

Associated Cement Companies Ltd. ACC Group
Gujarat Ambuja Cements Ltd. Ambuja Group
Birla Corporation Ltd. Birlas (MP) Group
India Cements Ltd. India Cement Group
JK Synthetics Ltd. Singhania (GH) Group
Table 1: Major cement business groups3

1.3 A Note on Consolidation

Business strategies of Indian companies have been evolving over the last four-five years
in response to the changing and more competitive environment. Unlike the past, when
companies business strategies were largely driven by revenue growth, now companies
focus only on those lines in which they enjoy sustainable competitive advantage either
capitalizing on their existing core competencies or by achieving it via Joint ventures. The
Tatas and Birlas, for whom diversification was a mantra till some years back, started
looking inward for core competency and focus. They initiated the exercise with the sale
of cement plant of Tisco and restructuring amongst Indian Rayon and Grasim. Same is
the case with companies, which have gone into unrelated diversification in the past and
are hurt today. Restructuring is the buzzword. It would be interesting to look at one such
industry, which is on a restructuring spree and know where it is heading. Cement industry
is one, which is in a state of flux with restructuring moves across the board.

3 Source: www.insight.asiancerc.com

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Figure 6: Industry Consolidation

Underpinning this theme is the Morgan Stanley Dean Witter report which states: "For
the longer term, the ongoing consolidation in the industry is likely to induce greater price
discipline in the country due to reduced fragmentation of capacity ownership.
Consolidation is likely to result in an outflow of capital as sellers of cement assets take
capital out of the cement industry and invest it in other assets." More importantly,
Ridham Desai and Sachin Sheth, analysts at Morgan Stanley, talk about how
consolidation will also imply greater economies of scale for the companies acquiring
capacity, which in turn will eventually translate into larger cash flows and a greater
ability to set up fresh capacity and thus shorter cement cycles.

Recently, Gujarat Ambuja Cement which has a capacity of a million tpa has acquired a
7.2 percent stake in the countrys market leader ACC from the Tata Group in a Rs. 455
crore all cash deal. Earlier Gujarat Ambuja Cement has taken over DLF Cement in a two-
part deal worth more than Rs. 175 crore.

ACC is one of the oldest players in the cement industry with a 12 million tonnes capacity.
The take over of Tata stake by GACL is seen as a part of the overall consolidation trend
happening in the cement industry. More recently, Lafarge SA the $ 11- billion French
Cement major took over Tiscos cement units for Rs 550 crore.

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1.4 More on the cement industry

Freight costs: Cement is mostly packed in paper bags and transported either by rail or
truck. Road transportation beyond 200kms is not economical therefore about 55% of
cement produced is being moved by railways. However, though rail freight is cheaper
than road transport, it does not include the additional charges for loading and unloading
and the freight for transportation from the railway station to the plant. Another problem is
the inadequate availability of wagons especially on western railways and south-eastern
railways, as wagons are increasingly being used by agricultural products as wagons are
increasingly being used by agricultural products. Under this scenario, manufacturers are
looking for sea routes being this not only cheap but reduce the loss on transit. Currently,
the sea route is mainly being used by Gujarat-based producers (1%). However the
scenario is changing and most of the big players like ACC and Grasim are setting up their
Bulk terminals.
Supply of raw materials: Supply of cement in the market is from domestic production.
Supply in turn influences factors like raw material availability, technology, capacity,
capacity utilization, etc. cement industry consumes about 10 million tone of coal
annually. The average coal costs of the industry have increased from Rs 269 per tonne of
cement in 1995-96 to Rs 279 per tonne by 2001-02. However, these costs have been
controlled as cement companies have improved their operations. Some factors for the
improvement are improved technology, increasing use of imported coal and the higher
production of blended cement.
Since a poor quality of coal is supplied by coalfields like BCCL, NCL and CCL the
industry has to blend high grade coal with it. The Indian coal has a low calorific value
(3500-4000 kcal/kg) with as content as high as 25-30% compared to imported coal of
high calorific value (7000-8000 kcal/kg) with low ash content 6-7%. Companies have
increased their usage of imported coal not only because of their high calorific value but
also because of competitive pricing. This trend will continue with the increase in coal
prices as prescribed by the Budget.

Cement industry consumes about 5.5 billion units of electricity annually while one tone
of cement approximately requires 120-130 units of electricity. Power tariffs vary on the

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location of the plant and on production process. State government supplies this input and
hence plants in different states shall have different power tariffs. Another major hindrance
to the industry is severe power cuts. Most of the cement producing states like Andhra
Pradesh and Madhya Pradesh experience power cuts to the tune of 25-30% every year,
causing substantial production loss.

During 1995-96 to 2001-02, average power costs increased from Rs 2.51 per tonne of
cement to Rs 3.1 per tonne of cement. But as in the case of coal, the average power
consumption of the industry fell. One of the reasons for the fall in power costs is the
increased use of captive power by companies. Most major cement producers have set up
captive power plants, in order to reduce their power costs. A few companies are also
considering power generating windmills. Gujarat Ambuja had the lowest power costs of
Rs 1.58.

Note on Gujarat Ambuja-ACC combine

Although the restructuring exercise in cement industry has gathered momentum now, the
whole process started way back in 1996-97 when the state of Indian economy suffered a
set back. The general perception of liquidity crisis, the high cost of money, political
uncertainty, and inadequate expenditure on infrastructure led to the fall in demand for
cement. Adding to the woe, the costs of inputs for cement production were on the rise.
And not to forget the South East Asian crisis - this left India, a dumping ground for
foreign countries forcing the domestic producers to be left worst affected. Profitability
narrowed leaving smaller and marginal players struggle for survival. While the larger
ones withstood the pressure of lower profitability, smaller ones closed down or merged
with other big players or left themselves favourable for a take-over. Over the years,
though there were some signs of recovery now and then, the situation continued leading
to the restructuring of the industry. As a result today, six major players account for nearly
52% of the total cement capacity of 110million ton.

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1.5 Capacity

Total capacity crossed the 100 mn tones mark in the year 1998-99 with a CAGR of
8.07% (considering 1991 as base year). Capacity utilization of the plant has decreased
from 84 % in 1990-91 to 76 % in 1999. However, capacity increased to 84.5% in the first
half of the year 1999-2000.

Year Capacity Production Capacity Utilization (%)

1990-91 57.29 45.75 79.86

1991-92 60.20 50.61 84.07

1992-93 62.09 50.72 81.69

1993-94 65.69 54.09 82.34

1994-95 71.25 58.35 81.89

1995-96 80.72 64.53 79.94

1996-97 88.60 69.98 78.98

1997-98 96.55 76.74 79.48

1998-99 106.63 81.65 76.57

1999-00 (Apr-Sep) 53.67 45.35 84.5

Source: Survey of Indian Industry, 1999, The Hindu

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Table 4: Cement production and capacity

Capacities 2000-01

Companies Location mt

Madras Cement Andhra Pradesh 0.6

ACC Maharashtra 0.4

Sanghi Cement * Gujarat 2.5

Saurashtra Cement # Gujarat 1.0

Total Expected 4.5

Capacities 2000-02

Companies Location mt

ACC Karnataka 2

GACL Maharashtra 2

GACL Gujarat 1

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Total Expected 5

Table 5: Capacities for 2000-02

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Figure 33: Demand Drivers

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Source: CRIS INFAC

Figure 34: Region-wise market shares and capacities

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2 Larsen and Toubro Limited

What began in 1938 with two Danish engineers and a dream, is today Indias largest
engineering and construction conglomerate and cement major. Larsen & Toubro Limited
was Indias largest engineering and construction conglomerate as of 2003. The segment-
wise 2003 revenues of the company are shown in the figure below. Cement contributes to
26% of the revenues of the company. From the revenue chart it is quite evident that L&T
has its major source of revenue coming from E&C, followed by cements.

Source: L&T Annual Report 2003

Figure 13: L&T revenues 2002-03

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Figure 14: L&T (pre-merger) organizational structure

2.1 Core Competence

Historically L&T groups focus has been on its E&C division, revealing its core
competence to be a bundle of capabilities in managing the engineering and design work.
Global
Exposure

Risk CORE Technical

management COMPETENCE Superiorit

Cost
Figure 15: L&Ts Core Competence
competitiveness

Global exposure:

L&T had always had a vision of being a professionally managed Indian multinational,
committed to delivering value. It does equipment exports to 45 countries around the
world including the U.S, Europe and the Middle East. It is highly successful in getting
turnkey projects (e.g.: Gas processing and pipeline project in Tanzania, Platform in
Qatar). It has built L&T as an international brand and created a global awareness of its
capabilities. The company has also entered into a number of strategic alliances and joint

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ventures that add to its value, with Komatsu, CASE equipment Pvt Ltd and John Deere
Ltd. It has also formed a consortium with global majors, expanded its product range and
formed a global network.

Figure 16: L&T Growth in International Business

Cost competitiveness

The company has continued its thrust on cost reduction mainly through global sourcing,
e-procurement, value engineering and efficiency improvement in plant operations. It has
Six Sigma processes in place to reduce rejection and rework. Effective supply chain and
working capital management initiatives have ensured that the company would sustain its
cost competitiveness.

Technical superiority

L&T has a front-end engineering and design group at Vadodara that is ISO 9001/ISO
m1401 certified. In addition it has basic and detailed engineering research centres at
Mumbai and Delhi, and an Engineering, Design and Research centre at Chennai serving
construction activities. It also has engineering JVs with world majors to meet capability
gaps.

Risk management

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merger L&T and Grasim
analysis
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L&T has institutionalised risk management practices due to the increasing size and
complexity of orders, and the decreasing delivery periods. It has a risk management
module evolving concomitantly even as the business is scaling up. A risk management
model incorporating state-of-the-art tools and techniques has been developed. Training
programmes are also in place for risk identification and management.

2.2 Cement division

L&T's cement business was expected to break even in 1999-2000 and had yet to
contribute to the bottom-line. In 1998, BCG had recommended the divestment of the
cement business. The operating profit margin were only 25-30 per cent. Cement prices
on an average were likely to veer towards Rs. 120-130. High financial charges due to
debt that bankrolled capacity expansion in cement resulted in poor contribution. Cement
has been a consuming a major part of L&T Groups investments. But average sales
realizations had dropped by 10% and there was a large supply overhang in the industry.
The volume had grown at 11.7%, while the industry capacity utilisation was at 85%.
There was scope for cost improvement efforts and better logistics management in the
division. But the group, given its focus on E&C, was not able to attend to these.

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3 Grasim Industries Ltd

Grasim Industries, a flagship of the Aditya Birla Group was originally incorporated as
Gwalior Rayon Silk Manufacturing (Weaving) Company in 1947. The company's key
business is Viscose Stable Fibre and Cement. It also produces sponge Iron, Chemicals
and textiles. Grasim which commenced operation in 1950 by manufacturing fabrics using
imported rayon (a manmade cellulose fibre) at Gwalior has now grown to become one of
India's top ten largest private sector companies in terms of assets and sales. The
company's foray into cement has become a successful diversification and the company
has become the third largest producer of cement in India.

Figure 8: Key Financials for Grasim

Grasim Industries Ltd is one of the most diversified companies in the Aditya Vikram
Birla Group. The main businesses4 of the company include:
1. Cement
2. VSF
3. Textiles
4. Sponge iron
As can be seen from the below figure it is the cement and VSF divisions that contribute to
around 85% of the revenue of the firm. The overall performance of the company in
FY2004 has been strong backed by a splendid performance from these divisions.

4 Refer Appendix for further details on Grasims backward integration strategies

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Figure 9: Revenue mix of Grasim over the years

3.1 Core competence

What is Grasims core competence that has made it so successful in the corporate jungle?
A deep study of its history reveals that it has been a bundle of capabilities in managing
commodity businesses that has been the Aditya Birla Groups core competence. Given
below are a bundle of these capabilities.

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Quality
Emphasis

Processes
and Trustees
Systems
CORE
COMPETENCE

Financial Operational
Prudence
Figure 10: Grasims core competence Excellence
Financial Prudence
Grasim has consistently demonstrated excellent financial prudence. The last time it issued
debt was in 1994. It also has an excellent debt - equity ratio of 0.57 as on 31 March 2004
(compared to industry average levels of 1.6), which it has been decreasing ever since its
restructuring in 1991. A timeline of its debt-equity management is given in the appendix.
The following table summarizes the financial prudence:
Year Issue Year Issue
1951 Equity, Preferential 1982 Convertible bonds
1953 Equity 1987 Non-convertible debentures
1956 Equity 1988 Partly convertible debentures
1959 Preferential 1989 Non-convertible debentures
1968 Bonus equity 1990 Non-convertible debentures

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1969 Preferential, bonus equity 1991 Non-convertible debentures

1971 Preferential 1992 GDS
1974 Bonus Equity 1994 Debentures
1976 Bonus Equity 2003 GDR
1979 Equity
Table 2: Grasim - Financial Management

Upto 1979, Grasim was focusing on equity issue in terms of preferential and ordinary
equity issues. In the 80s, it looked to leverage its equity, with number of debt issues in the
form of convertible, partly convertible and non-convertible debentures. The last time
Grasim issued debt was in 1994 and it has maintained a consistently good D/E ratio. By
doing so, Grasims interest burden has always been low. Thus overall, one of Grasims
core strengths is its financial prudence.

Operational Excellence
Grasims operational excellence is another of its core strengths. Its limestone costs (Rs
78/tonne for 2001-02) are the third lowest in the industry after Narmada Cements and
Andhra Cements. Its power consumption of 91kWh/ tonne is also extremely efficient in
the industry. Grasims operating margin for the year ending March 2003 is 21.15%, as
against an operating margin (of 11.78% for ACC, 20.71% for Madras Cements, 7.71% for
Andhra Cement, 13.7% for Dalmia Cement, 10.64% for Deccan Cement, and 3.64% for
Mysore Cements.

Quality Emphasis
Grasim has always focussed on quality programs. An excellent example is the adoption of
best practices like Value Based Management (VBM). The VBM process was adopted by
the Group with the intention to create awareness of the cost of capital, make operating
managers better relate to shareholder aspirations and link rewards more directly to
business performance. The new VBM system fundamentally impacts how the valuation
of businesses, and setting of targets.

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Processes and Systems

Grasim has excellent processes and systems. The company culture is of a meritocracy,
and operational excellence is achieved through its excellent processes and systems.
Manufacturing is a key process, and Grasim has always looked to achieving international
standards. An apt example is the adoption of the World Class Manufacturing (WCM)
system. WCM encourages manufacturing excellence by integrating several contemporary
initiatives like Total Productivity Management (TPM), Total Quality Management
(TQM), Business Process Restructuring (BPR), Six Sigma, International Quality Rating
Systems (IQRS) and several global best practices in the area of manufacturing.

3.2 Cement division

Grasim is the #1 producer of VSF, and the largest producer of white cement in India. Its
national brands are Birla White, Birla Super and Birla Plus, and regional brands are
Rajashree and Vikram.

3.3 Grasims backward integration

Company history:
Grasim industries Ltd History and Strategy: The Move towards Self-Reliance
The various milestones of the company are listed below:

1947: Grasim Industries Ltd is incorporated

1950: Grasim launches production of fabrics at Gwalior using imported rayon a man-
made cellulose fibre
1954: Grasim begins rayon production at Nagda.
1962: Grasim starts an engineering division to provide plant and machinery for VSF
production.
1963: Grasim sets up its first rayon grade pulp plant at Mavoor, Kerala; the first to make
rayon grade pulp from bamboo and other hardwoods.
Grasim purchases a composite textile mill at Bhiwani, Haryana.
1968: Rayon production commences at Mavoor, Kerala.

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1972: A completely indigenous plant based on Grasim's own engineering and know-how,
begins production at Harihar, Karnataka.
Grasim commences production of rayon grade caustic soda a major raw material for
VSF production at Nagda
1977: Grasim's third rayon plant at Harihar, Karnataka goes into production.
1985: Vikram Cement Grasim's first cement plant goes on stream at Jawad, Madhya
Pradesh.
1987: Vikram Cement's second production line is commissioned.
1991: A third production line is added at Vikram Cement.
1992: Grasim sets up Birla International Marketing Corporation (BIMC), a merchant
exporter.
1993: Vikram Ispat, India's third-largest gas-based sponge iron plant, is commissioned.
Birla Consultancy & Software Services is set up, to provide IT consulting services and
for software development
1995: Grasim commissions two greenfield cement plants Grasim Cement at Raipur
(Madhya Pradesh) and Aditya Cement at Shambhupura (Rajasthan).
Grasim sets up two new spinning units Elegant Spinners at Bhiwani (Haryana) and
Vikram Woollens at Malanpur (Madhya Pradesh).
1997: The first phase of Grasim's fourth VSF plant is commissioned at Kharach, Gujarat.
1998: Grasim's first major acquisition overseas the Atholville Pulp Mill in Canada.
Grasim acquires Dharani Cements Ltd.
Grasim acquires Shree Digvijay Cements Ltd.
The cement business of group company, Indian Rayon and Industries Ltd (IRIL), is
transferred to Grasim in a corporate restructuring exercise.
1999: Grasim's viscose staple fibre (VSF) and rayon grade pulp units at Mavoor are
closed down owing to lack of raw material.
Third issue on September 16, 1999 to Indian Rayon's GDR holders: Three GDRs in
Grasim for every 10 GDRs in Indian Rayon, on demerger of its Cement business into
Grasim.

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2000: The Lawson Competency Centre is set up as a division of Birla Consultancy &
Software Services, the software arm of Grasim, following a tie up with Lawson Software
(USA), among Fortune's top five private software companies.
Consultancy and software services are spun off as a separate entity, called Birla
Technologies Ltd.
Merger of Dharani Cements into Grasim.
2001: Grasim acquires a 10.05 per cent stake in L&T.
Four ready-mix concrete plants commissioned, with an aggregate capacity of one million
cubic metres per annum.
Divests holding in Birla Technologies to PSI Data Systems.
2002: The Grasim Board approves an open offer for purchase of up to 20 per cent of the
equity shares of Larsen & Toubro Ltd (L&T), in accordance with the provisions and
guidelines issued by the Securities & Exchange Board of India (SEBI) Regulations, 1997.
Grasim increases its stake in L&T to 14.15 per cent
Grasim divests its Gwalior unit to Melodeon Exports Ltd, and consolidates all textile
operations at the Bhiwani unit, which will manufacture both the 'Grasim' and 'Graviera'
brands at a single location.
2003: Grasim's Chemical Division receives the SA 8000 (Social Accountability) and
OHSAS 18001 certifications.

Strategy: A move towards Self-reliance

Grasim has identified three strategic areas: VSF, manufacturing process of viscose, and
cement. The company began Vikram Cement in 1985, its first cement plant at Jawad,
Madhya Pradesh. It increased its production capacity at Vikram over the years, and in
1995, commissioned two new cement plants Grasim Cement at Raipur (Madhya
Pradesh) and Aditya Cement at Shambhupura (Rajasthan).

Acquisitions and Consolidation

The companys strategic focus appeared to shift from textiles to cement during these
years. It decided to acquire a few cement plants to shore up capacity. Grasim acquired

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analysis
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Dharani Cements (since merged with the company) in April 1998. The company has a
cement plant at Ariyalur, Tamil Nadu. In April 2000, a state-of-the-art cement plant,
among the most modern in Asia, was commissioned at Reddipalayam, Tamil Nadu. This
unit has a capacity of 1.16 million TPA. Acquired by Grasim in 1998, Shree Digvijay
Cement Company Ltd (SDCC) is situated at Sikka (Gujarat). It has an annual capacity of
about 1.08 million TPA. Additionally in 1998, the cement business of Aditya Birla group
company, Indian Rayon and Industries Ltd (IRIL) was transferred to Grasim to increase
the consolidation process.

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3.4 Cement division

Grasim in #3 position in cement industry

Grasimjust behind
makes L&Toffer
an open (#2) at Rs. 190 - unsuccessful
Grasim acquires Indian Rayons Cement Businesses Grasim completes L&T acquisition

1998 1999 2000 2001 2002 2003 2004

Grasim cement
Grasim acquires Dharani acquires Sri Digvijay
Grasimcement
buys out 10% Reliance stake agrees
Grasim in L&Tto buyout L&T stake in CemCo

Figure 11: Acquisition of cement capacity a timeline

The timeline on acquisition of cements over the years (Fig 7) reveals that Grasim has
focussed on cements, and tried to strengthen its portfolio though small acquisitions over
the years. It was now ready to take a quantum leap by taking over the #2 cement
producer, L&T.

3.5 Merger timeline

July, 2000
L&T management takes decision to restructure cement
business
February, 2001 Grasim hives off software business into separate subsidiary

April - October, L&T in talks with 3 MNCs including Lafarge for selling off
2001 cement business

Grasim acquires Reliance Industries 10.05% stake in L&T

November, 2001 for Rs. 7.67 billion at Rs. 306 per share, a premium of 47%
above the market price.
Delays restructuring plans of L&T, and replaces Reliance in
December, 2001 L&T board
Reliance accused on insider-trading, Grasim of back-door
entry intentions. SEBI to investigate, calls for details
30
L&T and Grasim

January-June, Grasim acquires a further 5.65% mainly through creeping

2002 acquisition route in the open market.
Reliance found guilty and fined Rs. 470,000

September, Grasim stake in L&T increases to 15%

2002

Grasim announces open offer for 20% shares at Rs. 190 per
October, 2002 share.
Bid not successful as FIs decline participation

Open offer put on hold by SEBI. L&T decides on cement

November, 2002 restructuring, approaches CDC for strategic investment
through structural demerger.
Grasim replies with a vertical demerger proposal of its

Grasim challenges L&Ts demerger proposal in court.

December, 2002 CDC increases conditions on alliance.
FIs back Grasims demerger proposal.

February, 2003 ICRA approached by L&T to evaluate proposals and suggest

a suitable one.

Grasim cleared of allegations of intention to control by

April, 2003 SEBI.
To proceed with open offer

May, 2003 ICRA proposes demerger plan after detailed study.

Plan accused by L&T of being favorable to Grasim

Chartered Accountant from Chennai, S. Gurumurthy called in

for mediation
Figure 22:toMerger
reach a win-win
Timeline agreement
June, 2003 Grasim and L&T arrive at an agreement whereby cement
division of L&T would be demerged to form a separate
company, CemCo, which Grasim would acquire
31
L&T and Grasim

3.6 Intentionally Left Blank

32
L&T and Grasim

3.7 Share price trends

Final deal-making

Open Offer and

its implications

Role of Reliance

Figure 23: Share Trends

An analysis of the merger was done based on share price trends that are seen from NSE.
The above chart shows the share price trends from 2001 to 2004, for both Grasim and
L&T. Both their share prices are quite close to each other (#2 and #3 players as they are),
and there is a lot of correlation between the two share prices as is evident. From the chart
there are three inflection points that are clearly visible (marked in black circles). One is
the role of Reliance, the other is the controversy regarding the open offer made by
Grasim, and the third is the deal-making drama that happened towards the climax of the
merger. The following are the major areas of analysis of the merger which have been
arrived at:

a) Role of Reliance

b) Open offer and its implications

c) Final deal-making.

33
L&T and Grasim

4 Role of Reliance

Reliance was involved with L&T right from the 1980s, till 2001. In this relationship there
are four distinct phases that are identifiable. Phases 1 and 2 are concerned with a bit on
the history of relationship, while Phase 3 and Phase 4 relate directly to the merger.
Phase 1: In the 1980s, L&T was mainly an engineering company. Hence, Reliance had
acquired an equity stake in L&T at that time, to further its interests in engineering.
Additionally, Reliance was the largest customer of L&T, and the two had a strategic
supplier-customer relationship. Reliance acquired the stake with the aim to further the
synergies. Having obtained this (engineering) expertise over the years, the stake was no
longer strategic for Reliance.
Following its equity investment, Reliance became the single largest shareholder of the
company. Dhirubhai Ambani became the Chairman of the Board. After the takeover
however, Reliance was accused of unethical practices. The FIs had sold a part of their
stakes in L&T to a newly setup investment subsidiary of a leading nationalized bank.
This firm interestingly sold the stakes to Reliance. Following this, Reliance returned the
stakes it had acquired.
Phase 2: Worsening the situation, Reliance was accused of using L&T for its finances. In
1989 Reliance made a record public offering of Rs 8.2 bn of convertible debentures.
Reliance was accused of employing the money to manage the cost overrun of its
products. Dhirubhai stepped down, and the various Reliance Directors also left the board.
However, Reliance remained the single largest non-institutional shareholder in L&T.

34
L&T and Grasim

FIs
PHASE 1

Reliance returns stake, RIL directors remain on board

Reliance
Bank

PHASE 2 Boardthrough
Reliance improper financing Members Step down; Reliance still largest non
L&T

Phase 3: As of March 2001, Reliance owned 6.9% equity stake in L&T. Rumours arose
that Reliance started buying shares from the open market, and had increased its stake to
10% on the day of the announcement of the stake sale as in November 2001. Reliance
strategically increased its stake, to enhance its purchasing behaviour. It knew that L&T
was interested in divesting its cement business. It felt that there would be demand from
one of the large cement players for the stake, with the trend in the consolidation of the
industry. Also, Reliance wasnt interested in entering the cement business itself for
strategic reasons. Hence, Reliance increased its purchasing power by acquiring further
stakes in L&T.

November 2001: Reliance 10% stake

March 2001: Reliance 6.9% stake

PHASE 3

35
L&T and Grasim

Phase 4: Reliance sold its entire 10% stake in L&T to Grasim Industries for a
consideration of Rs 766.50 crore. The two companies Reliance and Grasim, in a
negotiated deal, have fixed the share price for each of the 2.5 crore L&T shares at Rs
306.60 per share, a 47% premium over Thursdays close of L&T at Rs 208.50. The deal
will result in capital gains of Rs 360 crore to RIL. Both parties saw it as a win-win
situation.

PHASE 4

Integrative Negotiations, Game theory

Reliance sells stake in November, 2001
Grasim, Reliance negotiate

Game theoretical explanation: Two-Player Game vs. Supergame

Grasim saw the game as a part of a supergame; wherein its acquisition of Reliances
stakes in L&T would help it in the takeover of L&T Cement division in the supergame.
The key point to note is that Reliance could have seen it as a one-time two-player game.
But Reliance took an allocentric view (from Grasims line of thinking) and knew that it
could bargain further, by understanding Grasims strategy in the game; and realizing that
Grasim wasnt playing a two-player game, but had adopted a supergame..
Additionally, Reliance knew Grasim was really interested and had very few choices. As
of April 18, 2001, three large foreign players, Lafarge, Holderbank and Cemex, had been
shortlisted as potential buyers of a stake in the cement division of L&T. Grasim had also
expressed interest, but was not included in the final list. Hence, Grasim was forced to
play its hand.

36
L&T and Grasim

5 Open offer and its implications

There are serious implications of the open offer on different stakeholders. After
examining the facts of the offer, the repercussions are studied.
Grasim paid Rs. 306.60 per share to Reliance for its first set of acquisition. That was in
November 2001, when the price was Rs 208. The open offer was made duly in October
2002 by Grasim at Rs. 190, 38% less than what Reliance got. This price was based on the
formula stipulated in the regulations. The prices of all shares came down in that period
including L&Ts. The open offer was stalled on the basis of a petition by the Investors
Grievance Forum (IGF). SEBI finally cleared the open offer sometime in mid 2003, but it
was a failure. The final deal made by Grasim was way above the open offer price of Rs.
190.

5.1 Legal implications Letter of the Law

Since Grasim acquired the shares with voting rights of a listed company, the provisions of
the Sebi (Substantial Acquisition of Shares & Takeovers) Regulations, 1997 applied to
the transactions. Regulation 8 comes into play since Grasim acquired more than 5 per
cent but less than 15 per cent shares of L&T. Regulation 7 stipulates disclosure of the
holding by Grasim to L&T and thereafter disclosure by L&T to all stock exchanges on
which L&T shares are listed. These regulations were duly complied with.
The most important regulation is regulation 10 which provides for a public announcement
to acquire shares at a minimum offer price from other shareholders when the acquirer of
shares with voting rights exercises 15 per cent or more of rights. Regulation 11 also
makes it mandatory for the acquirer to make a similar public announcement if the
acquirer acquires additional shares to entitle him to exercise more than 10 per cent of the
voting power in 12 months. Regulation 20 lays down the minimum offer price that is
payable by the acquirer to the other shareholders and provides for the method of
computation of the minimum offer price, computed as the highest price paid by the
acquirer during the 26-week period before the public announcement or the average of the
weekly high and low of the closing prices quoted on the stock exchange during 26 weeks

37
L&T and Grasim

preceding the date of public announcement, whichever is higher. Grasim had complied
with all the rules mentioned above.

5.2 Minority shareholders Spirit of the Law

Shareholders of L&T were genuinely aggrieved at the terms of the open offer. Grasim has
stuck to the requirements of the Takeover Code in pricing the public offer, but that was of
little concern to these shareholders who had been offered about 39 per cent less for their
holdings than what Reliance got. Fortunately, SEBI acted on the complaint by IGF, and
stalled the offer. By the time the open offer was re-allowed, it was quite clear that it
would be a failure, as Grasim was negotiating alternate proposals.
Besides, even the Financial Institutions (FIs) did not raise their voice against the offer,
and thus tacitly supported it. The L&T management was also quiet on the issue, and took
several months to initiate a counter action on Grasim by reviving the demerger proposal.
Thus the Grasim-L&T merger open offer has become a standing example of how
minority shareholders can be taken for a ride. This is the case not only in India, but across
the world, but the Indian stock market regulations definitely need tightening up.

5.3 Grasim Opportunity costs

Grasim seemed to have a made a serious miscalculation by pricing the open offer as low
as Rs. 190, and thereby failing to gain a controlling stake of 35.5% in L&T. There are
many implications for Grasims failed bid.
L&T's strength in infrastructure, engineering, and construction, its IT business, and its
host of joint ventures would have lowered the effective cost of acquisition. In addition, by
putting its stake in L&T beyond the doubt, Grasim could have stolen a march on its
competitor, and even would-be MNC aspirants. With capacity close to 28 million tonnes,
even the likes of Lafarge would have taken quite some time to build comparable muscle.
Legal costs as it was embroiled in a battle with SEBI that took take time to resolve, are
another issue.
Importantly, the open offer could have rubbed-off negatively on Grasim's brand equity,
which is high in the market. This could have an impact on the overall costs of doing
business, including raising funds.

38
L&T and Grasim

Trying to save a few hundred crore rupees, relying on a rather thin SEBI ruling in the
ACC-Gujarat Ambuja case and making use of the facility of market price-linked open
offer provided by the takeover law, Grasim might have missed a good business
opportunity.
Finally, in that period Grasims stock fell by 9 per cent in the bourses. Maybe the move
wasnt good even from the point of view of Grasims shareholders (which is assumed to
be the reason, ostensibly).

5.4 Role of SEBI

It was thanks to SEBIs intervention that the interests of L&Ts minority shareholders
were protected, better late if not never, which has to be applauded. But this put SEBI in
an embarrassing situation of being forced to review its own decision on the same issue
(Gujarat Ambuja-ACC case) within a year. In retrospect, SEBI's decision on the open
offer seemed to have been taken without due consideration of all facts.
The regulatory body has to assume more responsibility and be more alert if it is to
position India on the map of the worlds financial markets.

5.5 Society - Corporate governance

When Mr. Kumar Mangalam Birla was appointed to head SEBI's Committee on
Corporate Governance back in 1999, he was seen as the logical choice. The Kumar
Mangalam Birla Committee came out with some excellent statements on corporate
governance.
But the same Birla group headed by the same Mr. Kumar Mangalam Birla was then
forced to defend itself saying that it had satisfied the Takeover Code in all respects. It had
satisfied the letter of the law, but the spirit of the law hung in balance. Of course, Grasim
Industries has stuck to the legal requirements but ignored the impact on the shareholders
of L&T. Its moves on L&T have been perceived as investor-unfriendly. The failure to
adhere to the spirit of the law and on corporate governance front dented Grasim's image
and enhanced its risk profile.

39
 L&T and Grasim

In addition the role of the I-banker, JM Morgan Stanley also came under a cloud, when it
Grasim
failed to promptly disclose the receipt of SEBI's letter asking Grasim to put the public
(Pre-
merger offer on hold. The society became more cynical of the investment banking community.
analysis
In general, what is required is a robust regulatory system governed by strictly by SEBI so
)
as to ensure no such slippages on corporate governance issues occur in future.

6 The final deal-making

Very few mergers come to a close with a single proposed deal being accepted. Most
mergers have a whole bunch of deals being exchanged by both parties involved. The
Grasim-L&T merger is no exception.
The very first deal that was made to L&T was the open offer by Grasim (refer previous
section for detailed analysis). The open offer was mired in controversy, as SEBI
intervened to block it and finally give it a go-ahead. Event then it was a failure.
Meanwhile, L&T proposed a Structural Demerger, for which Grasim replied with a
Vertical Demerger with odds tilted in its favour. Now L&T played a very clever game,
and brought in CDC (Commonwealth Development Corporation) so as to change the
rules. CDCs proposal threw the gauntlet onto Grasim, for if it (Grasim) didnt come up
with a better proposal, it seemed as if it would lose L&T totally to CDC. A two-player
game in essence became a multiplayer game, raising L&Ts value. Grasim had no option
but to sweeten up its Vertical Demerger proposal, which it did by a considerable
amount, and finally managed to net L&T cement.

Table 3: Stakes of key players

40
L&T and Grasim

http://www.blonnet.com/2002/10/14/stories/2002101401870100.htm

Monday, Oct 14, 2002

Grasim taking 20 pc more in L&T Open offer at Rs 190 per share aggregating Rs 945 cr

MUMBAI, Oct.13

A.V. BIRLA Group's flagship company, Grasim Industries Ltd, is to pick up another 20 per cent
stake in Larsen and Toubro Ltd (L&T) at Rs 190 per share aggregating Rs 945 crore through the
open offer route shortly.

The much-anticipated decision was taken at Grasim's board meeting on Sunday. Currently,
Grasim holds 14.48 per cent stake in L&T. In the event, the open offer goes through successfully,
Grasim's stake will rise to 34.48 per cent. The cost of this open offer will be mainly met through
internal accruals.

The open offer is slated to commence early December.

41
L&T and Grasim

The acquisition of L&T shares would be done by Grasim and its wholly-owned subsidiary,
Samruddhi Swastik Trading and Investments Ltd, acting in concert, the company said in a press
release.

The offer price of Rs 190 per share is higher compared to the average price of Rs 174.93 per
share over the last 26 weeks and Rs 170.08 over the last two weeks on the National Stock
Exchange, which has the highest trading volumes for L&T, the release said.

``The initiative reflects Grasim's commitment to its strategic investment in L&T to enhance the
long-term shareholder value in both companies,'' the release said.

``We are at the threshold of 15-per cent stake position in L&T. Therefore the open offer becomes
mandatory. Besides, we wish to augment our stake and strengthen our position in L&T and in the
process bring down the average cost of holding,'' Mr D.D. Rathi, Group Executive President &
CFO, Grasim, said.

Grasim made its first `strategic' purchase into L&T's holding in November 2001 when it bought
Reliance Industries Ltd's 10 per cent stake at Rs 306 per share for a total consideration of Rs
766.50 crore.

42
L&T and Grasim

L&T's cement business was the factor that propelled Grasim towards this move, but Grasim
indicated that it was interested in L&T's other businesses engineering and construction.

Last month, Grasim Industries Ltd, further increased its holding in L&T to 14.15 per cent stake
after it acquired 1.26 lakh shares amounting to 0.05 per cent stake. The recent stake increase was
done through market purchases since September 9. After these purchases, Grasim's shareholding
in L&T was 351.84 lakh shares.

For Grasim, the total cost of acquisition has worked out to Rs 970 crore so far.

Mr Rathi declined to give details on the composition of the board saying that it was an L&T
board decision. Currently, the A.V. Birla Group has two representations on the L&T board Mr
Kumar Mangalam Birla, Chairman, A.V. Birla Group, and Ms Rajshree Birla, Director.

The acquisition through the open offer is in accordance with the provisions and guidelines issued
by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997. JM Morgan Stanley acted as transaction advisor and Mulla and Mulla and
Craigie Blunt & Caroe acted as legal advisors.

Ever since Grasim made its first investment in L&T, the market has been abuzz with rumours that
Grasim may try to gain management control with the support of financial institutions which hold
a 36 per cent stake in L&T.

The shareholding pattern at the end of the second quarter ended September 30, 2002 was as
follows: UTI 10.34 per cent, LIC 17.42 per cent, New India Assurance Company 2.5 per cent,
GIC 2.25 per cent, Oriental Insurance 1.42, United Insurance Co 1.05 and National Insurance Co
1.02.

Analysts, when contacted, said Grasim's decision to increase stake in L&T would augur well for
the company. ``With a stake of 34 per cent, there is a clear direction where L&T is headed,'' said
an analyst.

`Raw deal' for small investors

THE open offer price of Rs 190 per share being offered to the shareholders of L&T could emerge
as a contentious issue in the run-up to the open offer, according to equity analysts.

43
L&T and Grasim

``This price is not likely to attract investors, especially the financial institutions, who are holding
a major chunk,'' said an analyst.

Having offered Rs 306.6 per share to buy out Reliance's stake in L&T, the open offer price at Rs
190 is perceived as a `raw deal' for the small investors.

``It would be interesting to see how the Securities and Exchange Board of India looks at this
issue,'' said another analyst. However, Mr D.D. Rathi, Group Executive President & CFO,
Grasim, says the two deals are not comparable. ``The timing, rationale and the logic are very
different. There cannot be a comparison,'' he said. According to one analyst, the price offered to
Reliance was primarily to get a toehold in the company, therefore, should not be compared with
the open offer price.

The share price of L&T closed at Rs 172.05 on Bombay Stock Exchange on Friday.

-------------------------------------------------------------------------------------------------------

44
L&T and Grasim

http://www.dancewithshadows.com/birla_last_battle.asp

Since 2001, The Battle For L&T raged through the stock markets, corporate corridors and
regulatory verandahs, and it was finally the tough Birla who took the victory stand. Verdict was
final and thumping: Camp Birla wrested victory in what was the country's latest high-profile
corporate takeover battle after Dhirubhai Ambani's legendary battle for Bombay Dyeing much
earlier.

The story begins in the 1980s, when the Reliance group acquired a 10% stake in Larsen &
Toubro, set up by Holck-Larsen and Kristian Toubro in 1923. L&T specialised in engineering
contracts, and much later, diversified into cement, infotech and other segments. A professionally-
managed bluechip company, the promoter stake in the company was always very low, making it
vulnerable to hostile takeovers. At one time, public financial institutions like LIC and UTI held a
combined stake in L&T as high as 40%.

More than just the 10% stake, Reliance aspired for control of the engineering major. This attempt
came unstuck in the face of regulatory and shareholder oppositon, including from financial
institutions. Reliance finally bowed out by selling its stake.

The day Reliance announced its decision to move out, the L&T stock shot up on the bourses.
Later, it emerged that the entire L&T stake offloaded by Reliance was mopped up by L&T's
cement rival Grasim, the Aditya Birla group flagship. It was rumoured that someone got wind of
the impending stake sale of Reliance in L&T and bought L&T shares from the market to cash in
later. Also, it was rumoured that Reliance had bought L&T shares before selling the enire stake to
Grasim.

The higher stake of Grasim in L&T enabled Grasim to place two of its nominees on L&T board.

According to Sebi's takeover code norms, the acquirer company (Grasim) is supposed to make an
open offer to the shareholders of the target company (L&T) at the average prevailing stock price
of the company in the last 26 weeks. The price at which Grasim purchased the Reliance stake in
Grasim was Rs 304/share. But by the time the open offer came up, the L&T stock was trading
much cheaper and the Birlas could make a bid for the additional stake in L&T (Held by
shareholders) at a much cheaper price. Small shareholders cried foul and moved heaven and earth
to make Kumar The Raider pay more - the same Rs 304/share it paid Reliance. The Grasim
chairman stuck to his guns, since technically, Grasim did not have to pay the high price now. The

45
L&T and Grasim

matter went to Sebi and later, all the way to the Securities Appellate Tribunal (SAT). Sebi initially
stalled the open offer, but it was reversed by SAT. The Grasim open offer was finally cleared,
paving the way for Birla to acquire additional stake and acquire managment control of the once-
independent L&T.

There were also several interest sideshows to the drama. L&T feared losing its independece
and distrusted a takeover by rival Grasim. L&T tried to hive off the cement division into a
separate company in an attempt to make the main company unattractive for takeovers and
also to divest the cement business to a 'trustworthy' buyer, possibly a foreign partner like
Lafarge, looking for capacity expansion in India. But these attempts never bore fruit.

46
L&T and Grasim

7 THE RESTRUCTURING EFFORTS

http://www.domain-b.com/companies/companies_l/larsen/20000115larsen_restru.html

L&T to restructure, gain focus

15 January 2000

Larsen & Toubro, the leading Indian construction and engineering group, is preparing for some
major restructuring. The companys board has accepted a report by Boston Consulting Group to
turn the company into a focused group with clearly defined business areas that will help it
become a Rs 25,000-crore group in five years.

At the outset, the plan moots the creation of a separate division for the companys cement
business, stock market listing for infotech subsidiary L&T Information Technology, and an initial
public offering in mid-2001 and reducing equity exposure in two subsidiaries. The company will
enter the telecommunications sector with a subsidiary, L & T Telecom, with an initial investment
of Rs 450 crore. This company will become an Internet service provider and will target a turnover
of Rs 2,000 crore by 2005-2006.

The report has made a clear distinction between core business areas and thrust areas for the
company. While businesses like cement, information technology and telecom will be its thrust
areas, the core business will continue to be construction, E&C projects, heavy engineering, and
electrical and electronics-related activities.

The objective of the restructuring, in the words of managing director and chief executive officer
A.M. Naik, will be to increase shareholder value and take returns on capital employed to 20 per
cent, from the current 11 per cent, in the next five years. This will be achieved through
identification of core business areas and thrust areas, spinning off or selling non-core businesses,
and a realignment of the portfolios of the companies in the group fold.

47
L&T and Grasim

The plan consists of four key areas: shape and structure of the overall portfolio; value creation
plans for each business; corporate and organisational structuring; and internal value-based
management processes.

L&T has already merged the businesses of two subsidiaries, LTM and Audco, with its heavy
engineering division. It has decided to reduce its exposure in two other subsidiaries.

Mr Naik has spelt out the plans for the cement business. There is no proposal to sell off the
business as the worst is now over for the cement sector. In the years to come, cement is seen to be
a profitable business, and the company wants to exploit the opportunities there. It is in this
context that a separate subsidiary will be created and L&T may allow a partner to come in with a
minority shareholding.

As regards the information technology unit, an expert team will decide on the public issue. It
could be a rights-cum-public issue or an issue of American depository receipts.

The entire process of restructuring will be overseen by a special office set up in the company.
This "implementation office" will function under a senior member of the board and will report the
progress periodically to both the corporate management committee and the business management
committees of the board.

Even as the restructuring programme is implemented, the company will continue to evaluate its
other diversified operations and joint ventures from a value creation perspective. Exposure in
certain non-performing or under-performing areas will be reduced.

The Boston Consulting Group is understood to have pointed out the lack of transparency and
accountability, unclear portfolio, uncertain growth prospects and poor performance in several
businesses as reasons for the stagnated growth of the company. Immediately, Mr Naik says, the
company will initiate segment-wise reporting of profit and loss from the first quarter of 2000-
2001.

The restructured entity will be an organisation ensuring transparency, accountability and

management focus, says Mr Naik.

http://www.thehindubusinessline.com/businessline/iw/2000/05/28/stories/0528e251.htm

48
L&T and Grasim

Sunday, May 28, 2000

Excerpts from interview with L&T Managing Director and CEO, Mr. A. M. Naik

Larsen & Toubro is to restructure its cement business to optimally participate in the cement
business. The key is assets waiting. Existing plants have room for low-cost expansion; 10 million
tonnes was last April L&T's plant capacity, today it is 12.75 million tonnes and early next year it
will be 13.5-14.5 million tonnes. The capital expenditure has been approved and my aggregate
cost is coming below 20-25 per tonne. Now, let us assume that the capacity will be 14.5-15
million tonnes; which is what the capacity will be by next June.

Let us say that right now I go in for the restructuring because everybody wanted it. Then they will
say that the valuation is $1.5 billions or $ 1.4 billions, in case they give me a value at $120 a
tonne, because our capacities are new compared to where the valuation is taking place at $100 per
tonne, which are for plants older than 20 years. The bulk of our capacity was created in the last
three-four years. Now, if I raise the capacity to 14.5 million tonnes, which means 2 million tones
more than now, I have a differential gain of $100 -- $20 is the cost and $120 is the valuation.
Should I lose $200 millions? This is only if I shift the restructuring by one year.

The subsidiary for the cement business will take its own time but in less than a year and half it is
likely to happen. Latest by December 2001. The institutions did not stop us from restructuring.
The management was concerned about valuation. Institutions will not tell us not do that, only do
this. Finally the management of the company has to answer, not just to institutions but to all its
other shareholders. I am not going to up give up my mid/long-term value creation to meet needs
of quarterly reporting.

On sale of cement business:

There would be no sell off. We will always have 51 per cent. The correct story on cement which
has never been put in the right perspective is that the management has right now initiated a
tremendous amount of value creation. Last year, the profit margins of cement was six per cent.
Now, the year which has ended, it is 16 per cent, in spite of price not having gone up or down. Let
this management get the time to create the value which we have said in one year. We have
improved by 10 per cent.

49
L&T and Grasim

This year our target is 20 per cent. In spite of the drought, we are not lowering the target which
we had fixed before the drought. The following year, by March 2002, our plan is to take it to 23-
24 per cent. Up to 18-19 per cent, we want it happen without any price increase, which means
cost reduction. We have explained this position to our major shareholders who have agreed to
wait for the right time, which is next eighteen months. I want to improve our profit margins to a
minimum of 23-24 per cent and enhance capacity to at least 15 million tonnes.

JULY 21, 2000

http://www.myiris.com/shares/company/reportShow.php?url=AMServer
%2F2000%2F07%2FLARTOUBR_20000721.html

The company has now appointed JP Morgan and DPS Merrill Lynch as its financial advisors to
assist and advice the management on :-

1. Matters relating to the financial structure of the demerged company; and

2. Issues relating to strategic/financial partner or capital market related transation, if any and
helping in negotiations with such investors.

October 31, 2000

http://www.indiainfoline.com/comp/lart/me320.html

The company made further progress in the exercise of restructuring its cement business. The
board has approved the proposal of investment bankers on the ownership structure of the cement
subsidiary. Some of the key points in the proposal are:

A subsidiary company, L&T Cement Ltd (LTCL) to be formed.

L&T shareholders to receive about 25% stake in LTCL.

Narmada Cement company to be merged with LTCL.

L&T would invite strategic financial partner in LTCL.

50
L&T and Grasim

The strategic partner would reach equal level of shareholding with L&T through a
combination of secondary purchases and infusion of capital in LTCL over a period of
time.

The company intends to progress speedily in the above demerger proposal and unlocking the
shareholder value.

9 Business Standard. Oct 14, 1999; pg 1

Title: L and T SEEKS CEMENT PARTNERS (to spin off cement division into an independent
company)

Abstract: Larsen and Toubro (L and T) is planning to spin off its cement division into a separate
company. It has been negotiating with five global cement companies, Lafarge SA of France,
Cemex of Mexico, Blue Circle of the UK, Holderbank of Switzerland and Cement Frances for the
strategic investments. The spin off will take place after Boston Consulting group formulates a
restructuring package for the company and submits its report by the end of Oct 1999. L and T is
believed to have performed mini roadshows regarding the cement division's performance and
plans. It is supposed to have given presentations projecting its plan to hike the cement capacity to
14 million tonne from 12 million tonne. (hkd)(m)

10 Business Line. Dec 11, 1999; vol. 6 ; iss. 341 pg 4

Title: L and T MAY SEEK PARTNER FOR CEMENT DIVISION (DENIES QUITTING
CEMENT BUSINESS)

Abstract: Larsen and Toubro (L and T) plans to seek a joint venture partner for its cement
division. The company denied that is quitting the cement business by spinning off the cement
division into a separate company.

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L&T and Grasim

11

12 Business Standard. Dec 25, 1999; pg 1

Title: UK FIRMS OFFERS TO PICK UP 50% IN L and T CEMENT (L and T to spin off cement
division into separate entity, Holder Bank to buy 50% stake)

Abstract: Larsen and Toubro (L and T), India's largest cement manufacturing firm with a capacity
of 12 million tones, plans to hive off its cement division into a separate entity. The move is part of
L and T's restructuring plans. Holder Bank of the UK plans to buy a 50 percent equity stake in L
and T's proposed cement firm for around Rs3,300 crore. L and T's cement division has been
valued at Rs7,500 crore. L and T's proposed cement division will have equity of Rs3,750 crore.
(gs)(m)

13 Business Standard. Apr 11, 2000; pg 13

Title: L and T CEMENT SPINOFF AFTER CAPACITY HIKE (from 12 million tonnes to 15
million tonnes)

Abstract: Larsen and Toubro Ltd (L and T) has decided to hive off its cement division after
increasing its capacity from 12 million tonnes to 15 million tonnes. Financial institutions did not
have any part in this decision, the company has stated. The expansion will be over by Apr 2001.
By Apr 2003, it will add another 3.5 million to its capacity. It will also set up a grinding unit of
one million tonnes capacity at a cost of $35 a tonne. The brownfield addition will cost $15 a
tonne.

14

15 Business Line. Jul 5, 2000; vol. 7 ; iss. 186 pg 1

Title: L and T BOARD CLEARS CEMENT DEMERGER (DEMERGER LIKELY ONLY

AFTER MID-2001)

52
L&T and Grasim

Abstract: The board of directors of Larsen and Toubro (L and T) has approved the proposal to
hive off its cement business. However, the unit is likely to be demerged only after mid-2001. The
company's debt level, currently at Rs37 bn, is expected to reduce to Rs20 bn following the
demerger. If the company plans to divest a part of its equity in the demerged cement unit, debt
level is expected to reduce further. L and T has a total capacity to produce 12 M tonnes/y of
cement and is likely to increase the capacity to 14 M tonnes/y by the end of 2000.

16 Business Line. Oct 20, 2000; vol. 7 ; iss. 291 pg 4

Title: L and T CEMENT DEMERGER IN 6 TO 8 MONTHS (L and T plans to expand the

capacity from 16 M tonnes to 30 M tonnes)

Abstract: Larsen and Toubro (L and T) proposes to complete its cement demerger plan by May,
Jun 2001. The company plans to offer 19% stake in L and T Cement Ltd to its strategic/financial
partner by 2004. The partner can acquire another 13% from the L and T shareholders, who will be
given 25% share capital of L and T Cement Ltd. L and T plans to expand the capacity from 16 M
tonnes to 30 M tonnes and expects the strategic/financial partner to invest in the expansion
project.

17 Business Standard. Nov 8, 2000; pg 1

Title: L and T, STRATEGIC ALLY WILL HOLD 37.5% EACH IN CEMENT FIRM (over a
period of two-three years)

Abstract: Larsen and Toubro (L and T), as part of restructuring its cement business, will offer 37.5
percent stake in L and T Cement to the strategic investor over a period of time. As per the new
structure, the strategic investor would first take 24 percent and L and T 51 percent. Over a period
of two-three years the partner would be allowed to increase its stake to 37.5 percent through a
preferential allotment of equity shares. Consequently, L and T's stake in L and T Cement would
reduce to 37.5 percent. The proceeds of the preferential allotment would be utilised to fund the
expansions or acquisitions of the company. Meanwhile, Narmada Cement, the 90 percent
subsidiary of L and T, would be merged with L and T Cement.

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L&T and Grasim

18 Business Line. May 30, 2001; pg 1

Title: CEMENT MAJORS SEEK TO PARTNER L and T (Holderbank, La Farge and Cemex
bidding for a 37.5% stake of Larsen and Toubro)

Abstract: Larsen and Toubro (L and T) has received bids from Holderbank, La Farge and Cemex,
the global cement majors, to become joint venture partners for its cement business. L and T has
decided to hive off its cement business into a separate company and has issued tenders for 37.5
percent stake in the business. Of the 3 companies, 2 have taken due diligence and the third bidder
is likely to undertake due diligence by Aug 2001, after which the bids will be evaluated and
finalised.

THE BIRLA L&T STAND-OFF

On November 18, 2001, Reliance Industries Limited announced the sale of its holding of
25 million equity shares of L&T to Grasim Industries Limited of the Aditya Birla group,
for an aggregate sale consideration of Rs 7,665 million. Rajashree Birla and her son
Kumar Mangalam Birla were inducted to the Board in place of Mukesh and Anil Ambani.

The story begins in the 1980s, when the Reliance group acquired a 10% stake in Larsen &
Toubro, set up by Holck-Larsen and Kristian Toubro in 1923. L&T specialised in engineering
contracts, and much later, diversified into cement, infotech and other segments. A professionally-
managed bluechip company, the promoter stake in the company was always very low, making it
vulnerable to hostile takeovers. At one time, public financial institutions like LIC and UTI held a
combined stake in L&T as high as 40%.

More than just the 10% stake, Reliance aspired for control of the engineering major. This attempt
came unstuck in the face of regulatory and shareholder oppositon, including from financial
institutions. Reliance finally bowed out by selling its stake.

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L&T and Grasim

The day Reliance announced its decision to move out, the L&T stock shot up on the bourses.
Later, it emerged that the entire L&T stake offloaded by Reliance was mopped up by L&T's
cement rival Grasim, the Aditya Birla group flagship. It was rumoured that someone got wind of
the impending stake sale of Reliance in L&T and bought L&T shares from the market to cash in
later. Also, it was rumoured that Reliance had bought L&T shares before selling the enire stake to
Grasim.

The higher stake of Grasim in L&T enabled Grasim to place two of its nominees on L&T board.

19

20 Business Line. Nov 19, 2001; pg 1

Title: GRASIM TO ACQUIRE AMBANIS' L and T STAKE FOR Rs766.5 CRORE (representing
just more than 10% of the stake or 2.5 crore shares)

Abstract: Grasim Industries Ltd (GIL), the flagship company of the AV Birla group, has decided
to acquire 2.5 crore shares, worth Rs766.5 crore, representing just over 10 percent of the stake in
Larsen and Toubro (L and T), from the Ambanis of the Reliance group. Analysts feel that GIL
may go in for further acquisition of L and T shares and may try to get control of management
with the support of financial institutions (FIs) that hold 33 percent stake in L and T. GIL, which
has a cement capacity of 9.86 million tonnes, plans to increase it to 13.16 million tonnes by Dec
2002. L and T, which plans to add 1 million tonnes to its cement production capacity, will have a
total capacity of 16 million tonnes. Of late, GIL is depending on its cement business, as its VSF
and other divisions are not doing well. The combined cement capacity of GIL and L and T would
be comparable to the combined capacity of Gujarat Ambuja and ACC Ltd, which would have a
combined capacity of 27.8 million tonnes by Dec 2001. Analysts in the cement industry have
termed this acquisition as a marriage of synergy.

20.1 Business Standard. Jun 15, 2002; pg 3

Title: L and T DEFERS PLAN TO DEMERGE CEMENTS ARM (decision after discussion
with Birla Group)

55
L&T and Grasim

Abstract: Larsen and Toubro Ltd (L and T) has put on hold the proposed de- merger of its
cement division. It will decide on the proposal after discussions with the A V Birla Group
that acquired 10.05 percent stake in L and T. The Group has further increased its stake by
2.83 percent. L and T and the Group have a combined cement production capacity of 27
million tonnes per annum. They are working on integrating certain operations, and expect
to save Rs30 crore in 2002-2003. L and T posted a decline of 25.4 percent in net profit at
Rs186.76 crore in Jan-Mar 2002 against Rs250.4 crore in Jan-Mar 2001. Turnover was up
14.1 percent at Rs2,829.03 crore. Profit before tax was down 21.72 percent at Rs210.66 crore
(Rs269.14 crore). Net profit was up 10 percent at Rs346.8 crore in 2001-2002 against
Rs315.06 crore in 2000- 2001. Total income was up 6.8 percent at Rs8,358 crore (Rs7,825.43
crore). Export revenue was up 56 percent at Rs1,113 crore. The company retired Rs339
crore long-term debts and reduced interest outgo to Rs315.92 crore (Rs361.26 crore). The
order book grew by 4.7 percent to Rs10,922 crore.

http://www.blonnet.com/2002/10/14/stories/2002101401870100.htm

Monday, Oct 14, 2002

Grasim taking 20 pc more in L&T Open offer at Rs 190 per share aggregating Rs 945 cr

Our Bureau

MUMBAI, Oct.13

A.V. BIRLA Group's flagship company, Grasim Industries Ltd, is to pick up another 20 per cent
stake in Larsen and Toubro Ltd (L&T) at Rs 190 per share aggregating Rs 945 crore through the
open offer route shortly.

The much-anticipated decision was taken at Grasim's board meeting on Sunday. Currently,
Grasim holds 14.48 per cent stake in L&T. In the event, the open offer goes through successfully,

56
L&T and Grasim

Grasim's stake will rise to 34.48 per cent. The cost of this open offer will be mainly met through
internal accruals.

The open offer is slated to commence early December.

The acquisition of L&T shares would be done by Grasim and its wholly-owned subsidiary,
Samruddhi Swastik Trading and Investments Ltd, acting in concert, the company said in a press
release.

The offer price of Rs.190 per share is higher compared to the average price of Rs 174.93 per
share over the last 26 weeks and Rs.170.08 over the last two weeks on the National Stock
Exchange, which has the highest trading volumes for L&T, the release said.

``The initiative reflects Grasim's commitment to its strategic investment in L&T to enhance the
long-term shareholder value in both companies,'' the release said.

``We are at the threshold of 15-per cent stake position in L&T. Therefore the open offer becomes
mandatory. Besides, we wish to augment our stake and strengthen our position in L&T and in the
process bring down the average cost of holding,'' Mr D.D. Rathi, Group Executive President &
CFO, Grasim, said.

Grasim made its first `strategic' purchase into L&T's holding in November 2001 when it bought
Reliance Industries Ltd's 10 per cent stake at Rs.306 per share for a total consideration of
Rs.766.50 crore.

L&T's cement business was the factor that propelled Grasim towards this move, but Grasim
indicated that it was interested in L&T's other businesses engineering and construction.

Last month, Grasim Industries Ltd, further increased its holding in L&T to 14.15 per cent stake
after it acquired 1.26 lakh shares amounting to 0.05 per cent stake. The recent stake increase was
done through market purchases since September 9. After these purchases, Grasim's shareholding
in L&T was 351.84 lakh shares.

For Grasim, the total cost of acquisition has worked out to Rs 970 crore so far.

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L&T and Grasim

Mr Rathi declined to give details on the composition of the board saying that it was an L&T
board decision. Currently, the A.V. Birla Group has two representations on the L&T board Mr
Kumar Mangalam Birla, Chairman, A.V. Birla Group, and Ms Rajshree Birla, Director.

The acquisition through the open offer is in accordance with the provisions and guidelines issued
by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997. JM Morgan Stanley acted as transaction advisor and Mulla and Mulla and
Craigie Blunt & Caroe acted as legal advisors.

Ever since Grasim made its first investment in L&T, the market has been abuzz with rumours that
Grasim may try to gain management control with the support of financial institutions which hold
a 36 per cent stake in L&T.

The shareholding pattern at the end of the second quarter ended September 30, 2002 was as
follows: UTI 10.34 per cent, LIC 17.42 per cent, New India Assurance Company 2.5 per cent,
GIC 2.25 per cent, Oriental Insurance 1.42, United Insurance Co 1.05 and National Insurance Co
1.02.

Analysts, when contacted, said Grasim's decision to increase stake in L&T would augur well for
the company. ``With a stake of 34 per cent, there is a clear direction where L&T is headed,'' said
an analyst.

`Raw deal' for small investors

THE open offer price of Rs 190 per share being offered to the shareholders of L&T could emerge
as a contentious issue in the run-up to the open offer, according to equity analysts.

``This price is not likely to attract investors, especially the financial institutions, who are holding
a major chunk,'' said an analyst.

Having offered Rs 306.6 per share to buy out Reliance's stake in L&T, the open offer price at Rs
190 is perceived as a `raw deal' for the small investors.

``It would be interesting to see how the Securities and Exchange Board of India looks at this
issue,'' said another analyst. However, Mr D.D. Rathi, Group Executive President & CFO,
Grasim, says the two deals are not comparable. ``The timing, rationale and the logic are very

58
L&T and Grasim

different. There cannot be a comparison,'' he said. According to one analyst, the price offered to
Reliance was primarily to get a toehold in the company, therefore, should not be compared with
the open offer price.

The share price of L&T closed at Rs 172.05 on Bombay Stock Exchange on Friday.

20.2

21 Business Line. Jul 21, 2001; pg 2

Title: NO BREACH OF NORMS IN ACC TAKEOVER, RULES SEBI (GACL and

Ambujas have not violated SEBI Regulation as they picked up only 14.5% equity capital)

Abstract: Securities and Exchange Board of India (SEBI) said that Gujarat Ambuja
Cements Ltd (GACL) and the Ambujas had not violated SEBI Regulations, 1997 by not
making a public offer during the acquisition of shares in ACC Ltd. In a case submitted to
SEBI, it was alleged that Ambujas had acquired shares exceeding 15 percent in ACC.
SEBI observed that Ambujas had acquired only 14.5 percent equity shares capital/voting
capital of ACC, which was below the threshold limit of 15 percent as specified under
SEBI Regulations. Further, the Special Court observed that neither Tatas could be
described as promoters of ACC nor mere appointment of two or four directors of
Ambujas to ACC board would constitute acquisition of control by the Ambujas. Also,
SEBI assured that if further developments enabled Ambujas to gain direct or indirect
control over ACC, then the matter would be examined afresh at that time.
21.1
21.2 Business Standard. Nov 22, 2002; pg 1

Title: BIRLAS FAIL TO GET STAY ON L and T (SEBI directs AV Birla group to put the
open offer on hold)

59
L&T and Grasim

Abstract: The Securities and Exchange Board of India (SEBI) has ordered Grasim
Industries Ltd (Grasim) of the AV Birla group to put on hold announcement of its open
offer for shares of Larsen and Toubro Ltd (L and T). SEBI has issued the order, pending
investigation into the acquisition of 14.5 percent stake in L and T by Grasim. The group has
failed to obtain an interim stay order from the Securities Appellate Tribunal (SAT) on
SEBI's order. SAT has asked SEBI to file an affidavit and material evidence to justify
investigation by 26 Nov 2002. It will take up the issue for hearing on 27 Nov 2002.

22

23 Business Line. Nov 22, 2002; pg 1

Title: BIRLAS MAY HAVE GOT CONTROL OF L and T IN 2001: SEBI (Grasim has made an
open offer to acquire 20% more stake in Larsen and Toubro)

Abstract: The Securities and Exchange Board of India (SEBI) feels that the Birla group may have
gained management control of Larsen and Toubro (L and T) in late 2001. SEBI informed the
Securities Appellate Tribunal on 21 Nov 2002 that the facts are being ascertained through
investigation. Grasim had earlier made an open offer to acquire 20 percent more stake in L and T
and SEBI had asked Grasim on 8 Nov 2002 to hold back the offer. Grasim had acquired 10.6
percent equity in L and T from the Reliance group during Nov-Dec 2001.

24

25 Business Standard. Nov 26, 2002; pg 1

Title: SEBI SEEKS DATA ON BIRLA STAKE (to probe if Grasim violated in not making open
offer when it acquired more than 10% stake in L and T)

Abstract: Grasim Industries Ltd (Grasim) increased its stake in Larsen and Toubro Ltd (L
and T) from 10.05 percent acquired in Nov 2001 to 14.48 percent as on 13 Oct, and
proposed to make an open offer for additional stake. It had further increased its holding to
15.35 percent as on 22 Nov 2002. The Securities and Exchange Board of India (SEBI) has

60
L&T and Grasim

asked (Grasim) and the stock exchanges to furnish details of the transactions. It has also
asked L and T to furnish correspondence and minutes of board meetings relating to the
transactions. SEBI is investigating the transactions to find out if Grasim violated its norms
in not making an open offer on acquisition of over 10 percent stake in L and T in Nov 2001.
Subsequent hike in stake indicated the interest of the company in management control of L
and T. SEBI is examining whether the two nominees of the company on L and T board have
influenced decisions of the board.

26 Business Line. Nov 28, 2002; pg 1

Title: SEBI WANTS GRASIM OPEN OFFER STALLED (SEBI to investigate whether change of
management control in L and T was before or after open offer)

Abstract: The Securities and Exchange Board of India (SEBI) has asked the Securities Appellate
Tribunal (SAT) to freeze open offer proposal of Grasim Industries for shares of Larsen and
Taubro (L and T). SEBI is presently investigating whether Grasim had gained management
control of L and T before the open offer or after. The market regulator had earlier stalled the open
offer and Grasim had appealed to the SAT. SEBI is likely to arrive at a number of conclusions
after completing investigations. Grasim had earlier acquired 10 percent stake in L and T from
Reliance Industries and is presently holding over 15 percent stake in the company.
26.1
26.2 Business Standard. Nov 27, 2002; pg 1

Title: SUITORS VALUE L and T CEMENT BUSINESS AT $77 A TONNE (the cement
division of Larsen and Toubro is valued at Rs6,100 crore-20% more than the Birlas'
evaluation)

Abstract: Financial investors in the Larsen and Toubro (L and T) cement business have
offered $77 a tonne for a 6 percent stake in the unit. As a result, the 16.5-million-tonne
cement unit is valued at Rs6,100 crore. The valuation is 20 percent higher than that by the
Birlas. The Birlas have internally valued L and T at $60-65 a tonne to justify the offer price

61
L&T and Grasim

of Rs190 a share. CDC Capital Partners is one of the parties that are keen on acquiring a
stake in the L and T cement business.

26.3 Business Standard. Nov 27, 2002; pg 9

Title: NO MANAGEMENT CONTROL OF L and T, SAYS AV BIRLA (the AV Birla group

has said that it had only 2 nominees on the L and T's board of 17 directors)

Abstract: The AV Birla group has said that it has no management control or operational
control in Larsen and Toubro (L and T). It has pointed out that it had only 2 nominees on
the 17-member board of directors. Besides, it has not been informed of L and T
management's plan to de- merge the cement unit. The Securities and Exchange Board of
India (SEBI) is likely to argue before the Securities Appellate Tribunal (SAT) that the AV
Birla group has management control of L and T.

27 Financial Express. Nov 27, 2002; pg 1

Title: L and T BOARD WAS UNANIMOUS IN FORMING CEMENT DEMERGER PANEL

(the two representatives of AV Birla group on L and T board had approved cement de-merger
proposal)

Abstract: Larsen and Toubro (L and T) had resolved to set up a committee to examine the
proposal of demerging its cement business unanimously at the meeting of its board of
directors on 29 Oct 2002. Mr Kumar Mangalam Birla and Ms Rajashree Birla, the two
representatives from the AV Birla Group had approved the cement demerger proposal. The
proposal involved constituting a committee of directors to study the cement demerger plan.
The committee was expected to submit its report by the end of Dec 2002. The Group is of
the view that it cannot get control of L and T with only two of its representatives on the
company board. The two Birla representatives had come on the L and T board in 2001 after
acquisition of 10.05 percent stake from Reliance Industries Ltd. Given that these
representatives were not involved in the routine management of the company, the Birlas
apparently had no control of L and T. The Birlas have presently filed an appeal before the

62
L&T and Grasim

Securities Appellate Tribunal (SAT) against the directive of the Securities and Exchange
Board of India (SEBI) stalling the open offer of Grasim Industries.

28 Business Standard. Nov 27, 2002; pg 1

Title: L and T KEPT US IN THE DARK, SAY BIRLAS (a letter sent to Larsen and Toubro
seeking details of its plans to de-merge the cement business)

Abstract: The AV Birla (AVB) group has said that Larsen and Toubro (L and T) had not
informed it about its plan to de-merge the cement business despite being a majority
shareholder with 2 nominees on the L and T board of directors. It has said that there are
differences between the group and L and T. Grasim Industries Ltd (GIL), an AVB group
company, holds 15.35 percent stake in L and T. It despatched in early Nov 2002a letter to L
and T seeking details of its plan to de- merge the cement division.

28.1 Business Standard. Nov 28, 2002; pg 1

Title: SEBI: BIRLAS' STAKE BUY MEANT TO CONTROL L and T (acquisition from
Reliance Industries Ltd was structured to ensure management control)

Abstract: Grasim Industries Ltd (GIL) structured its acquisition of Larsen and Toubro Ltd
(L and T) stake from Reliance Industries Ltd (RIL) to ensure management control of L and
T for the Birla group. The Securities and Exchange Board of India (SEBI) has made the
statement in its affidavit filed with the Securities Appellate Tribunal (SAT). It has also
stated that GIL nominated 2 directors to the L and T board on its own and not at the
instance of L and T. The agreement between GIL and RIL required RIL not to hold any
securities with voting rights in L and T, and the 2 companies not to acquire L and T shares
from the market for 5 years. It also required RIL to get the transaction approved by the L
and T board. GIL acquired L and T shares from the market to consolidate its holding in the
company. SAT is hearing an appeal by GIL against a SEBI order to put on hold its open
offer for L and T shares.

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L&T and Grasim

L & T Revives Demerger Plans

29

30 Source: Business Standard. Nov 15, 2002; pg 1

Title: L and T MANAGEMENT ASKS FIs TO OPPOSE BIRLAS' OFFER (as the intrinsic
value of L and T stock is 40% higher than Grasim's offer price of Rs190 a share, says L and
T)

Abstract: Larsen and Toubro's (L and T) management has approached the financial institutions
(FIs) to oppose Grasim Industries' open offer for L and T. FIs hold the largest stake in L and T. L
and T said that the intrinsic value of the stock was 40 percent higher than Grasim's offer price of
Rs190 a share and therefore not an attractive exit option for the FIs. L and T scrip will be valued
at Rs300 a share under various valuation methods.

30.1 Source: Financial Express. Nov 22, 2002; pg 1

Title: FIs SWEAR NOT TO ALLOW CHANGE IN L and T CONTROL, MEETING TODAY
(will take legal recourse to prevent change in control)

Abstract: Financial institutions (FIs) are the largest stakeholders in Larsen and Toubro (L
and T) with nearly 37 percent stake in the company. They have kept close watch on all
recent developments at the company including stalling of open offer of Grasim Industries
for L and T by the Securities and Exchange Board of India. The Aditya Birla group has
expressed its intention not to increase the open offer price beyond Rs190 per share. FIs are
firm against any change in control at L and T. They would take all legal measures as may be

64
L&T and Grasim

necessary to stop change in management control in L and T. Amongst FIs, Life Insurance
Corporation of India (LIC), Unit Trust of India (UTI), and General Insurance Corporation
(GIC) have considerable sake in L and T. FIs will meet on 22 Nov 2002 to have an in depth
discussion on the situation.

30.2 Source: Business Standard. Nov 25, 2002; pg 1

Title: PANEL TO ADVISE L and T ON CEMENT DEMERGER (committee of independent

directors to recommend de-merger and stake offload to a financial investor)

Abstract: The management of Larsen and Toubro (L and T) has revived its plan to offload
sizeable stake in its cement business to a strategic partner. The board of the company has
constituted a committee of independent directors, which will submit its recommendations
on the demerger and stake offload to a financial investor at the earliest. Earlier, three
cement multinationals-Lafarge, Holcim and Cemex-had evinced interest in acquiring equity
in L and T's cement business. The L and T management is considering two options on the
cement business demerger. First, the cement business may be hived off into L and T
Cement, which will be a subsidiary company. The second one is to give the existing
shareholders of L and T shares of L and T Cement on a proportionate basis. The
management will wait for prices and the value to increase before inducting a strategic
partner.

31 Source: Business Standard. Nov 27, 2002; pg 1

Title: L and T KEPT US IN THE DARK, SAY BIRLAS (a letter sent to Larsen and Toubro
seeking details of its plans to de-merge the cement business)

Abstract: The AV Birla (AVB) group has said that Larsen and Toubro (L and T) had not
informed it about its plan to de-merge the cement business despite being a majority
shareholder with 2 nominees on the L and T board of directors. It has said that there are
differences between the group and L and T. Grasim Industries Ltd (GIL), an AVB group
company, holds 15.35 percent stake in L and T. It despatched in early Nov 2002a letter to L
and T seeking details of its plan to de- merge the cement division.

65
L&T and Grasim

32 Source: Financial Express. Nov 27, 2002; pg 1

Title: L and T BOARD WAS UNANIMOUS IN FORMING CEMENT DEMERGER PANEL

(the two representatives of AV Birla group on L and T board had approved cement de-merger
proposal)

Abstract: Larsen and Toubro (L and T) had resolved to set up a committee to examine the
proposal of demerging its cement business unanimously at the meeting of its board of
directors on 29 Oct 2002. Mr Kumar Mangalam Birla and Ms Rajashree Birla, the two
representatives from the AV Birla Group had approved the cement demerger proposal. The
proposal involved constituting a committee of directors to study the cement demerger plan.
The committee was expected to submit its report by the end of Dec 2002. The Group is of
the view that it cannot get control of L and T with only two of its representatives on the
company board. The two Birla representatives had come on the L and T board in 2001 after
acquisition of 10.05 percent stake from Reliance Industries Ltd. Given that these
representatives were not involved in the routine management of the company, the Birlas
apparently had no control of L and T. The Birlas have presently filed an appeal before the
Securities Appellate Tribunal (SAT) against the directive of the Securities and Exchange
Board of India (SEBI) stalling the open offer of Grasim Industries.

CDC proposal for cement biz pending since July: L&T

Our Bureau

MUMBAI, Dec. 12

LARSEN & Toubro (L&T) on Thursday said CDC Capital Partners' investment proposal for its
cement division had been under discussion since this July, and that it had been in dialogue with
several prospective investors since September 2001 to secure capital for its cement business.

66
L&T and Grasim

The clarification was in the light of recent implications that the demerger of its cement division
and the investment proposal for it were in response to the open offer made by Grasim Industries
for L&T shares, said a news release from L&T.

Last week, Grasim had issued a letter to L&T through its solicitors, saying that since its open
offer had been announced, L&T's demerger proposal violated the takeover regulations in both
letter and spirit and warned of protracted litigation should L&T go ahead.

It is understood that L&T has sent a rejoinder to the letter through its solicitors. "L&T is fully
aware of the legal issues and has been dealing with reputable private equity investors (including
CDC) who are also fully aware of these issues," its news release said. The demerger proposal was
awaiting identification of a suitable investor, said L&T. "Following the acquisition of a stake in
L&T by Grasim, the potential investors paused to assess the impact of this development and
resumed discussions in July 2002.

Financial Express. Dec 11, 2002; pg 10

Title: AV BIRLA GROUP CHARGES L and T WITH ASSET STRIPPING (takes recourse
under Section 23 of SEBI Act)

Abstract: The AV Birla Group has referred to the cement business demerger proposal of Larsen
and Toubro (L and T) and accused the management of L and T of indulging in `asset stripping'.
The Group has taken recourse under Substantial Acquisition of Shares and Takeover Regulations
(1997) as regards Section 23 of the Securities and Exchange Board of India (SEBI) Act. These
regulations pertain to general obligations of the board of directors of the target company. The
Group is considering various options for the future, including seeking legal remedy. According to
the Group, the open offer of Grasim Industries for L and T stake is still alive despite Securities
Appellate Tribunal upholding the SEBI order stalling the same.

Economic Times. Dec 11, 2002; pg 1

67
L&T and Grasim

Title: L and T SEEKS OUT LEGAL VIEWS; SAYS TAKEOVER CODE NOT FLOUTED (its
solicitors expected to respond to the notice sent by Grasim on 6 Dec 2002)
Abstract: Larsen and Toubro (L and T) has obtained legal opinion from three lawyers, including a
former Solicitor-General on the demerger of its cement business and the violation of Securities
and Exchange Board of India's (SEBI) takeover regulations. The company obtained the legal
opinion following the notice sent by Grasim Industries. Grasim had challenged the planned
demerger of L and T's cement business on grounds that the open offer made by Grasim has not
expired and the demerger plan violates SEBI takeover regulations. L and T claims that it has not
violated SEBI takeover regulations and is empowered to examine the demerger proposal. The
company's solicitors Manilal Kher and Ambalal and Co are expected to respond to the notice sent
by Grasim on 6 Dec 2002.

"We are not the buyer who would naturally look for the lowest valuations. We are the seller
looking for the best valuations. As a seller, getting funds at the current time at the best future
valuations is what the shareholder is looking for and that is what L&T has done."

- An L&T spokesman, speaking in favor of potential buyer CDC's proposal, in December

2002.

"It is obvious that the whole purpose of this exercise is to create confusion in the minds of the
shareholders of L&T and change the very structure of the target company, L&T, so that essential
features of our clients' offer would be greatly prejudiced and jeopardized."

- Grasim's solicitors, commenting on L&T's demerger proposal, in December 2002.

http://www.hinduonnet.com/thehindu/2002/06/11/stories/2002061101792000.htm

SEBI slaps fine on RIL

MUMBAI JUNE 10, 2002

The Securities and Exchange Board of India has slapped a fine of Rs. 4.75 lakhs on Reliance
Industries Ltd (RIL) for delay in informing the exchanges about hiking its stake in Larsen and
Toubro (L&T) beyond the 5 per cent limit under the takeover code.

68
L&T and Grasim

"The adjudication proceedings against the company are complete and RIL was asked to pay the
fine, which it has done last week,'' SEBI sources said here today.

The probe into alleged insider trading of L&T scrips prior to the deal between RIL and the Aditya
group would, however, continue, sources added.

An RIL spokesman in a brief statement said the amount was paid and was in line with the
voluntary payment offer made by it in February last to avoid any further controversy.

The Reliance group had hiked its stake in L&T from 3.92 per cent to about 10.06 per cent before
offloading in favour of Grasim Industries at Rs. 306 per share, a hefty premium to market price,
in November 2001.

Just about the time when SEBI launched adjudication proceedings for violation of the takeover
provisions, RIL issued a cheque of Rs. 5 lakhs to the market regulator to avoid any controversy.
PTI

http://www.capitalmarket.com/CMEdit/story4-15.asp?SNo=43044

November 26, 2002

Sebi slaps showcause notice on J Morgan Stanley

The markets regulator has asked the merchant banker to explain why it failed to intimate stock
exchanges immediately on the stay order on Grasim's open offer. Markets watchdog Securities
and Exchange Board of India (Sebi) has asked Grasim's merchant banker J M Morgan Stanley to
show cause as to why it failed to immediately intimate stock exchanges about Sebi's stay order on
Grasim's open offer for Larsen & Toubro. Sebi had issued a directive on the stay order on 8
November 2002, yet the merchant banker intimated the stock exchanges only on 20 November
2002.

http://www.telegraphindia.com/1021221/asp/business/story_1502551.asp

Rift within L&T over demerger

69
L&T and Grasim

Mumbai, Dec. 20, 2002: A ginger group of shareholders are opposing Larsen & Toubros
demerger move which they feel is not in the companys 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&Ts 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, CDCs 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 CDCs 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 CDCs 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.

70
L&T and Grasim

http://64.233.179.104/search?q=cache:s5gPX1wrx1MJ:www.cmots.com/cmedit/story2-0.asp
%3FSNo%3D45248+L%26T+denies+move+to+bring+in+a+%27white+knight
%27&hl=en&start=9&client=firefox-a

December 30, 2002

News reports that Grasim and the concerned financial institutions (which hold a 36% stake in
L&T) have come to a compromise over the de-merger of L&T's cement division , have brought
relief to the L&T scrip. According to reports, the settlement involves, Grasim making an open
offer for 51% stake in the de-merged cement division of L&T at a price to be decided by three
independent valuers, so that there is no controversy regarding the pricing of the offer. Valuers will
assess the cement company on the basis of replacement cost as well as discount cash flow.

Earlier, a crucial board meeting of L&T, which was to be held on 28 December 2002, was
deferred to January 2003. The board meet was supposed to consider a decision to de-merge the
cement business of the company. However, financial institutions had asked the company to
review the de-merger prosposal.

http://www.rediff.com/money/2003/jan/28grasim.htm

Grasim submits new demerger plan to L&T

January 28, 2003

Grasim Industries Ltd has submitted an alternate proposal to Larsen & Toubro before the
engineering major decides to demerge its cement business at its board meeting scheduled for
Wednesday.

71
L&T and Grasim

The Aditya Birla Group Company, which has vehemently opposed L&T's cement demerger plans,
has said that the L&T board should consider Grasim's "alternate proposal in better interest of all
the stakeholders of both the companies".

In a notice to Bombay Stock Exchange, Grasim admitted "it did not have any control over L&T"
and it will be entirely a prerogative of the board and shareholders of L&T to decide upon the
proposal.

The Grasim board had on Monday discussed their plans for L&T board meeting and later
submitted the company's proposal, which includes a suggestion for a vertical split in L&T.

L&T sources confirmed the receipt of the proposal and said, "We will have to study it in detail
before a final decision is taken".

The Birlas have opposed L&T's plans to rope in CDC Capital Partners as a strategic investor by
offering them 6.8 per cent stake in the company, in its demerged cement business.

Grasim holds just over 15 per cent stake in L&T and had made an open offer for acquisition of
further 20 per cent in the company last October.

Subsequently, on Securities and Exchange Board of India's advice, the open offer was put on hold
pending investigation on issue of "control" of L&T by the Birlas.

72
L&T and Grasim

http://www.blonnet.com/2003/02/16/stories/2003021601400100.htm

L&T refers cement recast plans to ICRA

Feb. 15

THE board of directors of Larsen & Toubro today decided to appoint ICRA Ltd to study both the
CDC proposal as well as Grasim's proposal for L&T's cement business, which the company
proposes to demerge.

The terms of reference for ICRA's study and evaluation of these proposals are yet to be worked
out, said a spokesperson for L&T, shortly after the company's board meeting today. He also said
there is no time frame as yet set for the evaluation to be done by ICRA Ltd. The spokesperson
declined to clarify whether ICRA would be asked to specifically suggest which is the better
proposal. "Both the proposals will be studied," is all he would say.

The proposal of CDC Capital Partners is for issue of bonds, convertible into 6.8 per cent equity in
the cement company, which is to be demerged from L&T as a subsidiary.

Grasim's proposal calls for a vertical split of the cement company and for Grasim's subsequent
acquisition of majority stake in it.

73
L&T and Grasim

Grasim, which has a 15 per cent stake in L&T, has been opposed to the initial proposal for
demerger of the cement business, which envisages a 25 per cent stake in the cement company for
L&T.

Grasim's own stake in L&T's cement company would then be a mere 3.75 per cent; Grasim's
central interest in L&T itself is on account of the cement business which holds the greatest
synergy with Grasim's own activities.

Grasim was also opposed to certain clauses in the CDC proposal. A revised CDC proposal, which
was discussed during the previous board meeting of L&T, also did not meet with their favour. It is
learnt that Grasim's opposition to the CDC proposal is increasingly gaining sympathy from some
of the other constituents of the L&T board.

In view of this, those who were advocating the CDC proposal are believed to be now persuading
the institutions to consider a more "transparent" manner (such as even competitive bidding) of
bringing in an investor into the company. Investor forums have earlier also insisted that the
institutions should call for independent evaluations to be done.

In view of all this, perhaps, ICRA has been roped in to study both the proposals, said sources.

Nothing is very clear as yet, they said.

Should ICRA's studies reveal that one proposal is better than the other, would it be binding on the
board to accept whichever is deemed better, they wondered.

The other reading of the situation is that SEBI's report on investigations into Grasim being
imminent; this could change the situation entirely. Referring the matter to ICRA would then allow
both parties some space.

http://www.blonnet.com/2003/03/14/stories/2003031402390100.htm

Grasim has no hold over L&T: Bajpai

Mar 14, 2003

74
L&T and Grasim

"SEBI's investigations into Grasim's acquisition of 10.05 per cent stake in Larsen & Toubro are
complete; Grasim holds no management control in L&T."

This came straight from the horse's mouth today. Mr G.N. Bajpai, Chairman of SEBI, himself
told newspersons at the sidelines of a lecture here that SEBI investigations are complete and that
Grasim does not hold management control in L&T.

"We have asked Grasim for a revised open offer with additional disclosures," he said.

This seems a clear pointer to which way the Grasim-L&T issue is headed after nearly four months
of the matter topping the corporate news charts.

That Grasim must have been asked to make a revised open offer was indicated in Grasim's public
announcement made to L&T shareholders a few days ago. The public announcement detailed the
exchange between SEBI and Grasim, with the former asking Grasim, among other things, to
justify the premium that it paid to Reliance for its initial stake in L&T.

33 http://www.domain-b.com/companies/companies_g/grasim/20030401_unaltered.htm

Grasims revised open offer for L&T unaltered at Rs 190

1 April 2003

Mumbai: Grasim Industries open offer price for Larsen & Toubro in its revised draft offer
document submitted to the Securities and Exchange Board of India (SEBI), remains unaltered
from its earlier open offer at Rs 190 per share.

Sources at Grasim say the revised document, which was submitted last week to SEBI, contains
the revisions that SEBI requested, but the offer price remains at Rs 190.

Grasims open offer was stalled by SEBI, pending investigations into its acquisition of 10.05-per
cent stake in L&T in late 2001. Among other matters, SEBI had said it would have to examine
whether Grasim acquired management control in L&T in acquiring the stake.

75
L&T and Grasim

SEBI chairman G N Bajpai had, a few weeks ago, said the investigations into Grasims
acquisition into L&T are complete and that Grasim has no management control.

We see no reason to change our offer price, says a Grasim official. The revisions in the draft
pertained to certain changes requested by SEBI, already made public in notice to L&T
shareholders, issued by Grasim several weeks ago.

34 Source: Financial Express. May 24, 2003; pg 5

Title: ICRA PRESENTS REPORT ON CEMENT DIVISION DE-MERGER TO L and T

BOARD (the final decision on de-merger is to be taken after studying the report)

Abstract: Investment Information and Credit Rating Agency (ICRA), the credit rating agency, has
given its report on the de-merger proposal of the cement division of Larsen and Toubro (L and T).
The board of directors of L and T had appointed ICRA to consider the 2 alternative de-merger
proposals, one by Grasim Industries and the other by CDC Capital Partners. The board will now
study the report of ICRA and convene a special meeting to take a final decision over the split. The
report has been submitted even as Grasim Industries, the equity holder in L and T, has announced
an open offer to the shareholders of L and T to acquire 20 percent more stake in the company. All
the board members of L and T, including the AV Birla group Chairman, Kumar Mangalam Birla,
attended ICRA's presentation.

76
L&T and Grasim

35

36 Business Standard. May 28, 2003; pg 1

37 Title: L and T SEES BIAS IN ICRA REPORT ON DE-MERGER (management group

describes the analysis by the rating agency as biased towards Grasim Industries Ltd)

38 Abstract: The Investment Information and Credit Rating Agency of India Ltd (ICRA) has
presented its analysis of proposals of Larsen and Toubro Ltd (L and T) and Grasim Industries
Ltd (GIL) for de-merger of the cement business of L and T. The management group of L and
T has described the analysis as biased in favour of GIL's proposal and against the interests of
shareholders. Icra will meet all L and T shareholder groups to clarify the issues raised by the
management group before finalising its report.

39

77
L&T and Grasim

40 Business Standard. Jun 5, 2003; pg 1

41

42 Title: L and T PUSHES FOR ICRA VALUATION (lobbying for Rs180-190 per share
in the proposed second open offer of Grasim Industries Ltd)

43

44 Abstract: Grasim Industries Ltd (GIL) has quoted a price of Rs130 per share in its
proposed second open offer for stakes in the cement business of Larsen and Toubro Ltd (L
and T). L and T is lobbying with financial institutions, its principal shareholders, to demand
Rs180-190 per share. The Investment Information and Credit Rating Agency of India Ltd
(Icra) has given a benchmark valuation of $85 per tonne for the cement division of L and T.
GIL has given a share price that corresponds to $65 per tonne. The benchmark valuation puts
the enterprise value of the 16.5 million tonnes per annum cement business at Rs6,600 crore.
The value, after providing for Rs2,000 crore debts and Rs24.86 crore equity, works out to
Rs184 per share.

45

78
L&T and Grasim

46 Business Standard. Jun 7, 2003; pg 1

47

48 Title: GRASIM MOPS UP 2% OF L and T (through its open offer that closed on 5 Jun
2003)

49

50 Abstract: Grasim Industries Ltd's open offer for 20 percent stake in Larsen and Toubro has
attracted a poor response. The open offer, which closed on 5 Jun 2003, was able to mop up
less than two percent of L and T's stock. This has increased Grasim's stake in L and T to 17
percent. The poor response to the open offer is attributed to a lower offer price of Rs190 per
share, against the market price of Rs200-220 per share prevailing during the 30 days that the
offer was open. Also, financial institutions, which hold 40 percent stake in L and T, did not
participate in the offer. Grasim can now look at increasing its stake in L and T through
market purchases.

http://www.domain-b.com/companies/companies_g/grasim/20030618_buy.htm

Grasim signs deal to buy L&T's demerged cement business

18 June 2003

Mumbai: The board of Larsen & Toubro (L&T) has decided to demerge its cement business into
a separate cement company, called CemCo, in which L&T will retain 20 per cent of the equity.
The balance will be distributed to its shareholders, in proportion to their shareholding in L&T.

The board of Grasim Industries also gave its approval to this transaction. As a consequence, on
the demerger of L&T's cement business to CemCo, Grasim will acquire an 8.5-per cent equity
stake from L&T and, thereafter, make an open offer at the same price, for 30 per cent of the
equity of CemCo, to acquire the management control of CemCo.

79
L&T and Grasim

CemCo will be listed on the National Stock Exchange and the Mumbai Stock Exchange, among
others. Investors holding global depository ratios (GDRs) in L&T will be entitled to proportionate
GDRs in CemCo as well. Concurrent to Grasim's purchase of an 8.5-per cent equity stake from
L&T in CemCo, Grasim will divest its holding in L&T to one or more of L&T foundation or
trusts.

The detailed scheme of arrangement will be developed, in compliance with regulations, over the
next few weeks. This transaction will represent a major value enhancing initiative for both the
parties.

Grasim will buy shares from L&T in CemCo, and make an open offer for acquiring management
control at Rs 171.30 per share, and sell its holding in the demerged L&T at Rs 120 per share. For
the sake of simplicity, these prices are based on an assumed equity share capital of 24.87 crore
fully paid-up equity shares of Rs 10 each for both the entities the demerged L&T and CemCo.

The number of equity shares actually to be allotted in the two entities may vary and accordingly
the offer price might change proportionately

Final Deal

http://www.frontlineonnet.com/fl2017/stories/20030829004009700.htm

Valued at Rs.2,200 crores, the complex deal has a layered structure. The first phase will result in
the demerger of Cemco, in which L&T will hold 20 per cent; the remaining 80 per cent will be
distributed among L&T shareholders. Consequently, Grasim by virtue of its ownership of 15.7
per cent of L&T, will acquire 12.6 per cent in Cemco. In the second phase, Grasim is to buy 8.5
per cent of L&T's stake in Cemco at Rs.171.30 a share, aggregating about Rs.360 crores. As a
result, L&T's stake in Cemco will fall to 11.5 per cent. This would trigger an open offer by
Grasim to L&T shareholders for their stake in Cemco at the same price. If fully subscribed, this is
expected to cost Grasim a further Rs.1,280 crores. In return for the transfer of L&T's cement
business, Grasim will set its stake in L&T's non-cement business at Rs.120 a share, earning an
aggregate of Rs.470 crores in the process. The net cost of the deal for Grasim, including the
Rs.1,020 crores that it paid Reliance Industries under controversial circumstances in 2001, is
likely to be about Rs.2,200 crores. For L&T the irony is that its foray into cement, made just after

80
L&T and Grasim

it effectively smothered Reliance's takeover attempt, were beset with problems. In fact, industry-
watchers had said then (Frontline, January 3, 2002) that the company was putting too many eggs
into one basket.

Business Line. Jun 18, 2003; pg 5

Title: POSITIVE OUTCOME: L and T DEBT-EQUITY RATIO CUT (with the de-merger of
the cement division, L and T will reduce debt of Rs1,868 crore)

Abstract: The de-merger of the cement division of Larsen and Toubro (L and T) has a
number of positive aspects. The company will get Rs360 crore in cash from the sale of 8.5
percent stake to Grasim Industries. Grasim Industries will divest from the rest of the business of L
and T. The de-merger of the cement division will also result in reduction of debt by Rs1,868 crore
and will reduce the debt- equity ratio from 0.61:1 to nearly 0.5:1.

81
L&T and Grasim

TIMELINE: FROM ESTABLISHMENT TO STAND-OFF

1938
Holck-Larsen and Soren Kristian Toubro form L&T as a partnership firm.

1944
Engineering Construction Corporation Limted (ECC) is established as a partnership firm

1945
L&T becomes a dealer for Caterpillar Tractor Company of the US

1946
L&T becomes a limited company on February 7 and acquires the majority shareholding in ECC.

1947
Mr. Henning Holck-Larsen and Mr. Soren Kristian Toubro sell their shares in ECC to L&T, which
becomes ECC's managing agents.

1950
L&T goes public with a paid-up share capital of Rs20 lakh.

1958
ECC enters into collaboration with CITRA, Paris, for the construction of a cruiser graving dry
dock for the Indian Naval Dockyard, Bombay

1959
L&T acquires remaining shares and ECC, reconstituted as a public limited company,
becomes a wholly owned subsidiary of L&T.

A full-fledged designs division is established in Madras.

1960 1963

82
L&T and Grasim

Utkal Machinery Limited, Audco India Limited, Eutectic Welding Alloys and Tractor Engineer
Limited are established as associate companies. The company however gives up the agencies
when the government abolishes the system in 1969.

1963
The design division merges with the construction wing in a reorganization move enabling ECC to
bid for turnkey jobs.

1965-69
ECC takes over the Engineering Projects Division (EPD) of L&T and transfers the staff to its
Madras office. This enables ECC to enter the mechanical and electrical areas of construction
activity.

1973
Enters into a collaborative agreement with Poclain to manufacture earthmoving
equipment

1980
L&T forays into cement business, places order on ECC for the construction of its first
cement plant at Awarpur.

L&T moves into Shipping, purchases two dry bulk carriers

ECC diversifies into railway electrification.

Enters into collaboration agreements to update its technological competence with Doka of
Austria, SECTRA of France and GEA of Germany.

1981
Larsen & Toubro (Singapore) Pte. Limited is established as an extension of its manufacturing
arm.

1982
ECC Workshops Limited (EWL) is incorporated as a wholly owned subsidiary of ECC.

83
L&T and Grasim

1984
ECC is merged with L&T with retrospective effect

1987
EWL merged with L&T and started functioning as a unit of ECC Division.

1999
Acquires Narmada Cement

Boston Consulting Group submits reports to restructure operations, suggests hiving off of cement
division.

2000
L&T formally approves restructuring plan, starts scouting for foreign investors.

2001
Reliance sells of its 10% stake in L&T to Grasim at Rs.306.60 per share at a premium of 47%
over market price. Grasim places two nominees onto L&T board.

2002
L&T receives strategic investment proposal from CDC Capital Partners.

Grasim makes an open offer for 20% of L&T shares after increasing stake to 14.15%. The
company offers Rs.190 per share.

SEBI stalls Grasim open offer pending an enquiry into change of management control at
L&T prior to open offer.

84
L&T and Grasim

GRASIM TIMELINE:
Grasim was incorporated on August 25, 1947, just 10 days after India became independent,
manufacturing textiles made from imported raw materials. It is now a global leader in
viscose staple fibre (VSF), the country's largest merchant producer of sponge iron and the
second-largest caustic soda maker in India; and poised to be India's largest cement
manufacturer.

2004
:: Completion of the implementation process to demerge the cement business of L&T and
completion of open offer by Grasim, with the latter acquiring controlling stake in the newly
formed company UltraTech
:: Board reconstituted with Mr. Kumar Mangalam Birla taking over as Chairman

2003

:: The board of engineering major Larsen & Toubro Ltd (L&T) decides to demerge its cement
business into a separate cement company (CemCo). Grasim will acquire an 8.5 per cent
equity stake from L&T and then make an open offer for 30 per cent of the equity of CemCo,
to acquire management control of the company.

2002
::

:: The Grasim Board approves an open offer for purchase of up to 20 per cent of the equity
shares of Larsen & Toubro Ltd (L&T), in accordance with the provisions and guidelines
issued by the Securities & Exchange Board of India (SEBI) Regulations, 1997.
:: Grasim increases its stake in L&T to 14.15 per cent
:: Grasim divests its Gwalior unit to Melodeon Exports Ltd, and consolidates all textile
operations at the Bhiwani unit, which will manufacture both the 'Grasim' and 'Graviera'
brands at a single location.

2001
:: Grasim acquires 10 per cent stake in L&T. Subsequently increases stake to 15.3 per cent by
October 2002
:: Four ready-mix concrete plants commissioned, with an aggregate capacity of one million
cubic metres per annum.
:: Divests holding in Birla Technologies to PSI Data Systems.

85
L&T and Grasim

2000

:: Merger of Dharani Cements into Grasim.

1999
:: Grasim's viscose staple fibre (VSF) and rayon grade pulp units at Mavoor are closed down
owing to lack of raw material.
:: Third issue on September 16, 1999 to Indian Rayon's GDRs holders: Three GDRs in Grasin
for every 10 GDRs in Indian Rayon, on demerger of its Cement business into Grasim. Nos:
1,624,336

1998
:: Grasim's first major acquisition overseas the Atholville Pulp Mill in Canada.
:: Grasim acquires Dharani Cements Ltd.
:: Grasim acquires Shree Digvijay Cements Ltd.
:: The cement business of group company, Indian Rayon and Industries Ltd (IRIL), is
transferred to Grasim in a corporate restructuring exercise.

1995
:: Grasim commissions two greenfield cement plants Grasim Cement at Raipur (Madhya
Pradesh) and Aditya Cement at Shambhupura (Rajasthan).
:: Grasim sets up two new spinning units Elegant Spinners at Bhiwani (Haryana) and Vikram
Woollens at Malanpur (Madhya Pradesh).

1994
:: Second issue of GDRs on June 15, 1994 for US $100 million.
Nos: 4,878,048

1993
:: Vikram Ispat, India's third-largest gas-based sponge iron plant, is commissioned.
:: Birla Consultancy & Software Services is set up, to provide IT consulting services and for
software development

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1992
:: Grasim sets up Birla International Marketing Corporation (BIMC), a merchant exporter.
:: First GDR issue on December 2, 1992 for US$ 90 million.
Nos: 6,933,745

1991
:: A third production line is added at Vikram Cement.

1987
:: Vikram Cement's second production line is commissioned.

1985
:: Vikram Cement Grasim's first cement plant goes on stream at Jawad, Madhya Pradesh.

1977
:: Grasim's third rayon plant at Harihar, Karnataka goes into production.

1972
:: A completely indigenous plant based on Grasim's own engineering and know-how, begins
production at Harihar, Karnataka.
:: Grasim commences production of rayon grade caustic soda a major raw material for VSF
production at Nagda; another step towards becoming self-reliant

1968
:: Rayon production commences at Mavoor, Kerala.

1963
:: Grasim sets up its first rayon grade pulp plant at Mavoor, Kerala; the first to make rayon
grade pulp from bamboo and other hardwoods.
:: Grasim purchases a composite textile mill at Bhiwani, Haryana.

1962
:: Grasim starts an engineering division to provide plant and machinery for VSF production.

1954

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:: Grasim begins rayon production at Nagda.

1950
:: Grasim launches production of fabrics at Gwalior using imported rayon a man-made
cellulose fibre.

1947
:: Grasim Industries Ltd is incorporated.

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50.1.1.1 Larsen & Toubro Ltd: Revenues by Segment for 2001-2002 (In Rs. Crore)

Source: Annual Report

Larsen & Toubro Ltd: Profit & Loss Statement for 1995-1996 to 2000-2001
(In Rs. Crore )
Year Mar-01 Mar-00 Mar-99 Mar-98 Mar-97
INCOME :
Sales Turnover + 7,825.43 7,423.81 7,291.49 5,676.77 5,304.74
Excise Duty 446.33 467.72 408.72 371.6 322.4
Net Sales 7,379.10 6,956.09 6,882.77 5,305.17 4,982.34
Other Income + 326.49 255.23 279.8 260.55 140.9
Stock Adjustments + -1.25 -12.98 158.63 64.4 107.01
Total Income 7,704.34 7,198.34 7,321.20 5,630.12 5,230.25
EXPENDITURE :
Raw Materials + 2,198.06 2,059.14 2,576.03 1,709.86 1,645.03
Power & Fuel Cost+ 622.03 578.93 499.44 433.8 363.84
Employee Cost + 586.18 538.7 490.29 410.97 381.97
Other Manufacturing Expenses + 1,910.66 2,163.16 2,023.97 1,637.90 1,546.18
Selling and Administration Expenses + 1,064.19 621.47 531.73 383.34 377.45
Miscellaneous Expenses + 205.13 145.89 139.61 129.9 88.3
Less: Pre-operative Expenses Capitalised+ 26.78 12.61 11.95 35.44 17.46
Total Expenditure 6,559.47 6,094.68 6,249.12 4,670.33 4,385.31
Operating Profit 1,144.87 1,103.66 1,072.08 959.79 844.94
Interest + 493.04 429.1 282.45 160.23 196.94
Gross Profit 651.83 674.56 789.63 799.56 648
Depreciation+ 313.13 293.18 268.14 210.27 175.6

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Profit Before Tax 338.7 381.38 521.49 589.29 472.4

Tax+ 23.64 39.75 50.75 57.85 61.05
Deferred Tax+ 0 0 0 0 0
Reported Net Profit 315.06 341.63 470.74 531.44 411.35
Extraordinary Items + 47.16 32.3 75.11 99.02 -6.04
Adjusted Net Profit 267.9 309.33 395.63 432.42 417.39
SOURCE: CAPITALINE

Larsen & Toubro: Balance Sheet (In Rs. Crores)

Year Mar 01 Mar 00 Mar 99 Mar 98 Mar 97
SOURCES OF FUNDS :
Share Capital + 248.65 248.55 248.52 248.5 248.49
Reserves Total + 3,750.76 3,615.63 3,457.67 3,173.52 2,856.33
Total Shareholders Funds 3,999.41 3,864.18 3,706.19 3,422.02 3,104.82
Secured Loans + 3,001.95 2,904.72 2,289.46 2,274.25 1,611.31
Unsecured Loans + 1,261.44 1,069.02 1,069.32 545.01 373.83
Total Debt 4,263.39 3,973.74 3,358.78 2,819.26 1,985.14
Total Liabilities 8,262.80 7,837.92 7,064.97 6,241.28 5,089.96
APPLICATION OF FUNDS :
Gross Block + 6,309.08 5,824.28 5,380.59 4,322.34 3,820.99
Less : Accumulated Depreciation + 1,767.21 1,474.34 1,245.39 1,141.82 985.26
Net Block + 4,541.87 4,349.94 4,135.20 3,180.52 2,835.73
Lease Adjustment -3.07 -3.07 -74.61 -51.96 -30.67
Capital Work in Progress+ 132.19 241.86 494.18 1,168.81 693.22
Investments + 813.47 774.16 489.38 348.24 142.43
Current Assets, Loans & Advances
Inventories + 2,427.35 2,111.95 1,998.63 1,453.45 1,318.70
Sundry Debtors + 1,374.99 1,276.11 991.47 925.3 873.09
Cash and Bank+ 138.9 220.83 271.62 394.33 277.79
Loans and Advances + 1,265.25 1,116.77 1,133.72 940.76 811.58
Total Current Assets 5,206.49 4,725.66 4,395.44 3,713.84 3,281.16
Less : Current Liabilities and Provisions
Current Liabilities + 2,200.44 2,011.99 2,107.24 1,850.91 1,584.83
Provisions + 271.22 274.81 283.82 283.21 260.4
Total Current Liabilities 2,471.66 2,286.80 2,391.06 2,134.12 1,845.23
Net Current Assets 2,734.83 2,438.86 2,004.38 1,579.72 1,435.93
Miscellaneous Expenses not written off + 43.51 36.17 16.44 15.95 13.32
Deferred Tax Assets 0 0 0 0 0
Deferred Tax Liability 0 0 0 0 0
Net Deferred Tax 0 0 0 0 0
Total Assets 8,262.80 7,837.92 7,064.97 6,241.28 5,089.96
SOURCE: CAPITALINE

Larsen & Toubro Ltd: Revenue Break-up by Segment for 1997-1998 to 2000-2001 (In
Rs. Billion)

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Segment 2000-2001 1999-2000 1998-1999 1997-1998

E&C Segment 45.92 43.53 44.62 30.9
Cement 21.94 19.35 16.17 12.9
Electricals 7.01 6.29 6.66 6.14
Constn. Eqpt 2.1 3.15
3.39 5.07
Others 3.37 3.68
Total Revenue 78.26 74.24 72.92 56.77
Source: L&T Presentations to Analysts

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Indiainfolines summary of the final settlement:

Grasim open offer for Ultratech Cemco

(Erstwhile L&T Cement)
Grasim has made an open offer for 30% stake in CemCo.
Open offer price for CemCo is at Rs346 per share.
We estimate Rs292-306 as a fair valuation of Cemcos shares post
listing.
We recommend surrendering Ultra Tech CemCo shares at the open
offer and reacquiring the same in the open market post listing.
June 09 , 2004 2
Grasim Open Offer for Ultratech Cemco
Open offer
Larsen & Toubro announced the demerger of its cement division into a separate entity
UltraTech CemCo (UCL). Shareholders of L&T as on May 27, 2004 would be
entitled to 5 shares of the L&T Engineering (Face value Rs2) and 4 shares of UCL
(Face value Rs 10) for every 10 shares held in erstwhile L&T Ltd.
Grasim currently holds 12.6% in UCL. As per the scheme of demerger, Grasim has
made an open offer to the shareholders of UCL to acquire upto 30% of the stake at
Rs342.6 per share. L&T will also transfer 8.5% of its holding in UCL to Grasim at the
open offer price, enabling Grasim to acquire a controlling 51.1% stake in UCL. In
addition, Rs3 per share would be paid out of the interest on the money deposited in
the escrow account (Rs12.6bn) for the open offer. This would mean a final price of
Rs346 per share to all those tendering their shares in the open offer. The offer opens
on June 7 and closes on June 21.
Valuation
ACC GACL CEMCO
CMP/Offer Price (Rs) 267 287 346
Capacity (mn tons) 18 13 17
Enterprise Value (Rs mn) 59,564 61,775 53,625
EV/Ton (Rs) 3,370 4,942 3,250
EV/Ton (US$) 72 110 83
EV/EBIDTA (x) 14.6 9.7 15.4
EBIDTA Margins (%) 16.3 29.0 14.1
ROCE (%) 14 22 4
As per the open offer price of Rs346 per share, EV/ton works out to US$83 per ton
of capacity (US$105 per ton of production). This is at a 15% premium to ACC and
32% discount to GACL valuations.
GACL is the most efficient player in the cement industry, which justifies its premium
valuation. At the offer price of Rs346, Grasim is offering to pay US$83 per ton for its
stake in UCL. Part of this premium can be attributed to a premium for acquiring
controlling stake in the company through the offer. The listing price however would
not include a Control Premium and is likely to be lower than the offer price.
Based on operational parameters, we expect Cemco to trade at a discount to Gujarat
Ambuja as well as ACC on listing. Its EBIDTA margins are lower than both its peers.
ROCE is a low 4%. EV/EBIDTA at 15.4x is on the higher side as compared to ACC

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(14.6) and Gujarat Ambuja (15.4).

June 09 , 2004 3
Grasim Open Offer for Ultratech Cemco
Based on an EV/Ton of US$70 (2.5% discount to ACC), the fair price works out to
Rs293 per share. Even if Cemco manages to get a valuation similar to ACC at US$72
per ton, fair price works out to Rs306.
EV/Ton (US$) 83 72 70
Fair Price 346 306 293
Shareholding pattern
Pre Offer Post Offer
Grasim 12.6 Grasim 51.1
L&T 20.0 L&T 11.5
Others 67.4 Others 37.4
As domestic financial institutions (hold over 35% of L&T equity) had approved this
scheme of de-merger and are likely to participate in the open offer, there is little
likelihood of the open offer price being revised upwards. Moreover, as Cemco GDRs
will not be listed, L&T GDR holders would either need to convert their Cemco
GDRs to local shares or tender in the open offer.We would therefore recommend
investors to divest their shares in the open offer.
Outlook
Outlook for the cement sector remains positive. The demand for cement is expected
to grow about 8% during 2004-05, with prospects of increased investment in
manufacturing and infrastructure facilities in the economy. Key drivers of demand
would continue to be the housing sector and the infrastructure sector like roads and
ports.
UCLs earnings are also expected to register strong growth driven by domestic demand,
firm prices in key markets and synergy benefits. However the offer price is attractive,
considering 12% premium to fair value. Investors seeking to remain invested in UCL
could tender their shares in the open offer and acquire shares later in the market post
listing.
Background on UCLs operations
Pure play in the cement business and second largest cement company in India with
a capacity of 16.5mtpa capacity and 10% market share.
Large size of plants, age profile and operational costs are the key strengths of UCL
besides the strong brand.
Plants located at Pipavav (Gujarat), Chandrapur (Maharashtra), Tadipatri (Andhra
Pradesh) and Hirmi (Madhya Pradesh).
June 09 , 2004 4
Grasim Open Offer for Ultratech Cemco
The companys cement capacity was increased by 0.5mn tons through debottlenecking
during FY04. With this, the capacity is now 15.5mn tons and along with the
capacity of 1.5mn tons of Narmada Cement Company Limited, the Companys
subsidiary, the total capacity stands at 17mn tons.
Merger synergies - Joint purchasing of raw material and packaging material with
Grasim, as also sharing of freight costs would benefit UCL.
Financials of Ultra Tech Cemco.
Period to 03/04 03/03 Growth
(Rs mn) (12) (12) (%)
Sales 22,628.4 21,540.0 5.1

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Expenditure (19,437.5) (18,165.3) 7.0

Operating profit 3,190.9 3,374.7 (5.4)
Other income 420.5 160.0 162.8
Interest (974.7) (1,390.0) (29.9)
Depreciation (2,144.7) (2,144.7) -
PBT 492.0 Na -
Tax (103.7) Na -
PAT 388.3 Na -
OPM (%) 14.1 15.7 -
Equity 124.4 -
EPS (Rs) Annualized 3.1 Na
FY04 results
UltraTech CemCo Limited has reported net sales of Rs22.6bn for the year ended
March 31, 2004. The sale of cement and clinker during 2003-04 was 14.87mn
tons, 7% higher than the level of 13.8mn tons achieved in the previous year. Domestic
realizations declined to Rs1,266 per ton as against Rs1,276 per ton in the
previous year.
The Company achieved a higher clinker production of 12.1mn tons as against
11.5mn tons in the previous year. The Company continues to be the largest exporter
of cement and clinker, with exports of 3.4mn tons during 2003-04 as against
2.7mn tons in the previous year. Export realizations improved from Rs1,064 per
ton to Rs1,169 per ton during the year.
OPM stood at 14.1%, during FY04, a decrease of 160bps on account of an
increase of raw material, other expenditure, power and fuel cost.
June 09 , 2004 5
Grasim Open Offer for Ultratech Cemco
As % of net sales
Raw Material 9.4
Staff cost 2.9
Power & Fuel 27.9
Freight 16.6
Sales & Admin 11.7
Other expenditure 17.4
Interest cost declined by 30% yoy to Rs947.7mn in FY04 from Rs1,390mn in
FY03. The PBT and the PAT for the year amount to Rs492mn and Rs388.3mn
respectively. The company has recommended a final dividend of 5% for the financial
year ended March 31, 2004.

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50.2 Relevant sections from SEBI Substantial Acquisition of Shares

and Takeover Regulations, 1997
Section 2.1 - Control shall include the right to appoint majority of directors or to
control the management or policy decisions exercisable by a person or persons acting
individually or in concert, directly or indirectly, including by virtue of their shareholding
or management rights or shareholders agreements or voting agreements or in any other
manner.
Section 7 (1) The section defines the limit on shareholding, crossing which the acquirer
has to inform the target company. Any acquirer, who acquires shares or voting rights
which (taken together with shares or voting rights, if any, held by him) would entitle him
to more than 5% or 10% or 14% shares or voting rights in a company, in any manner
whatsoever, shall disclose at every stage the aggregate of his shareholding or voting
rights in that company to the company and to the stock exchanges where shares of the
target company are listed.
Section 12 The section explains that one company cannot acquire control in the other
without going for an open offer. Irrespective of whether or not there has been any
acquisition of shares or voting rights in a company, no acquirer shall acquire control over
the target company unless such a person makes a public announcement to acquire shares
and acquires such shares in accordance with the Regulations.
Section 21 (1) The section declares that a company cannot acquire share beyond 15%
without going for an open offer. The public offer made by the acquirer to the
shareholders of the target company shall be for a minimum fifteen per cent of the voting
capital of the company.
Section 23 (1) The section explains the rights of the acquiring company after it has
declared an open offer. Unless the approval of the general body of shareholders is
obtained after the date of the public announcement of offer, the board of directors of the
target company shall not, during the offer period
(a) sell, transfer, encumber or otherwise dispose of or enter into an agreement for sale,
transfer, encumbrance or for disposal of assets, otherwise, not being in sale or disposal of
assets in the ordinary course of business of the company or its subsidiaries, or

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(b) Issue [or allot] any authorized but un-issued securities, carrying voting rights during
the offer period; or
enter into any material contracts
Section 44 (E) The section explains punishments that SEBI can force on companies on
violation of the takeover code. SEBI can debar any person concerned from accessing the
capital market or dealing in securities for such period as may be determined by the Board.

50.3 SEBI rulings

Takeovers & Substantial acquisition of shares
When an "acquirer" takes over the control of the "target company", it is termed as
Takeover. When an acquirer acquires "substantial quantity of shares or voting rights" of
the Target Company, it results into substantial acquisition of shares. The term
"Substantial" which is used in this context has been clarified subsequently.

Target Company
A Target company is a listed company i.e. whose shares are listed on any stock exchange
and whose shares or voting rights are acquired/ being acquired or whose control is taken
over/being taken over by an acquirer.

Acquirer
An Acquirer means and includes persons acting in concert (PAC) with him i.e. any
individual/company/any other legal entity which intends to acquire or acquires substantial
quantity of shares or voting rights of Target Company or acquires or agrees to acquire
control over the target company

Definition of a substantial quantity of shares or voting rights

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 has
defined substantial quantity of shares or voting rights distinctly for two different
purposes:

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I. Threshold of disclosure to be made by acquirer(s):

1) 5% and more shares or voting rights: A person who, along with PAC, if any,
(collectively referred to as " Acquirer" hereinafter) acquires shares or voting rights
(which when taken together with his existing holding) would entitle him to more than 5%
or 10% or 14% shares or voting rights of target company, is required to disclose at every
stage the aggregate of his shareholding to the target company and the Stock Exchanges
within 2 days of acquisition or receipt of intimation of allotment of shares.
2) Any person who holds more than 15% but less than 75% shares or voting rights of
target company, and who purchases or sells shares aggregating to 2% or more shall within
2 days disclose such purchase/ sale along with the aggregate of his shareholding to the
target company and the Stock Exchanges.

3) Any person who holds more than 15% shares or voting rights of target company and a
promoter and person having control over the target company, shall within 21 days from
the financial year ending March 31 as well as the record date fixed for the purpose of
dividend declaration, disclose every year his aggregate shareholding to the target
company.
4) The target company in turn is required to inform all the stock exchanges where the
shares of Target Company are listed, every year within 30 days from the financial year
ending March 31 as well as the record date fixed for the purpose of dividend declaration.

(II) Trigger point for making an open offer by an acquirer

1) 15% shares or voting rights:

An acquirer, who intends to acquire shares which along with his existing shareholding
would entitle him to exercise 15% or more voting rights, can acquire such additional
shares only after making a public announcement (PA) to acquire atleast additional 20% of
the voting capital of Target Company from the shareholders through an open offer.

2) Creeping acquisition limit:

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L&T and Grasim

An acquirer who holds 15% or more but less than 75% of shares or voting rights of a
target company, can acquire such additional shares as would entitle him to exercise more
than 5% of the voting rights in any financial year ending March 31 only after making a
public announcement to acquire atleast additional 20% shares of target company from the
shareholders through an open offer.

3) Consolidation of holding:
An acquirer who holds 75% shares or voting rights of a target company, can acquire
further shares or voting rights only after making a public announcement to acquire atleast
additional 20% shares of target company from the shareholders through an open offer.

Control
Control includes the right to appoint directly or indirectly or by virtue of agreements or in
any other manner majority of directors on the Board of the target company or to control
management or policy decisions affecting the target company. However, in case there are
two or more persons in control over the target company the cesser of any one of such
persons from such control shall not be deemed to be a change in control of management
nor shall any change in the nature and quantum of control amongst them constitute
change in control of management provided this transfer is done in terms of Reg. 3(1)(e).
Also if consequent upon change in control of the target company in accordance with
regulation 3, the control acquired is equal to or less than the control exercised by person
(s) prior to such acquisition of control, such control shall not be deemed to be a change in
control.

Determination of Price in an Open Offer

SEBI does not approve the offer price. The acquirer/ Merchant Banker is required to
ensure that all the relevant parameters are taken in to consideration while determining the
offer price and that justification for the same is disclosed in the letter of offer

The relevant parameters are:

(a) Negotiated price under the agreement which triggered the open offer.

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(b) price paid by the acquirer or persons acting in concert with him for acquisition, if any,
including by way of allotment in a public or rights or preferential issue during the twenty
six week period prior to the date of public announcement, whichever is higher;
(c) the average of the weekly high and low of the closing prices of the shares of the target
company as quoted on the stock exchange where the shares of the company are most
frequently traded during the twenty six weeks or the average of the daily high and low
prices of the shares as quoted on the stock exchange where the shares of the company are
most frequently traded during the two weeks preceding the date of public announcement,
whichever is higher.
In case the shares of Target Company are not frequently traded then instead of point (c)
above, parameters based on the fundamentals of the company such as return on net worth
of the company, book value per share, EPS etc. are required to be considered and
disclosed.
In case of non-compete agreement for payment to any person other than the target
company, if the payment is more than 25% of the offer price arrived in terms of the
Regulations, the same has to be factored into the offer price.
Any person who holds more than 15% but less than 75% shares or voting rights of target
company, and who purchases or sells shares aggregating to 2% or more shall within 2
days disclose such purchase/ sale along with the aggregate of his shareholding to the
target company and the Stock Exchanges
Further, annual disclosures have to be given regarding holding of promoters, persons in
control, and persons holding more than 15% shares or voting rights of the Target
Company. Further, a copy of the Public Announcement to acquire shares from public is to
be given to the Stock Exchanges simultaneously with the publication in the newspapers...
Subsequently, upward revisions in offer, withdrawal of offer have also to be intimated to
the Stock Exchanges simultaneously.

The Takeover Panel

An acquirer who proposes to acquire shares through a mode which is not specifically
covered under regulation 3 may seek exemption from the applicability of the provisions

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Grasim
Grasim
(Pre-
(Pre-
merger
merger L&T and Grasim
analysis
analysis
) )
of the offer process by making an application. SEBI has constituted a panel consisting of
independent persons to examine such applications which is called the Takeover Panel.
The present composition of the Takeover Panel is as follows:
Chairman: Justice S. M. Jhunjunwalla - Retd. High Court Judge, Mumbai High
Court
Shri S. C. Bafna: Former Member of the Company Law Board
Shri S. A. Dave: Former Chairman, SEBI and Former Chairman - UTI
Shri R M Joshi (former Executive Director of SEBI)
Shri Rajendra P Chitale (Managing Partner, M/s M P Chitale & Co.

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