ASIAN PAINTS

British major ICI's acquisition of a 9.1 per cent stake in the company raises the spectre of a takeover.

By Robin Abreu with Sharmila Dhal

August 14, 1997: Atul Choksey, chairman and managing director of Asian Paints, gets in touch with Uday Kotak of investment banking firm Kotak Mahindra Capital Company (KMCC). Choksey wants to offload his 9.1 per cent stake in the Rs 883.88 crore paints and chemicals giant.

August 17, 1997: Kotak in principle buys out Choksey's holding (3.66 lakh shares) for Rs 127.1 crore and within hours signs another deal with British paints major ICI Plc, selling the block for Rs 128.4 crore.

The news sent shockwaves through corporate India. The British firm, many felt, was taking advantage of the internal squabbling at Asian Paints to slyly attempt the takeover of a company that had roundly thrashed it in the battle for marketshare. The move also raised a question: would the blue-chip Indian multinational -- run by four unrelated promoters for over 50 years -- allow itself to be devoured by the foreign predator?

While Choksey's co-promoters -- Abhay Vakhil, Ashwin Choksi and Ashwin Dani -- dismiss charges of infighting, there's no denying that many of Choksey's plans for the company had not met with their approval. Choksey wanted to expand aggressively. This meant raising equity and diluting control, which the other three vehemently opposed. He offered to buy them out, or alternatively sell his stake to them. When they refused, he went ahead and sold 8 per cent of his stake to institutional investors on July 31, the day on which his father and company chairman Champaklal Choksey passed away. This deal, brokered by DSP Merril Lynch, was later cancelled, finally making way for the Kotak-ICI buyout. "The financing of the expansion of the company led to the differences," says Choksey.

His demand for a higher representation on the board of directors, in violation of an agreement drawn up in 1950, is also said to have angered the other promoters. Such differences of opinion may be natural in a company of the size and structure of Asian Paints, but as Berger Paints Chairman K.S. Dhingra observes, "They also make it an easy takeover target." ICI, desperate to increase its meagre 7 per cent market share in India, was quick to cash in. Says Asian Paints Director K. Rajagopalachari: "ICI's decision to invest in Asian Paints shows that it is attempting to destroy a successful Indian company. It indirectly wants to affect the operations of a more profitable company."

Growing at nearly 25 per cent annually and commanding 43 per cent of the market, Asian Paints is in an enviable position. Its four manufacturing plants produce a wide range of paints, including those for the niche car segment. Besides, it has a strong marketing and distribution network -- 14,000 dealers compared to ICI's 4,000 -- which will give the British firm a strategic edge.

For ICI, Kotak's offer couldn't have come at a better time. ICI Chairman A.N. Ganguly makes no bones about how the company "will explore any position whereby it will be able to gain a dominant position in the market". Its massive restructuring drive in India had failed to yield the desired results and, having hived off its loss-making divisions, it was looking around for strategic alliances. This was a chance to grow through acquisition.

However, Vakhil, Choksi and Dani -- whose combined stake in Asian Paints is more than 40 per cent -- are out to challenge the ICI deal, which is awaiting clearance from the Foreign Investment Promotion Board (FIPB). Choksi told reporters recently, "While FIPB guidelines state that the board of directors of an existing company must by a resolution support foreign direct investment before any approval is accorded, our board is of the opinion that the investment is to nobody's interest and is not welcome."

But is that enough ground to block the deal? Legal experts contend that such arguments hold no water and under the Companies Act, Asian Paints will have to prove that the transfer will lead to a change in management control and will actually be prejudicial to public interest. However, ICI's current 9.1 per cent stake in the company does not give it any say in the management. Just speculating that it will eventually mount a hostile takeover through the open market is one thing, proving it right now is quite another.

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