Building the nation and thwarting take-overs: An excerpt from The Nationalist by Minhaz Merchant
This excerpt from a biography of L&T’s AM Naik details how he ensured employee ownership of the companybooks Updated: Nov 18, 2017 11:49 IST
The forthcoming biography of Larsen & Toubro’s Group Chairman Mr A M Naik by Minhaz Merchant focuses on the combative business leader’s rise from a humble background and his robust sense of nationalism which has propelled the company’s foray into strategic projects like building India’s first nuclear submarine.
But building the nation presupposes the freedom to operate without the overhang of family ownership. So riveting sections of the book deal with the challenges that Naik faced to preserve L&T’s professional character.
The biography is being released in Mumbai on November 18th, at a launch function in the presence of Maharashtra Chief Minister Mr Devendra Fadnavis, Union Railways Minister Mr Piyush Goyal, the National Security Advisor Mr Ajit Doval and Chairman of Reliance Industries Mr. Mukesh Ambani among others.
An excerpt from the book:
Throughout the tug of war between RIL and L&T, Naik played the role of a mediator. He had the Ambanis’ trust. And L&T’s top brass reposed full faith in the man who was rising rapidly up the company’s hierarchy and whose loyalty to L&T over the past twenty-five years had been beyond reproach.
In 2001, Grasim was India’s third largest cement producer, with an annual capacity of 13 million tonnes. L&T was at the time the largest cement producer, with a capacity of 18 million tonnes a year. By then L&T’s market value had climbed to Rs 8,350 crore, having grown considerably under the stewardship of Naik, who had been CEO for over two years.
In November 2001, in a surprise move, Reliance sold its shareholding in L&T to the Aditya Birla Group. Naik was in Chicago on business. He retells the story, adding context to it. ‘I received a call at 2.20 am from my colleague, the late Mohan Karnani. His first words, were: “Maalik badal gaya hai.” That was the first time I came to know that I had a maalik! I asked him what had happened. He said the Ambanis had sold all their shares in L&T to Kumar Mangalam Birla, around 10.5 per cent. Anil Ambani called me a few minutes later. Anil said that since L&T had never wanted them, they were going — “We have sold our shares to Kumar Mangalam Birla.” I did not reply directly to him, but made general talk. Then at 7 am, Kumar Mangalam called. He said, Naikji, you did not come to us, so we are coming to you. His father, Aditya babu, had tried from 1976 till 1993 to persuade me to join the Birlas. He once told Dhirubhai, light-heartedly, I am going to take Mr Naik away from you. He said this in front of me at a function soon after the Ambanis had bought a stake in L&T. So later I told Aditya babu that we are an independent company. During Anil Ambani’s wedding, standing just in front of me was Aditya babu. He was talking to Dhirubhai. He saw me and he immediately told Dhirubhai again, this man I am going to take him away. As if I am available to whoever wants me!’
In windy Chicago, Naik wrapped up business and left for Mumbai immediately. He took a flight from Chicago’s O’Hare airport and was back in India the next day. Holck-Larsen had already phoned Kumar Mangalam Birla, with whom Naik had developed a rapport. ‘Aditya babu had given Kumar Mangalam only a few names with whom, as he said, “we should never lose a relationship”,’ recalls Naik. ‘When Kumar Mangalam got married, only family members were invited. From L&T I was the only one invited. It was a close relationship and has remained so.’
In those turbulent months sixteen years ago, however, the tension was palpable between the two. Says Naik: ‘I asked Kumar Mangalam, why have you bought this shareholding in L&T? He said L&T is a grossly undervalued company, there is a lot of money to be made. Then he asked if he could meet Holck-Larsen. So we all met. Three months later Kumar Mangalam started buying shares in the open market. L&T’s stock price went up and up. From Rs 178 it started rising. People said he is buying in the market. I realized then that he is buying because he wants to take over L&T. So I went to Kumar Mangalam and asked him, why are you buying? He said, I had told you, there is money to be made. S Gurumurthy came to my rescue; RV Pandit also came to my rescue. I was a man from the village. I did not know a single secretary in the government or even the chairman of LIC. I did not know any minister or politician, I knew nobody. I was sitting here, doing my job as a professional, trying to change the company, make it entrepreneurial, transforming the company.’
Gurumurthy took Naik to meet Prime Minister Atal Bihari Vajpayee. He then took him to see Deputy Prime Minister LK Advani and Defence Minister George Fernandes. Says Naik: ‘Fernandes was like me, a working-class man. He understood what L&T is. He said L&T cannot be sold — and remember, he was NDA Chairman at that time. He told Vajpayee: we cannot sell L&T. Now don’t forget that the BJP had a cordial relationship with the Birlas. I had nobody. I am a man from the village. I wanted to sell our cement division anyway. It was not something we wanted to grow. So I brought an offer from England to buy our cement business. Kumar Mangalam got worked up as he had come in only to buy cement. And here I had created a competitor. In meeting after meeting there was a stand-off.’
As tensions rose the government became concerned. ‘RV Pandit [the well-connected veteran publisher] called me from Delhi,’ recalls Naik. ‘He said he was visiting the finance ministry. Everybody is upset with you, all meetings are at a standstill, he said. No business is being transacted.’
By now the Birlas had brought up their stake to 16 per cent in L&T. Finance Minister Jaswant Singh told Kumar Mangalam not to buy any more. The share price was now Rs 220. Birla stopped buying at 16 per cent. Government institutions stopped at 37 per cent. Slowly, the government shareholding came down to 30 per cent. Those were fraught days for Naik and L&T. He had taken over as CEO barely three years ago and now found himself embroiled in a corporate battle with one of India’s most respected and gilded business houses. Naik flew to Delhi. He told a senior government secretary he was now willing to sell L&T’s cement division to Birla without competition. There was a caveat though: he asked the government official to put it down in writing that L&T should sell the cement division to the Aditya Birla Group without competitive bidding.
‘The government secretary suddenly fell quiet,’ recalls Naik. ‘He asked me if I wanted tea or coffee. Then we talked a bit and the meeting was over. The stand-off continued for two more months. One day the banking secretary, a lady, called and asked me if an L&T board meeting could happen that day. All meetings had been at a standstill. She said she would give me a one-line note okaying L&T selling cement. I said yes, provided there is competitive bidding. So they found a way to do it. They got the valuation done by the government credit rating agency ICRA. They said: whatever ICRA says should be acceptable. ICRA did the valuation at Rs 310 against the market price of Rs 220. They told me to now work it out with Birla. What should be the price component of engineering and of cement? We had many bilateral meetings. Gurumurthy was present, but most of the discussions were between Kumar Mangalam and me. We negotiated the value-split; how much of the Rs 310 I should take, how much he should take. The original price at which the employees were given stock options in 1999 was Rs 178. We did not give any concessions to them whatsoever. That was the market price and we gave the stock options at that price. Around 5 per cent of the L&T stock was given. Then we gave another stock option of 5 per cent in 2003. And then once more, another 5 per cent in 2006. Always at the market price. But our board directors did not get stock options after 2003. Only our employees were given them. About 200-250 employees got stocks in 1999, around 700-800 in 2003, and 2,500 employees in 2006.’
Naik stood firm throughout the negotiations. ‘I told Gurumurthy that we cannot do any deal till the remaining shareholding comes back to us. The L&T Employees Welfare Foundation was then formed, and the structuring was done. Gurumurthy negotiated with the government that L&T should be allowed to give a loan to the L&T Employees Welfare Foundation to buy shares in L&T. I went to a bank, deposited the shares, mortgaged them, and worked out the entire scheme.’
It’s important to understand the financial architecture of the scheme. Under the Integrated Scheme of Arrangement, approved by the stock exchanges, SEBI, the Registrar of Companies, shareholders, creditors and the Bombay High Court, L&T’s cement business was demerged. The L&T Employees Welfare Foundation (Trust) acquired the 14.95 per cent stake in L&T held by Grasim Industries Ltd and its subsidiary, Samruddhi Swastik Trading & Investments Ltd in 2004 for around Rs 446 crore. L&T, its shareholders, creditors, Grasim, its subsidiary, and the Trust were parties to this Scheme of Arrangement.
Crucially, SEBI had granted exemption to the Trust from the requirement of making an open offer under the provisions of the erstwhile SEBI Takeover Code to facilitate its acquisition of L&T shares from Grasim. SEBI noted that these shares would be held in perpetuity by the Trust to ensure that L&T retains its ownership and management character. The purchase of L&T shares was financed by way of a loan of Rs 275 crore from L&T to the Trust, bank borrowings by L&T Welfare Company Limited (LTWCL) totalling Rs 150 crore (Rs 105 crore from Bank of America and Rs 45 crore from HSBC), and voluntary contributions to the Trust from employees of the L&T group (Rs 21 crore).
The Trust had agreed to give a tax-free return of 5 per cent on the contributions made by employees. The manner of providing this return was left to the wisdom of the trustees. Since the dividend was tax-free in the hands of the recipient, the trustees felt that issuing preference shares to employees against their contribution would be beneficial to them. The Trust subscribed to the preference shares of LTWCL and held them through L&T Employees Welfare Foundation Private Limited (LTEWFPL) on behalf of the employees. LTWCL issued preference shares carrying a rate of 5 per cent cumulative dividend to the Trust. As per the terms of the issue, the preference shares were to be redeemed after a period of ten years from the date of allotment. However, the issuer (LTWCL) had an option to redeem the shares any time after three years from the date of allotment, while the shareholder (Trust) could seek repayment any time after seven years from the date of allotment.
Based on the instructions of the Trust, LTEWFPL allocated the beneficial interest in the preference shares to employees based on the contributions made by them. The dividend received was utilized initially to repay the loans taken from the banks and L&T, as well as to pay dividend on the preference shares. LTWCL declared a dividend of 5 per cent on the preference shares till 2006, and 6 per cent from 2007, until the time these preference shares were redeemed in 2009-10. The beneficial interest in these preference shares was revoked from the employees in three tranches on 28 February 2009, 31 December 2009 and 30 November 2010. The employees were repaid the principal amount, along with proportionate dividend at 6 per cent per year.
As Naik says today, with a smile: ‘That’s how the L&T Employees Welfare Foundation shareholding in L&T became 14.9 per cent. So now there was around 15 per cent with individual employees as stock options and nearly 15 per cent with the employees’ foundation — 30 per cent in all.’ The L&T’s Employee Welfare Foundation had ringfenced L&T from future takeovers. Analysts agree that Naik’s innovative and complex financial engineering to create the L&T Employees Welfare Foundation will go down in Indian corporate history as an unprecedented achievement.
‘You will be surprised to know that today our employees welfare foundation has several hundred crore rupees,’ says Naik. ‘All out of nothing … zero. Plus all employees got stock options, plus we became the owner, the largest shareholder in L&T, plus we reduced the debt and became an AAA-rated company and I brought down the equity. Therefore, after adding a lot of value, we could give four bonuses — a 1:1 bonus in 2006, a 1:1 bonus in 2008, a 1:2 bonus in 2013 and a 1:2 bonus in 2017. That is how so many employees of L&T have become millionaires and crorepatis.’
Once all the paperwork was done, L&T and the Aditya Birla Group issued a public statement in July 2004 that the process of implementing the scheme of demerger of the cement division of L&T as approved by the Bombay High Court was complete. Grasim had acquired a majority stake in UltraTech CemCo Limited, the demerged cement business of L&T, effective 14 May 2004. Accordingly, the cement business undertaking was transferred to and vested in UltraTech CemCo Limited. Grasim had made a successful open offer bid for 30 per cent of the equity of UltraTech with a view to taking management control. Concurrently, Grasim acquired an 8.5 per cent equity stake in UltraTech from L&T. Grasim and its associates sold 14.95 per cent of their holding in the demerged L&T to the L&T Employees Welfare Foundation.
Naik smiles, his face creased in mirth: ‘I tell you, the ladies are more grateful then the men. One was forthright in telling me: “I am from Kerala, we used to take forty hours to reach Kerala, now when we go on holiday we are able to reach in two hours by air, thanks to Mr Naik giving us stock options.” I was once in Austria, and visiting an exhibition. When we were about to get back into the car three people came towards us. An ex-employee of L&T greeted me and said he had sold 300 shares of L&T and toured the whole of Europe with the money. Both he and his wife thanked me.’
Naik recalls: ‘After signing the cement deal, Kumar Mangalam extended his hand to me and said “history should never, never forget you. You know what you have achieved: employee ownership of the company.” Nobody had believed it possible. In postIndependent India it has never been done, and shall never be done. So If anybody tries to attack L&T again — and so far people have not tried as I am still here, people know that I am a fighter — then I am the guard at the gate by way of managing trustee of the L&T Employees Welfare Foundation.’