On Wednesday November 12, the board meeting of liquor giant Herbertsons passed off peacefully. Only routine matters including the ratification of the half-yearly results had been on the agenda anyway. And there was no mention of the matter that has been occupying everyones attention the spat between chairman Vijay Mallya and executive vice-chairman Kishore Chhabria over the latters alleged attempt to take control of the company.
The matter never came up for discussion because Kishore Chhabria has already laid down his cards and his terms to Mallya. And he is now waiting for the latters decision and his next move. Whichever way Mallya moves, Kishore is sure of one thing he can now finally establish his new identity. He will no longer be known as Kishore Chhabria, estranged younger brother of Manu Chhabria and ally of Vijay Mallya henceforth, he will be known as Kishore Chhabria, liquor baron and businessman in his own right.
How strong are his cards? Judge for yourself. Kishore has become the biggest shareholder in Herbertsons with a 49 per cent stake. And now he is leveraging that to get what he wants. Though Kishore refuses to confirm it, one friend and ex-employee says that he has set two simple options before Mallya. One, Mallya pays Kishore Rs 150 crore and in return, Kishore walks out of Herbertsons and charts his own course, but with Herbertsons fully-owned subsidiary, BDA Distilleries, under his arm. Two, Mallya cedes management control over Herbertsons to Kishore.
If Mallya refuses to play ball, Kishore with his bigger shareholding can mount a bid for management control of Herbertsons. If he succeeds, he will end up with both Herbertsons as well as BDA. And thus become a liquor baron of enormous influence.
But why is Herbertsons so important? Because it controls via its own brands and those of BDA, nearly 40 per cent of the regular whisky market. And the regular whisky market makes up 50 per cent of the 33 million cases whisky market. Moreover, Herbertsons is the lynchpin of Mallyas Indian empire. Last year it accounted for half the turnover and a third of the profits of Mallyas Indian liquor operations. In liquor, Mallya operates through two arms Herbertsons (1996-97 turnover Rs 242 crore, net profits Rs 4.5 crore) and UB Ltd (1996-97 turnover Rs 262 crore, net profits Rs 10 crore. (See The Jewels in the Crown)
How did Kishore manage to put himself in such a strong position? The sequence of events leading up to the current phase makes that clear. The story began some years ago when Kishore Chhabria was still at Shaw Wallace.
Cain and Abel: The fight between the brothers Chhabria at Shaw Wallace three-and-a-half years ago was conducted very publicly. Who was to blame for that battle still depends on which brothers story you believe. But there were a few incontrovertible facts which were not disputed then, or now.
The first of these was that Kishore Chhabria was the man in charge of Shaw Wallace in those days and by all accounts, the company was doing quite well in the market place. It was also true that while he managed the company, and held some shares (about 11 per cent) in it, the majority equity control of Shaw Wallace was with his elder brother Manohar (or Manu). And the tussle started over the issue of control each brother believing that the company was his by rights.
When the dust settled, the division of spoils was like this: Manu had complete control over Shaw Wallace though Kishore still held some shares. Kishore walked away with BDA Distilleries, an associate company of Shaw Wallace that had been created to promote a second series of liquor brands. (Kishore got BDA Distilleries intact with its two distillery units even though at one point it had seemed that Manu would get control over BDAs Aurangabad distillery). More important, Kishore, via BDA, also walked away with Officers Choice, a new whisky brand he had created, which was a runaway hit from the moment it came into the market in the late eighties.
One person who had publicly supported Kishore in his battle against Manu was Vijay Mallya. Mallya had a very good reason for doing that just a few years ago, Manu and he had jointly mounted a takeover bid of Shaw Wallace. Shortly after the takeover, however, the partners fell out and in the bitter fight that followed, Mallya had to exit the company while Manu got full control. Thus, as far as Mallya was concerned, Kishore was his friend simply by virtue of being Mallyas enemys enemy. While supporting Kishore made sense at that point, Mallyas next move took every onlooker by surprise and also set in motion the events leading to the present spat.
Partners, not friends: Immediately after Kishore wrested BDA and Officers Choice from Shaw Wallace, Mallya got into a partnership with Kishore. Even today, many senior executives at Herbertsons are at a loss to understand why Mallya did what he did. The official story given out then was that acquiring BDA helped Herbertsons in the western regions which was historically a stronghold of rival Shaw Wallace. The other theory was a rumour doing the rounds that since the legal tussle between BDA and Shaw Wallace had not really ended, Mallya saw getting BDA as a backdoor entry to Shaw Wallace itself.
Anyway, the terms of the partnership were simple enough and read like this.
BDA was made a wholly-owned subsidiary of Herbertsons. In return, Mallya gave half his original equity stake in Herbertsons to Kishore. Thus, both partners ended up with 26 per cent each in Herbertsons. Mallya remained chairman, and his old employee, S D Lalla, remained the managing director. Kishore Chhabria became the executive vice-chairman of Herbertsons.
However, as far as operations were concerned, BDA remained wholly independent, under Kishores direct charge and functioning with staff handpicked by him. It had its own production bases, brands, marketing team and distribution network.
By all accounts Kishore never interfered with the functioning at Herbertsons either, which was directly run by Lalla who reported only to Mallya. While this arrangement, formalised sometime in 1995, functioned quite well initially, what Mallya didnt realise was that bringing BDA into the Herbertsons camp meant opening the camp doors to the Trojan horse.
Inch by inch: By Mallyas own statement, he and Kishore had a tacit agreement that neither would try to buy additional shares and create problems for the other. However in 1996, this tacit agreement was breached. The immediate trigger was a block of Herbertsons shares that a big shareholder was offloading. The shares amounted to almost 12 per cent. When the broker for this shareholder was looking for customers, Kishore picked up the entire amount. He also gave Mallya an explanation that such a block of shares in an outsiders hands could create problems. And that it made sense for either Mallya or Chhabria to buy it instead. To show that he meant no harm, he even gave Mallya the proxy for his shares for the forthcoming AGM.
By one account, Kishore also suggested to Mallya that both partners increase their stakes a little via open market purchases to make the company absolutely invader proof. Mallya agreed, but thought it was a bit farfetched that anyone else would try to takeover. That was because the shareholding pattern was like this: Mallya had 26 per cent or so and his other associates controlled another 10-odd per cent giving them a 36 per cent stake. Kishore now had 38 per cent (the original 26 per cent he got while bringing BDA into Herbertsons and the additional 12 per cent block he picked up from the market.)
But while Mallya disregarded Kishores advice to start picking up shares from the market, the latter had started purchasing Herbertsons stock from the market in right earnest. In the space of one year, he came to the Herbertsons board several times for transfer of fresh shares. By the time the board started getting worried, Kishore already had some 45 per cent stake in Herbertsons registered under his own name and had applied for another 3.8 per cent to be registered.
Fighting for time: Mallya woke up to the threat some time in July/ August this year and immediately tried to safeguard himself. His first salvo was getting the Herbertsons board to refuse transferring the final 3.8 per cent shares in Kishores name under the plea that the open market purchase contravened the SEBI takeover rules. Simultaneously, an associate of Mallyas, M Sreenivasulu Reddy, chairman of Balaji Distilleries Ltd, his associates and associate companies filed a case in the Mumbai High Court alleging that Chhabria bought the shares from the open market with the express intentions of a takeover and that such a takeover would be harmful to Balaji Distilleries. While these two actions cannot really deter Chhabria because the bulk of his shares were purchased and registered before the current takeover code came into effect it can still slow him down.
Simultaneously, Mallya began negotiating with Kishore to find out exactly what the latter wanted and the options before the two partners in a bid to buy some time.
Chhabrias offer: Though neither of them are talking to the press at the moment, the terms of the Chhabria offer to Mallya are slowly leaking out. According to sources associated with both, Kishore has given Mallya two simple options. One, Mallya gives Kishore Rs 150 crore in cash and BDA back and Kishore will exit Herbertsons for all time. The money would allow Kishore to set up two more distilleries which he requires to make BDA a truly national company and promote his brands to make him an independent liquor baron. Since BDA already has its team and chunks of infrastructure in place, Kishore can strike out as an independent baron without any problems.
The other option is that Kishore, with his superior shareholding, takes a big chunk of management control in Herbertsons so that Herbertsons with its hotselling Bagpiper brand and BDA, which is already under his control, will make him a liquor baron to be reckoned with. In this particular scenario, Mallya will be a largely passive shareholder in Herbertsons and will instead concentrate on his UB brands.
The way Kishore sees it, he is through with being the second in command. From now on, he will be an independent baron himself. Which of the two options will Mallya take? The answer will emerge very shortly.
Prosenjit Datta (With inputs from Manish Khanduri)
