Birla Corp worked backward to ward off challenges

M P Birla Group company is in middle of ownership dispute with court vesting control to a three-member committee

As many as 96 per cent of Birla Corp’s retail shareholders voted against a board resolution last year to increase borrowing limit to Rs 3,000 crore from Rs 1,000 crore. But they were in minority and the resolution was passed with close to 88.5 per cent votes in favour.

Companies generally have a default borrowing limit up to the sum of their paid-up capital and free reserves. They cannot borrow beyond this without taking shareholder approval.

Birla Corp had paid-up capital and free reserves of Rs 2,200 crore in the year, so the resolution enabled it to borrow up to Rs 5,200 crore. This resolution came handy when Birla Corp acquired the eastern India assets of Lafarge India for Rs 5,000 crore. On March 31, it had internal accruals of Rs 1,400 crore, including cash balances and current investments. It will now need to borrow Rs 3,500 crore to fund the acquisition.

“Shareholder approval is generally required for an amalgamation or merger or where fresh shares are issued as part of a share swap arrangement,” said Amit Tandon, founder at proxy advisory firm IiAS. “Since the intent seems to be on using cash and incremental debt only, Birla Corp may not have to approach shareholders for their consent,” he said. The company would only need approvals from the Competition Commission for transfer of mining licenses, he added.

The battle for Birla Corp, a MP Birla Group company, started in 2004, a few days after Priayamvada Birla’s death when R S Lodha, father of present chairman Harsh Lodha, read out her will bequeathing her estate worth around Rs 5,000 crore to the Lodha family. Lodha, a well-known chartered accountant, was financial adviser to many Birla group companies, including the MP Birla group. He was also appointed co-chairman of Birla Corp.

The Birlas, including Kumar Mangalam Birla, moved the Calcutta High Court against Priyamvada Birla’s will. After the death of R S Lodha, his son Harsh Lodha assumed charge of Birla Corp as chairman. The M P Birla Group owns 62.9 per cent of Birla Corp through various holding companies. In an order passed in August 2012, the court vested control of the assets of Priyamvada Birla, including MP Birla group assets like Birla Corp, to a three-member committee of administrators.

The ownership and control of the MP Birla Group is still disputed. The outcome of the court battle will decide who controls Birla Corp. But the day-to-day functioning of the company is not affected as the Lodha family is in effective control. “For the present acquisition the approval of the board of directors will suffice,” said Debanjan Mondal, partner of solicitor firm, Fox & Mondal and counsel of Harsh Lodha. Mondal added the administrator body set up by the Calcutta High Court was only to oversee the affairs of the Priyamvada Birla Trust.

When contacted, N G Khaitan, partner of Khaitan and Khaitan and solicitor for the Birlas, refused to comment on the issue as it was sub judice.

“In case of a business or asset transfer, the purchaser company is not required to obtain shareholders’ approval. Therefore, a minority shareholder does not have much say in such a deal,” said Rukshad Davar, partner, corporate and M&A group, at Mumbai-based law firm Majmudar & Co.