Chapter F
Conclusion: The paramount rule of war
As you come to the end of this book, you could pause and ponder on the lessons learnt. These pages continually remind us that you don’t go to court without a very clear sense of what you are likely to achieve. You have to be realistic and you have to be practical. Litigation is a tool to achieve your purposes: it is not itself ever its own purpose. You must litigate because it is profitable: avoid it when it is not profitable.
You may have learnt also that as you fight your legal war, every decision you take keeps in mind the strengths and weakness of the two fighting armies. You also keep in mind the conditions on the field of battle. Your greatest duty to yourself is to remain cool and calculated, to think through the issues, to evaluate the situation as it is. You cannot afford to let your emotions and your prejudices distort your thinking. Livelihoods and lifestyles are at stake, and effective decisions cannot be taken unless you are totally calm and calculating. If you go wrong in your calculations, the results may be disastrous.
Beyond pragmatism, you also need to reassess what you are doing continuously. It may well be that conditions favored you when you started your legal war, but these favorable conditions changed as you went along, leading up to a point when it was not realistic for you to continue the fight. When this happens, you must have the capability, and the maturity, to reevaluate your situation and change course while there is still time. If you do not, but bash on regardless, disaster is inevitable. In all things, and at all times, practical realities must guide your decision making. There is no other way. This is the central message of this entire book.
For our last case study, let us look at a case where the reality on the ground changed during the course of the war. Even though this was clear to everyone, one of the warriors persisted in his fight in circumstances where he should have stopped. This had unfortunate consequences.
The Jaguar Case
As the Sensex climbed from 6250 in 2004 to 21,200 in 2008, many dizzy punters believed that the era of high GDP growth was here to stay indefinitely. Financial mavericks and flyboys quit their jobs, punted profitable on the bourses and waited for the inevitable steep correction, believing that the time for hostile acquisitions of listed companies would come. Some anticipated events better than others and organized themselves just before the market collapsed. The Jaguar Value Cartel was one of them.
Staffed entirely by young stock traders and analysts, Jaguar was an unincorporated association of wealthy individuals, their heads brimming with ideas. In the summer of 2009, they set their sights on what they believed was a grossly undervalued company: Rajamundry Textiles. It was a classic story of the aging patriarch presiding over a large family-owned business with too many senior citizens resisting change and growth. Inevitably, this led to savage infighting and the younger members of the family group won. As the curtain went up on our story, Rajamundry was slowly making a come back but it had miles to go yet.
There is no doubt that Rajamundry Textiles was grossly undervalued. It had large real estate holdings in several metros, none of which had been correctly valued in its balance sheet. Jaguar believed these properties were worth more than the business! Like many listed companies, Rajamundry’s promoters owned only 16% of its shareholding, 29% being held by Financial Institutions. Rajamundry had floated 55% of its equity on the stock exchange. The company’s management remained stable because financial institutions and promoter generally acted together. If Jaguar wanted to mount a hostile take-over attack, they would have to gain control of more than 45% of the company’s voting power. This did not make for an easy hostile bid.
As plans developed, Jaguar‘s case for a hostile acquisition rested on two central issues: (1) how to effectively bid against the promoters and (2) how to unlock real estate value in the face of India’s complex land use laws.
Given the long history of lackluster performance of the underlying stock, Jaguar that the financial institutions could be persuaded to switch sides. All Jaguar had to do was match Rajamundry’s promoter holding. Jaguar would then be in a position to persuade these financial institutions that their political contacts had the ability to deliver land use conversion approvals. Jaguar’s partners were not poor but picking up 16% of Rajamundry’s equity at a realistic price was no cakewalk. In any case, being good stockbrokers, they were not about to punt on their own money. They needed subscribers to their acquisition bid and they needed deep pockets with lots of patience.
Eventually, Jaguar found Kochhar. Kochhar was a wealthy self-made man with driving ambition. He was in many businesses – steel, forging, auto parts – and he was growing. He was also cash rich. Most fundamentally though, he was a rebel in search of a cause, always wanting to bend the world to his will. He bought into Jaguar’s idea, but he could not understand how he would pick up 16% of Rajamundry without the share price shooting through the ceiling. Jaguar’s lawyers had the answers.
In those days, the Takeover Code didn’t need an acquirer to disclose his purchases till be had accumulated 5% of the equity of a listed company. If two or more acquirers acted in concert, their cumulative holding had to be disclosed at the 5% threshold. Jaguar needed to find four unconnected persons to each buy 5% of Rajamundry’s equity. Kochhar was happy to provide a second name, an old-world punter called Seth, very conspiratorial, very savvy, nine-tenths ‘under the water’. He said he could pick up 5% without trouble.
After introducing Seth to Jaguar, Kochhar now insisted that Jaguar also buy at least 1% of Rajamundry’s equity using its own money. It was a ‘put your money where your mouth is’ argument, and Jaguar agreed. Eventually, they found the fourth player, a Portfolio Manager tapping into foreign funds. The die was cast.
As the scheme rolled out, Kochhar’s company approved a large expansion project based on advance orders received from a large Dubai based business house. He then used these orders, and the Board authorizations, to get funding from his long-standing lenders. He used this money to place purchase orders on several European machinery suppliers and paid them large advances. This money was routed to various tax havens, flipped to Dubai and came back to the Portfolio Manager as investible funds. Meanwhile, the other two players lined up their own funds. This Gang of Four now moved into the market, picking up small lots, week on week. In less than six months, the Portfolio Manager, Kochhar and Seth had each picked up 5% of Rajamundry’s equity. Jaguar meanwhile had picked up 1%. Promoter holding matched, Kochhar, Seth and the Portfolio Manager now made their disclosure under the Takeover Code. This triggering Act two of this particular play.
Curiously, despite these massive purchases, Rajamundry’s share price didn’t move much. The bull run between 2004 and 2008 had led most people to believe that modest price rises were the natural state of being for even poorly performing companies. Since the old guard had recently given way to the new, Promoter inexperience may also have had something to do with it. Whatever it was, the Promoters now had a mess to contend with. Three people acting independently had each picked up 5% of the company and this combined holding now equaled promoter holding. What was to be done?
Although Indian stock markets were widely believed to be opaque at the time, in truth, be it politics, economics or society itself, India has always been completely transparent. Everyone knows what everyone else was doing. The grape wine was generally very effective. In two weeks, Rajamundry promoters knew that Seth and Kochhar were acting in concert. They didn’t quite know what to make of the Portfolio Manager but they were not about to leave it to chance. They decided to attack each of the three players. This is when Jaguar’s scheme began to come unstuck.
Rajamundry promoters had several choices. For one, they could start mopping up substantial shares themselves. It took money to do this and they did not have funding. Alternatively, they could go to SEBI and complain about the manner in which the Gang of Four had gone about buying shares secretly without following the law. The Promoters didn’t like this route. It was a matter of legal interpretation and SEBI’s action could not be predicted. Their last option was to attack the acquirers rather than the share acquisition. The youngsters went to seek the counsel of the senior members of the family. Rajamundry’s old guard had grown up in the license-permit-quota raj of old. Although times had changed, they understood the political-regulatory-Justice Machine better than the new age Jaguar flyboys.
As the curtains went up on Act Two, the Portfolio Manager suddenly found himself faced with a 26-page inquiry from the government. They were crawling all over his business with a microscope. There were questions about the Rajamundry investment but there were questions about everything else too. They had the right to ask him these questions but if he answered, he would jeopardize practically all his investments. It was obvious they were throwing the book at him. The Portfolio Manager stalled. Inquiry followed inquiry and the stream of paperwork intensified. Eventually, they wanted him to make highly confidential disclosures about his source of funding, all funding. They truly pressured him. Eventually, they called him in, read him the riot act and declared that he would either give them the information or lose his license. The Portfolio Manager knew he was beaten. He told Kochhar he was out of choices. To be fair, the Portfolio Manger was more than reasonable. He was ready to discount his fee and sell his Rajamundry holding to any person of Kochhar’s choosing.
Meanwhile, Rajamundry’s promoters turned their attention to Seth. Seth was a pure punter, loyal only to his investments. He realized the plan had unraveled the moment the Portfolio Manager lost his nerve. Rajamundry’s promoters told Seth to sell in the market or to them, at his option. Seth told them he would not sell at a loss. Rajamundry’s promoters offered to buy him at his purchase price. Seth said he would think about it. In turn, Seth very fairly called up Kochhar and recounted the whole conversation. He then took up the classic punters position: he would sell to the highest bidder! He sat on the fence, ready to weigh his options. Kochhar had lost control.
Rajamundry promoters now approached Kochhar. At this point, they did not know who was leading this Gang of Four. Perhaps something in Kochhar’s demeanor gave the game away. They told Kochhar they had both Seth and the Portfolio Manager in the bag. They told him he stood isolated and offered to buy him out at his purchase price.
Kochhar was now at one of those defining moment in time when history waits to be made, or bypassed. His ego overwhelmed his pragmatism and he failed to see the writing on the wall. He became incensed and turned down the offer. Worse, he was abusive, allowing his ego to drive his agenda in the heat of the moment. The blunder made, Kochhar now constructed a solution in his head. He would find someone to take the Portfolio Manager’s holding. He would then persuade Seth to change his mind. The plan could still be on track.
Rajamundry’s old guard decided Kochhar was not a man to reason with. They had enough experience of political intervention to understand the cost. They decided to pay the price, whatever it was. Kochhar found himself in the middle of a war.
Rajamundry launched a bitter and concerted attack on Kochhar. They used their political clout to deliver a succession of extremely crippling blows. Income tax authorities raided Kochhar. It went on for a day and a half and the authorities followed it up with several demand notices. The Sales Tax authorities raided Kochhar’s factories, warehouses and dealers. His trucks of merchandise were seized on at least four occasions within a week. Out of the blue, Kochhar’s bankers started asking invasive questions. They hinted that his expansion project was under scrutiny. The Reserve Bank of India made a routine inquiry on the expected date of delivery of the machines he had ordered abroad. Kochhar’s business now came under threat.
All of this cost Rajamundry aplenty. They were cool-headed customers and didn’t have a financial death wish. If they could, they would settle. Two months after the first offer, they send Kochhar a second exit feeler. They now offered him current market value plus 10% for his shares. It was substantially below his purchase price. Looking at the creek he was paddling in, it was a pretty good offer. Kochhar’s ego got in the way again. He now wanted to teach Rajamundry a lesson: finish them off, destroy them, ruin their name, and so forth. He had blood in his eyes. He called the others for a meeting. Seth and the Portfolio Manager were aghast. What was happening to Kochhar? He had punted and lost: this was no big deal. It wasn’t personal. The logic of the situation was to cut their losses and run. Their three-way meeting ended in bitter acrimony, much of it coming from Kochhar.
The Portfolio Manager was the first to act. He sold his shares back in the market at whatever price he could get. Since Kochhar had funded him, he sent whatever he got back to Dubai. His Dubai based business associates took their fee and send the balance back to Kochhar’s machinery purchase advance account. Kocchar took a body blow. He now had a huge foreign exchange regulatory regime issue to deal with. Soon after that, Seth, the quintessential punter, sold his shares to the Rajamundry promoters at his purchase price. He lost nothing. Jaguar was never in the equation. When the deal came apart, they traded their 1% on the screen and wrote off their losses. They were never paid their consolidators fee but all things considered, they didn’t worry about it. You can’t win them all.
Kochhar meanwhile ended up entangled in a war he could not control. The battles carry on to this day. The investigations into Kochhar’s businesses have escalated his problems. He faces litigation, demands and penalties. The fight is no more about Rajamundry. It is no more about unlocking real estate value. It is a simple war of domination and control and both sides are entrapped. Rajamundry engages as little as possible but circumstances force them to react when they would rather not. Kochhar is in retribution mode: his hatred controls his actions and he responds to every real and imaginary provocation with counter attacks. Like an enraged child, he is in permanent tantrum mode. It’s all rather sad to be honest, and it shows no signs of ending.
Jaguar is a good example of a war that perhaps should not have been started. The five conditions necessary to start a winnable fight did not favor Kochhar. Kochhar’s preparations for the fight were good and while his strategy may be faulted, his basic failure was not strategic. Kochhar lost out on the tactical game. He could not seize and control initiative, he could not control his enemy’s responses, he could not exploit the momentum and he certainly could not achieve unpredictability or deploy the unorthodox. Beyond detailed debates on good and bad tactics however, Kochhar fundamentally violated the paramount rule of war.
So let us state it one more time. Anger and frustration have no role in litigation. Life is ephemeral; environmental conditions alter, feelings are transient, emotional realities change. The night turns to day but acts that have been done, cannot be undone. We cannot erase the hand of history, we cannot rewrite our fate after it has unfolded and we cannot stop the moving hand, which having one written, has moved on.
In the end, we can only remind ourselves that in whatever we do, we need to ponder hard, decide our actions unerringly, and then we can move with conviction, with commitment. In all this, every day, we must reflect on where we are, evaluate constantly if we are on the right course, and then adapt and adjust our actions to be in resonance with nature. This is the secret of a successful personal and professional life. It is also the secret of good litigation.