Sterlite residual buy in HZL may be stalled

Govt official quotes Balco case ruling as hurdle.

Sterlite Industries' hopes of increasing its stake in Hindustan Zinc Ltd (HZL) to around 95 per cent by exercising an open-ended call option (right but not the obligation to buy) over the government's 29.54 per cent residual stake have receded.

A senior government official said Sterlite would not be able to exercise the open-ended option in HZL, which kicked in after April 2007, because the Attorney General has declared illegal another call option granted to the company to acquire the remaining 49 per cent in Bharat Aluminium (Balco).

Sterlite had acquired a 51 per cent stake in unlisted Balco as part of the government's strategic sale of its shareholding in March 2001 for Rs 551.50 crore.

The company was entitled to exercise a call option to acquire the government's remaining 49 per cent stake, but the matter was referred to the Attorney General following a dispute over the valuation.

The Attorney General declared the Balco call option as being "ultra-vires" of the Companies Act, 1956, and said it was no longer valid. Sterlite has since challenged the Attorney General's views in the Delhi High Court.

Sterlite hopes to delist HZL after exercising the call option, but the official said: "The delisting is the difficulty." This is because delisting would make HZL a 100 per cent private company, contradicting the current government's no-privatisation agenda.

"In Balco's case, the government had Sterlite to list the company, but Sterlite was reluctant to do so," the official added.

Meanwhile, Sterlite sources said the shareholders' agreement entitles the company to exercise its second call option in HZL five years from the initial sale anytime after April 2007.

The company, however, has not exercised that option so far. Sources said the company might inform the government of its plan to exercise the option some time this month.

Sterlite has acquired 64.92 per cent in HZL till date.

Under the shareholders' agreement, the government had granted Sterlite two call options to acquire the government's entire shareholding in HZL.

Sterlite exercised the first option and acquired an additional 18.9 per cent in the company for Rs 323.9 crore in 2003.

Tough call

Apr 2002: Sterlite acquires Centre's 26% in Hindustan Zinc Ltd (HZL), follows it up with successful open offer for another 20%

Aug 29 2003: Sterlite exercises first of two options to acquire all shares in HZL held by the govt, acquires additional 18.9%

May 2004: United Progressive Alliance (UPA) assumes power, drafts governance agenda that binds it to abandon privatisation

Jan-Aug 2006: Sterlite's call option in Balco falls victim to the no-privatisation agenda, Attorney General declares option illegal, following valuation dispute. Had it been exercised, Sterlite's holding would have breached the minimum threshold level of 90% required for delisting a company. The government is averse to delisting since this would make the company 100% private. Sterlite appeals in the Delhi High Court.

Apr 2007: Open-ended second and last call option of Sterlite in HZL begins, future uncertain as Balco events cast their shadow