Mint Explainer: Is Dr. Saluja's battle against the Burmans worth fighting?

As the power tussle between the Burmans and the Religare board unfolds, recent revelations that Dr Saluja herself sold Religare shares after a hitherto-unknown meeting at The Oberoi with a Burman family representative on the evening of 20 September (just before the open-offer announcement) could have two serious consequences.

Both potential outcomes could severely weaken Dr Saluja’s position and the current Religare board's arguments unless she or her board quickly collects enough evidence to prove their latest allegations that the Burmans are involved in fraudulent funding activities and unfair trade practices, and thus not fit to be Religare 's new promoters.

There is also a third possible scenario, one that may only earn Dr. Saluja a costly victory over the Burmans.

Battle over pricing

When the Burmans announced an open offer for Religare at Rs. 235 a share, the board vociferously protested the takeover, urging Sebi to halt it. It said the price offered was too low and a fair price would be above Rs. 275.

But Saluja herself sold her own Religare shares just a few days before making such an argument. The sale, she claimed, was planned during July-September as a part of exercising her employee stock options. After her meeting with a Burman family representative on 20 September, Saluja sold shares worth crores in Religare on 21 and 22 September .

Now, between the start of July and 20 September, Religare stock was hovering between a low of ₹160.20 (on 21 July) and a high of Rs. 270 (on 18 September). Going by Dr. Saluja's own submissions, she was ready with a share-sale plan and happily sold her shares within this price range, just two days before the open-offer announcement. But when it came to the hostile takeover announcement on 25 September, Dr. Saluja and the board argued that any offer price below Rs. 275 was not fair.

Despite everything, if Sebi accepts Dr. Saluja's argument for a higher valuation, the Burmans may only postpone the takeover and come up with a better offer when the share price goes up. But, at this juncture, Dr. Saluja's "planned" share sale defies her board's fair-price argument.

In fact, the latest share-sale revelation may completely upend her board's efforts to prevent the takeover. This, in turn, could cause her to lose her job at Religare.

Allegations of insider trading

The second possible outcome could be even more dangerous for Dr. Saluja. In a 26 October letter to the Religare board, the Burmans claimed that to their surprise, Dr. Saluja sold the shares immediately after getting insider information from Lamba, just prior to the open offer announcement. If this allegation is true, and Dr. Saluja’s share sale wasn’t pre-planned, she could be found guilty of violation of Sebi's rules against insider-trading. 

The exchange data shows Dr Saluja and a few other employees sold Religare shares worth over Rs. 34 crore on 21 September and 22 September. Sebi's rules on preventing insider trading say violations could result in a penalty of Rs. 25 crore or three times the illegitimate gains made from trades, whichever is higher. 

In the interest of preserving market integrity, Sebi may opt for the harsher penalty, given the Dr Saluja’s influence in the corporate world, and because JM Financial, the banker for the Burmans’ open offer, decided the open-offer price based on Sebi's own formula under the takeover code.

The art behind Dr. Saluja's war against Burmans

While the corporate world is closely tracking the power struggle between Dr Saluja and the Burmans, the latest share-sale revelation gives rise to another question, whose answer could justify the Religare board's strong resistance to the open-offer price of Rs. 235 a share.

If one goes by Dr. Saluja's argument that the share sale was pre-planned, it may be noted that during August, while she was well on her way to selling her Religare shares, the Burmans were getting ready to accumulate more shares of Religare. On 16 August, Burman family-owned MB Finmart Pvt. Ltd, VIC Enterprises Pvt. Ltd and Puran Associates Pvt. bought 2.45 crore equity shares in Religare Enterprises at Rs.217.95 a share. 

This means that unless the Religare board opposes the Burmans' open offer of Rs. 235 and pitches a price above Rs. 270, it could be a long time before small shareholders, including Dr. Saluja (who holds 1.42%), see the value of their investment grow. It may even result in much lower personal gains than anticipated. This fear among shareholders may rise further thanks to the persistent fall in Religare shares after the Burmans' open-offer announcement.  After all, no investor would like to sell shares of a steady company at Rs. 270 and then sell them months later for smaller gains.

Dr. Saluja holds 1.42% in Religare, which would be worth Rs. 128.58 crore at Rs. 275 a share, but only Rs. 109.8 crore if shares are valued at Rs. 235, as per the Burmans' open offer. While market-research reports have predicted Religare's shares will gain after the Burmans' takeover, it is not known how long public investors, including Dr. Saluja, would have to wait to see the value of their Religare shares across Rs. 275 from the current Rs. 222.65. 

If the Burmans succeed in becoming Religare’s promoters rather than mere investors, the company may have enough cash for faster growth and the way the company is run may change. "We need to make some changes," said Mohit Burman, chairman of Dabur India, adding that his family began their Religare takeover journey when the company was on its deathbed in 2018. "...this company did not have money to pay salaries. There was chaos . We stabilized the ship then," said Burman.

The Burmans have put in money several times via preferential allotments since then, and "there came a time we realized that this company needs a promoter", Burman said, adding that such a change may remove the fraud tag from Religare, whose original founder brothers Shivender and Malvinder Singh were jailed for defrauding the company by siphoning off funds. Burman also said Religare would do much better in terms of cost of capital and credit rating if his family took over.

Stopping the Burmans at the gate

In letters to Sebi, RBI and Irdai, the board led by Dr. Saluja has accused the Burmans of fraud and other breaches. They have accused the family of colluding with the Singh brothers, questioned the source of their funds for the acquisition, and alleged market manipulation. 

"Just by saying that it is fraud, and the money is tainted, you cannot just trust… you have to prove it as well," said Burman, adding that the family earns around Rs.900 crore of dividends every year. "Throwing mud is easy, let us see how much of it sticks," he added. Sebi, meanwhile, has asked REL to provide evidence and documents to back the Religare board's allegations in an 18 October letter.

This is where a third possible scenario comes in.

If the Religare board proves that the Burmans’ offer was fraudulent, it could halt the attempted takeover. But this could involve huge costs, in terms of time, effort and money – for Dr. Saluja herself and her board.

In the Tata-Cyrus Mistry case at NCLT in 2016, aggrieved by his abrupt removal as the Tata Sons chairman, late Cyrus Mistry and his Shapoorji Pallonji group had alleged fraudulent dealings concerning Air Asia and dubious, biased and unfair transactions at certain Tata group firms. This first drew a vehement criticism from NCLT since the tribunal noted that Mistry was still a director on the board of flagship Tata Sons when the things he alleged were taking place.

In 2021 the Supreme Court, while passing its final verdict in the case, rebuked Mistry, noting that he was a director of Tata Sons during the period, and that a person who set his own house on fire could not be tolerated to be on the board of any company.

"The directors have a fiduciary responsibility to act reasonably with the highest level of duty and, once appointed, owe their allegiance to the company and not their nominators. The provisions (in the Companies Act)further strengthen the case for corporate governance in listed companies," noted the Supreme Court.

In the present case, the Dr Sajula-led board's fraud allegations against the Burmans were revealed recently, but since 2018, under her own chairmanship, the Burmans were never prevented by the board from acquiring shares in the company. The board first approved a preferential allotment to the Burmans to raise Rs.183 crore in 2018, and then Rs. 175 crore in 2021.

Any preferential allotment requires the board's approval and intervention at every stage, including verifying the credibility of the allottees. Both under Sebi's ICDR norms and Section 13 of the Companies Act, a company's shares can be issued or allotted on a preferential basis only after authorization by the board. The allotment must also be authorized by the articles of association and the directors must attach an explanatory statement with information about the preferential issue.

Ever since Dr. Saluja was brought in as Religare chairman, the Burmans have invested in the firm through at least two preferential allotments. Both were approved by the board led by Dr. Saluja.

So, unless the board can prove that it was not aware until mid-October about the allegedly fraudulent nature of the deal, it could face serious charges from Sebi and the court. This could not only cause Dr. Saluja to be expelled from the Religare board but also prevent her from being a director in any Indian company forever.