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Do companies respect shareholders?
March 27, 2009
The Crompton Greaves [Get Quote] stock lost nearly a fourth of its value in just two trading sessions. Investors slammed the stock after they heard that the Thapar-owned engineering firm was picking up a 41 per cent stake in a group company, Avantha Power. Avantha Power is into power generation.
To be fair, Crompton has not violated any rules or laws of corporate governance. But what has put off shareholders is that a fair amount of the listed company's cash -- around Rs 225 crore (Rs 2.25 billion) -- is being channelled into a business that needs large amounts of money but returns from which could take their time coming; the cash, they feel should have been reserved for Crompton especially at a time when things aren't going too well in the US and Europe.
Even if the company didn't have use for the money immediately, it could have come in handy for acquisitions. How could the promoters, without so much as a by-your-leave, decide to use the cash for their own company?
Analysts also questioned the value of the acquisition; J P Morgan believed it was difficult to value Avantha for more than Rs 250-Rs 300 crore (Rs 2.5-Rs 3 billion) with most of the capacity still in the pipeline. At Rs 550 crore (Rs 5.5 billion), Crompton had valued the business at nearly twice that amount.
Valuation can be a matter of opinion but managements need to be far more forthcoming with shareholders and far more transparent when they're dealing with cash. The Crompton management didn't even think it necessary to put out any financial details about Avantha at the time of the announcement.
Unfortunately, more and more companies seem to care less and less about the interests of minority shareholders. A couple of months back, shareholders slammed the Siemens stock after the multinational announced that it was spinning off its infotech subsidiary to its parent Siemens AG.
It was surprising, analysts pointed out, how the operating margins of the infotech business had weakened just before the divestment and how there had been a similar occurrence earlier when another subsidiary had been spun off. Late last year, the J P Associates stock lost around 10 per cent in a single session after it announced a group restructuring.
While none of these companies may be skirting the law, what is happening is that companies are increasingly getting away with decisions that are not necessarily in favour of minority shareholders.
In September last year, the promoters of Sterlite wanted to transfer the high-quality aluminium business to group company Malco in return for high-cost and reportedly low-quality copper Konkola mines. After the stock lost 18 per cent, the management gave up the idea but only after some foreign institutional investors kicked up a fuss.
Take also the case of Larsen and Toubro. The company initially denied that it had an interest in picking up a stake in Satyam [Get Quote] and only later conceded that it was planning to bid for it -- around Rs 650 crore (Rs 6.5 billion) from the L&T balance sheet had been spent on a 12 per cent stake without anyone having an inkling of what was going on. Not surprisingly, the stock has been thrashed.
In most instances the management may be well within its rights to restructure the business -- it's not that the moves are always regressive, but there are far too many cases where minority shareholders are losing out. Companies seem to have little respect for shareholders' money. With this kind of behaviour, the attempt to improve corporate governance practices seems almost a farce.
Grant Thornton and FICCI have just finished talking to a clutch of midmarket-listed smaller companies on the subject. The findings are politically correct.
Most companies say they see significant value in adopting the corporate governance practices prescribed, and 84 per cent of the 500 respondents say that 'compliance with section 49 enhances the perception of their stakeholders on the conduct of the company's business.'
Judging by the actions of most companies, you wouldn't think they cared two hoots what shareholders thought or didn't think! Most of them felt that Clause 49 was 'adequate to bring the requisite levels of transparency to the business.' Of course! The fact is that the rules don't prevent promoters from doing related-party transactions -- like the Satyam-Maytas and Crompton deals -- and allow them to get away with pulling out cash or transferring a business.
The point is that related-party transactions need to brought under the scanner and the laws suitably changed so that these deals are run past shareholders. Since it won't help if the promoters own a majority share, the transaction should be voted on only by minority shareholders as is the case in several countries. Unless this is made compulsory, promoters will continue to play truant.
For all their fascination with corporate governance, not too many seem to be doing much about it -- the survey revealed that just 9 per cent of the companies spoken to were 'in the process of developing a suitable strategy to comply with clause 49.' That's not surprising. Given how the bigger lot is getting away doing as it pleases, why would smaller companies want to even try?