Some time back four private equity firms together put in around Rs 400 crore into Moser Baer’s 100 per cent solar power subsidiary for a 6.5 per cent stake. In other words, the business was being valued at over Rs 6,000 crore. Curious about why the business was considered so valuable, we called up the management. But the conversation didn’t leave us any wiser; we didn’t know what the revenues of the photovoltaic business were at the time, let alone how profitable it was. All we got were some details about the installed capacity and the tariffs. Since Moser Baer is a listed company, we wondered how other shareholders of the company were dealing with this. Were they content with the limited disclosures? More recently, when Tata Motors released the prospectus for its Rs 4,000 crore plus rights issue, the company shared very few details about the business of Jaguar and Land Rover. After all shareholders were being asked to buy shares in the company, the money from which would be funding the acquisition. Shouldn’t they have enough information to be able to make an informed decision?
It’s not just their financial performance, companies don’t seem to be comfortable talking to shareholders about other things too. For instance, a mutual fund which had a stake of around 5 per cent in Novartis raised some pertinent questions about how the surplus cash was being used and whether or not it could be put to better use. Novartis was apparently lending money to some group companies and was reportedly not too keen to discuss the subject. But, that was a rare occasion because not too many shareholders seem to be asking questions. It took a foreign fund to make the Vedanta Group’s management roll back its restructuring plan. In fact, the manner in which the company announced that it would be demerging the energy and aluminium businesses from Sterlite and transferring Vedanta’s stake in Konkola Mines to Sterlite, was in itself, quite shocking. Overnight a shareholder of Sterlite was told, without so much as by your leave, that he would no longer have a direct exposure to the energy and aluminium businesses. Even if the move had been positive for shareholders, which it was clearly not, the management could have held an extraordinary general meeting to see how shareholders felt. After all it was a major restructuring. Under the circumstances, the stock tanked turning shareholders into sitting ducks. Although some research reports pointed out that the management had valued the mine way above what analysts had, institutional shareholders didn’t really make too much of a noise about it. Most of them perhaps felt that the best way out was to vote with their feet — just dump the stock.
Typically in overseas markets the local hedge funds, which take fairly large bets and therefore have a lot at stake, tend to be more active shareholders. Public sector funds like Calpers have a long history of campaigning for shareholders’ rights and also have enormous credibility. Recently, for instance, Franklin Templeton protested that the price paid by Sun Pharma for shares of Taro — $7.75 per share — was not good enough. But in India even big public sector investors such as Life Insurance Corporation that have very large stakes in companies haven’t been known to voice their concerns. Unless, of course, they’ve been doing it privately. That is sad because it would help if institutions came together to air their grievances in public; that would put more pressure on managements to make more disclosures and do things the right way. In fact, there would be no need to even proceed legally against an errant firm; a little pressure and bad publicity would probably do the trick. One reason why funds overseas are more aggressive is because few managements have controlling stakes or even large stakes; it is, therefore, easier to oust them through hostile takeovers. Here managements typically own a good chunk of their stock and it’s difficult to dislodge them. Also funds overseas are often pushed by their own shareholders to act. Perhaps unit holders back home also need to pressure mutual funds into becoming more vigilant though that kind of concerted action looks difficult. In India, many of the funds are backed by corporate houses and, therefore, have their own priorities even if they claim to be functioning independently. It’s possible they’re taking up the problems with the respective management though some amount of transparency would be welcome. The Children’s Investment Fund was among those responsible for the sale of ABN Amro Bank — back home, shareholders are sometimes clueless about the price at which an acquisition has been made. Indian companies have flourished in the last few years because money was easy to come by in a bull market; with their share prices soaring, many managements believed they didn’t need to talk to their shareholders. Maybe the bear market will see them opening up.
Oct 10, 2008
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