'Sweetheart deals' not for only promoters anymore

Jun 30, 2011

In this issue:
» China shorts are wrong, says Rogers
» Bank of America's settlement is too little, too late
» Gold and silver prices could fall in near term, says Faber
» Road developers land into another trouble
» ...and more!
----------------------------- A Good Time To Sell Bad Stocks -----------------------------

It's never too late to get rid of 'bad stocks'.

After all, you never know how bad a market crash could get.

But what are these 'bad stocks'? How do you identify them?

For answers to these questions, and more,click here to read on...


Pharma major Ranbaxy could be a shining example of the rapid strides the domestic pharmaceutical industry has taken. But the company doesn't quite cover itself with glory when it came to protecting the right of minority shareholders. It so happened that a few years back, the promoters of the company decided to sell their equity stake to a Japanese pharma major. And they had the chance to part with all their shares at a certain price. However, when it came to minority investors, the scene was slightly different. This group got to sell only 1 out of 3 shares that they held at the lofty price that promoters got. And the other two shares were left entirely to the vagaries of the market! This certainly goes to show how despite being equal owners in a company, the minority shareholders are often taken for a huge ride.

Mind you, Ranbaxy is not alone. Reports indicate that about 80% of the open offers between 2006 and 2010 were only for the mandatory minimum 20% of company's equity. Unfortunately, such deals had the full backing of the regulators. And public shareholder interests were routinely being compromised under the garb of promoting takeover activity. But perhaps not anymore. A committee responsible for recommendations under the new Takeover Code has gone on to recommend a 100% open offer rule. In other words, as per the committee, the minority shareholders should have 100% access to the deals made by promoters!

It has to be noted that this is just a recommendation and is yet to be approved by the SEBI board. Nonetheless, it is certainly a step in the right direction. It will not only call into question the seriousness of the acquirer but also do complete justice to the interests of the minority shareholders we believe. Thus, it is very important that such a rule sees the light of the day. It will be worth adding here that immediately after the Ranbaxy promoters cashing out, lot of skeletons started tumbling out. This led to a huge reduction in the company share price, causing even more heartburn for minority investors. Hence, all the more important that the new rule or a much improved avatar of the older one comes into play soon.

Do you think it is practically possible to implement this 100% rule? Share your views or you can also comment on our Facebook page.

 Chart of the day
The Indian markets may be in the middle of a purple patch as of now. But if the data for inflows into India dedicated funds and ETFs is any indication, it has received the lowest amount of inflows of any BRIC nations during the last three months. As shown in the chart, while net inflows for India stood at just US$ 40 m for the last 3 months, the same for China stood at a whopping US$ 1.3 bn. Even Brazil and Russia received much higher inflows than India. However, we believe that this is just a temporary phenomenon and should the economic headwinds in India recede, the inflows should once again start looking up.

Source: LiveMint

Jim Rogers who is known as a maverick investor, commodities guru is also known to be extremely bullish on China. And he leaves no chance to rebuke his opponents. By opponents, we mean investors who have been bearish on China. Rogers boldly asserts that people who have been 'short' on China, have been proved wrong. Though he acknowledges the problems that the dragon economy is bound to face, he is confident enough that the country will make it through.

He cites the rise of US as the economic superpower for his argument. Despite all the recessions, depressions, the terrifying civil war and many other economic catastrophes during the early 20th century, the US economy was able to get through all of them. So he doesn't deny that China will have an easy ride. There will be major setbacks on the way. But as he eloquently puts it in his own words: "If I see serious problems in China, I'm not going to stop teaching my children Mandarin."

It seems that the transport ministry is all set to further intensify the cash flow crunch faced by the road developers. And this is via altering the timing related to disbursement of viability gap funding (VGF). It may be noted that VGF (40% of the project cost) is given by the government to road developers so that un-feasible projects become commercially viable.

As per the recent report tabled by Mr B K Chaturvedi, government had decided to make an upfront payment of VGF to the highway developers. However, now the government is planning to disburse half of the VGF amount during construction and other half once the project is commissioned.

A shift in stance to disburse VGF in two installments is likely to impact the cash flows of the road developers. Further, rising interest rate scenario will make the situation all the more difficult for them. While an upfront payment mechanism can ease these cash flow issues it may be noted that most of the road projects are facing obstacles related to land acquisition and environmental clearance. Hence, making an upfront payment meant that cash was not getting deployed. Thus, tweaking the law was appropriate to a certain extent. However, considering that credit is hard and expensive to come by timing was a bit inappropriate.

Remember the subprime crisis of 2007? It had caused the mayhem the effects of which are still visible in the recession that has gripped US. Well one of the banks that had issued the residential mortgage-backed securitization (RBMS) securities was Bank of America. And like all others, these securities also lost their value following the crisis. After a long legal tussle with the bondholders, Bank of America (BoA) has finally agreed to pay US$ 8.5 bn to settle the dues. The amount appears quite a lot but it is paltry when compared to the total amount outstanding. The total outstanding on the book was a whopping US$ 424 bn. The settlement would completely wipe out all of BoA's profits that it has made since 2008. To that extent the amount appears to be huge. But if one looks at the amount lost by the investors, the settlement appears to be too little. And even then it has come too late.

With the instability in global economic scenario yet to show any signs of cooling off, the direction of prices of gold and silver is undoubtedly northbound. Legendry commodity investor Dr Marc Faber confirms this view. However, like any other asset class, the upward movement in prices of the precious metals will not be without hiccups. In fact, if one is to go by Faber's prediction, very soon both gold and silver prices could be trailing the fall in other asset classes. At least for a temporary period. The logic for the contrarian movement though is very simple. The very reason that led to the debt accumulation and price bubbles in global economy is set to be withdrawn. After the withdrawal of QE2, the US Fed will be done with its loose monetary policies for the time being. And although QE 3 will certainly come; it will be a while before the Fed decides to print more dollars. At least not until asset prices have cooled off a bit. Hence, while Faber is not yet short on gold or silver; he advises caution to those wanting to buy the precious metals in the near term.

Meanwhile, indices in the Indian stock market have continued with their upward trend of recent times, with the BSE Sensex trading around 90 points higher at the time of writing. Heavyweights like RIL and SBI were seen driving most of the gains. Almost all the major Asian indices closed strong today whereas Europe too has opened on a strong note.

 Today's investing mantra
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." - Warren Buffet

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11 Responses to "'Sweetheart deals' not for only promoters anymore"

Agnel Pereira

Jun 30, 2011

This rule is practical and is very important. Every company is taking minority shareholders for a ride. Look at the example of Patni Computers! Their CEO was paid a whopping Rs12 crore plus salary and perhaps his only task was to help an overseas company IGate to come and acquire that minimum 20% stake at a certain price and then through their board room squabbles, they left the share price to fall by over 40%. Now as they contemplate further IGate buying (remaining 17% which is with public) over the next 2 years, I am sure they will do everything possible within them to keep the share price go lower to enable acquisition at much lower prices! This is daylight robbery, completely unethical business practice and if regulator like SEBI does not act on them, then either we should forget that there is a regulator to help small investors, or they should exit from stock market investments immediately.

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