Shareholders' interest more important than family ties

Aug 14, 2010

In this issue:
» Tata group's succession efforts sets the right example
» SEBI can hold auditors accountable
» Food inflation back to double digits
» Bonuses are back on Wall Street
» ...and more!!

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Of late there has been a lot of comparison between the top business leaders in India with those of the West, especially the US. With good reason. Firstly, India businessmen lag behind their US counterparts when it comes to charity. Secondly, and more importantly for investors, they tend to restrict the upper echelons of management to only their family members. We have very few Indian examples like the Rothschilds, Rockefellers and Vanderbilts, who gave up management.

But that seems to be changing. And the example is being set by the best known Indian business house of them all - the Tatas. Ratan Tata, who is due to retire by the next fiscal year, has indicated that he is open to looking at a successor beyond his family. This is an important development for Indian investors because it shows the maturing of India Inc. Large Indian companies have long been marred by succession issues and infighting over ownership of the family jewels. The uncertainty and acrimony only hurts the interests of shareholders who end up as hapless bystanders in such important matters. Hence, we hope more and more family run businesses take a cue from Mr. Tata and become rational about management competence. The interests of the company and its shareholders must take precedence over family ties. That would provide an additional assurance for the small investor to buy into such companies.

 Chart of the day
Source: PTI

Perhaps the single most pressing economic problem that the Indian government faces today is that of rising prices. Especially the rise in food articles. It is especially important because it affects the middle class and the poor a great deal. There were some signs of relief for a few weeks. Alas, that was not to last. As the chart of the day show, food inflation is back in the double digits. The figures for individual food items are even more worrying. The price of pulses is up 20.7% YoY, rice 6.9% YoY, wheat 7.9% YoY, cereals 7% YoY and milk 19% YoY for the week ending 31st July, 2010. Clearly the headaches of the government are far from over.

In an interview he recently gave to The Economic Times, legendary investor and commodities guru, Jim Rogers suggested that Indian equities are not cheap anymore.

Rogers however sees India opening its market to foreigners to make it easy for all foreigners to buy and sell shares here. And then he says, "If India does that, that will make me to have to scratch my head and think a lot more about India. Indian shares are certainly not cheap and they have gone up a lot, but if they are finally going to make the Indian stock market open and accessible to everybody, than having to go through a bunch of hoops or a bunch of rigmaroles, that is certainly going to attract more and more investors to India."

Rogers has also talked about making the Indian rupee convertible so that it becomes easier for foreigners to transact. And again, if India succeeds in doing that, Rogers says, " would have to make me reconsider my views on India." Interesting thoughts indeed from the man who has been the most bullish proponent of (only) China all these years!

The RBI, like the stock market regulator SEBI, is getting strict with the wrongdoers. This time it is the turn of holding companies. As per a leading business daily, the RBI has introduced a regulation that will limit the amount that can be borrowed by core investment companies that operate as holding companies. We see this impacting several large business houses. This is given that this regulation will restrict borrowings by several large companies and force them to revamp their ownership structures. RBI has also said that holding companies must ensure that their outside liabilities do not exceed 2.5 times their adjusted net worth. This restricts such companies from borrowing outside the group.

For any industry customer is king. But for the knowledge industry, the 'knowledgeable' is the king. Or in simple words, it is the employee who is king. For the knowledge driven IT industry it has been a pain to retain their 'kings' since the turnaround in the industry began. Attrition rates across the board in the IT industry have shot up to levels that have started to make the managements sweat. This has led to the IT majors take all possible steps to retain their employees. Giving bonuses, promotions, wage hike or even guaranteeing higher variable pays are just some of the measures they are adopting to retain their employees. The companies hope that loosening their purse strings will prove incentive to retain their invaluable knowledge base.

More than a year and a half after the Satyam scandal hit headlines, SEBI finally has the authority to question auditors of listed companies and proceed against them. Previously, the regulation of auditors was only through the Institute of Chartered Accountants of India. But the Bombay High Court has now upheld SEBI's powers to issue show-cause notices to auditors like PWC, KMPG, Deloitte etc. If suspected, they will need to appear in court and defend their actions. If they are unable to do so, remedial action can be taken against them.

Auditors have a direct, fiduciary relationship with shareholders. They need to make sure that the books of accounts they audit are clean. Giving SEBI the jurisdiction to question these auditing companies will help protect the interests of investors in these companies' shares. And prevent future scams and shams like Satyam's.

The world's cheapest car will soon be available with you having to form a queue. We are talking about Tata's Nano. Currently the waiting time to get a car from the date of booking ranges anywhere between one to five months. The reason - constraints in production. Orders for the Nano have been pouring in and the company has been trying to meet them. But as of now there are still 1.5 lakh bookings waiting to receive the car. The company has started to step up production at the Gujarat factory and is aiming to do away with the entire booking period. Soon a customer will be able to go to a Tata showroom and drive out in the Nano on the very same day. This would be rolled out from Maharashtra and will soon follow in other states.

The financial sector, responsible for the entire global meltdown has somehow recovered faster than the broader US economy. Wall Street bonuses are likely to be back again this year, despite huge regulatory concerns. Taxpayers' funds were used to bail out this sector in 2008. Yet huge bonuses were doled out to executives, causing public uproar.

In spite of all of this, some sections of Wall Street will see bonuses rise by up to 15% in 2010. Others could however see a 15% drop. Businesses most likely to see big bonuses include brokerages, equity based asset management. But, fixed-income units at investment and commercial banks and equities are likely to see a bonus decline. Let's hope the regulators come out with rules soon that give shareholders a say in executive compensation.

Indian stock market across the world tumbled during the week to close in the red. This was largely due to dour economic reports from the US retail and consumer sectors. Larger than expected rise in jobless claims also added to the market woes. In fact, the stocks markets have been bearish since Tuesday when a report from the Federal Reserve gave its most bearish outlook in more than a year and said the economic recovery is weakening.

The only market to close the week in the green was India, up 0.1%. The biggest loser was Japan, down 4%; closely followed by US (down 3.3%). In Europe, the UK was down 1.1%, while Germany and France were down 2.4% and 2.8% respectively. In Asia, Singapore was down 1.8% while China was down 1.9%. Hong Kong also closed in the red down 2.8%. Brazil in the Americas closed the week down 2.7%.

Source: Kitco, CNN Money, Yahoo Finance

 Weekend investing mantra
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." - Warren Buffett

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7 Responses to "Shareholders' interest more important than family ties"


Aug 16, 2010

nice idea


alaka garud

Aug 15, 2010

It's a good start, even if it may be a show.
I think ,a big name to remember in this context is:
Mr.Narayan Murthy from Infosys.



Aug 15, 2010

I am not sure if an outsider is better. In most cases an insider has the interest and zeal to uphold family values and culture. An Outsider can have his mindset wired in a specific way especially if he has been an salaried employee, which will make his priorities and risk appetite very different then somebody from the family. And if the Outsider is not been a salaried employee but from a business family then why should he switch to Tata's. Ultimately whats important is the perseverance, attitude, dedication from heart, and management skills can be learn't over time. There are global instances where the company after change of hand from family to an outsider has slowly disintegrated. The successor and the Board should have mutual trust and "chosen one" should not see himself subserviant to the Board.



Aug 15, 2010

The move by TATA is just an exception, i can say one in a million, so we can not say any positive so far. To protect shareholders' interest what is needed are rules and regulations and a body which can enforce. We have seen Oswal Chemical promoter Abhay Oswal, who refuses to even share a nominal dividend with the shareholders after selling the fertiliser plant for about 1500 crores. The money is neither used in any productive busienss but used for advancing loans to associates on which negligible returns are received. One day these loans will be written off on the pretext of non-recoverablility. Don't we have any mechanism, investor forum who can take up such promoters to task? I suggest the author should take initiative and start such a campaign to highlight all such companies and their wrong deeds, which will prompt the Govt. to look into such issues. We have one more company like Piramal healthcare,which will be getting huge USD 3.8 bn in next 3 years and promoters have no concrete plan about the use of this money. Again in the name of some Research business or education business, the money can be siphoned off from the company. The Govt. should bring a legislation to regulate all such dealings. The company should be asked to distribute the money to shareholder all such surplus about which nothing concrete plan is formulated. I hope somebody will definitely take initiative and I shall be happy to contribute by digging into the balance sheets.



Aug 14, 2010

The example set by TATAs: Well, often times what started as the 'family business' becomes a conglomerate with public stake holding steadily going up, becoming significantly higher than what is held by the promoters. Yet, the single largest individual shareholder happens to be the promoter family!

Therefore, it is not correct to expect 'absolute philanthropy', when it comes to naming a successor; we are talking about Chiarmanship and not the COO post; the latter, almost in all cases, go to the best man/woman for the 'job', as the board deems fit. Let us respect the fact that the 'interested' promoter also has substantial interest (read, shares) at stake, to deserve. Precisely for that reason, he would not want to rock the apple-cart, atleast by design!

Elder Ambani found a sticky wicket and his life time was too short to leave papers behind (I mean stamp papers, signed tri-party) clearly demarcating spoils that will go to the two deserving, yet ambitious brothers; Yes, it no doubt, was poor succession planning.

But then, for every such muddle, even if the wise men and women adopted 'absolute philanthropy', we shall have the incidents such as Rusi Modi, a non promoter, usurping despite not having enough paper (read shares) backing him! Well, 'natural' storms (read ambition) hit even haloed Tatas!

As is happening elsewhere, the breaking up of joint families giving way to 'independent' nuclear families results in weakening strength of the patriarch whose word (never mind papers - here I mean stamp papers) were gospel. Go no farther than Goenkas, to see evidence of blood on the floor.

By and large, share holders value is intact & sometime it even betters after such incidents (well, instead of one, two or more drivers take independent risks spawning growth, without wasting energy in putting up a show of unity while what is happening inside is further diversion of energy in internal tussles, all the same affecting the prospect of Public share holding's 'value', to that extent, though 'invisible'!).

But then, when giants go to war, the jackals circling around benefit, to that LIMITED extent, diluting value of shares held by the public and indeed the promoter (or would be promoterS). The classic recent case: When Mukesh walked away with Reliance 'Petro emblem', he could not fathom the risk of brother-held telecom company spying on privileged 'petro-conversations' of Mukesh's empire. Promptly, Bharti was only too keen to offer an offer that cant be refused by Mukesh's empire!!

It was not the result of ego clash (as popularly believed and reported); I am sure even Mukesh would not have liked real-money (telephone bill payments) going out-of-the-family! Dont think for a moment the sweet guy Anil, who swears by pristine Corporate Governance at every opportunity, would not do such a thing. Both guys were groomed by the 'smart' elder Ambani on how to use 'resources' like 'Environment Budget' in their companies' books to get things done in Delhi & such other power centres, that unfortunately CANNOT be owned by The Family! Presto, our Swadeshi blood will suddenly swell out of Delhi, raising import duty of certain stuff, with no correlated events in the few preceding/succeeding months, for 'domestic' capabilities to 'eventually' fill the vacuum and provide the Nation self-sufficiency (err, amongst other-things!!). The battered Wadias, I am sure, will have a story or two more to tell about this aspect (since Independence, till early 70s was Bombay Dyeing not synonymous with Textiles, from farm to fashion-romps?!).

Back to 'must everyone emulate Tatas?'. Well, everything is fair in love and war. That war includes the Corporate Kind too!!


Rishabh gupta

Aug 14, 2010

Very good ANALYSIS.Continue the good work.



Aug 14, 2010

It is all for show. Finally the chosen person will be from the family only

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