Minority shareholders deserve more

Apr 15, 2009

In this issue:
» Is your bank on the brink of going bust?
» Pharma companies enjoy 'bonus' season
» Infosys predicts a tempered FY10
» Surplus cash being used to 'diworsify'
» ...and more!!

A couple of months back, market regulator SEBI had decided to hike the upfront margin to be paid by promoters on optionally convertible warrants to 25% from the erstwhile 10%. This was essentially meant to deter promoters from refusing to opt for conversion of the warrants at a later date. SEBI's foresight was well timed keeping the correction in stock prices in mind.

As per Mint, out of the warrants issued by 34 companies that are due to expire this year, only 15% of the value has got converted so far. It may be noted that promoters use the optionally convertible warrant route to increase their stake, infuse more capital into the company or for treasury management. However, the same has become difficult for promoters who have issued the warrants at expensive valuations and where the warrants are convertible at a huge premium to the underlying share price. To cite a recent example, Mr. Kumar Mangalam Birla, the chairman of Aditya Birla Group has opted out of converting Rs 40 bn worth of warrants in Aditya Birla Nuvo into equity shares as the stock price has dropped by 60% since the allotment of warrants.

We wonder what kind of message do the promoters of these companies wish to send out to the other stakeholders? That they are themselves unsure of the long term prospects of the company that they are running? Or that their interest in upping stake in the company is subject to making short term gains? If at all, they should at least have the obligation to quell the concerns in the minds of the minority shareholders!

Investors, however, need not despair! There are some promoters who are treading a completely different path even in these times. We recently uncovered one company where its promoters exercised their warrants at a huge premium to the market price (Read more about this).

If you thought that only banks in the US were going bust in the economic meltdown, think again. As per a business daily, when banks in US were falling like ninepins, some cooperative banks in India were not far behind. In fact, for every five banks going bust in the US, there were two in India that were going belly-up. It may be noted that as many as 19 Indian co-operative banks collapsed in FY09, as against 44 American entities. The newspaper report also states that the RBI's credit insurance arm had to pay over Rs 1.4 bn to depositors to cover the liabilities of these 19 entities. Under the insurance norms of the Deposit Insurance and Credit Guarantee Corporation, a wholly-owned subsidiary of the RBI, a maximum of Rs 1 lakh is paid to a depositor in case his bank becomes insolvent.

While this may shock readers who all this while thought that the Indian banking sector was in a far better health as compared to its US counterpart, we wish to reassure them that their belief holds good with regard to most of the listed entities. The reasons for that being their continuous review by the RBI and their limited obligation to comply with the government's social welfare mandates like lending without sufficient collaterals and waivers on loans.

In a recent survey that we conducted on our website asking readers whom would they prefer placing their bank deposits with, only 2% of the respondents voted for cooperative banks, obviously due to the lack of disclosure and limited franchise. Here we reiterated that investors parking their funds with cooperative banks must try to verify their credentials, especially parameters like capital adequacy ratio (CAR) and non performing assets (NPAs) before entrusting them with the deposits.

At a time when companies across sectors are looking to cut costs by slashing salaries, pharma companies seem to be an exception, as many of the employees here are set to receive generous bonuses and increments. The rationale cited for the same is to retain talent and encourage a culture of growth and learning. Further, given that the pharma sector is highly research oriented, attracting the right talent, atleast, in the R&D department becomes very important. For instance, while Lupin has given its employees increments in the range of 25% to 40%, Cadila Healthcare is contemplating an increase of 25%. Those companies which have been catering to the US and are basically well diversified in terms of geographies have done well and this has translated into higher salaries. Having said that, not all pharma companies have been that lucky and those who have not logged in a strong performance will be shelling out relatively lesser increments to employees.

Infosys kick started the March quarter and full year FY09 result season today on a mixed note. Although its fourth quarter operating performance did not have much to be enthused about, the company managed to add 37 new clients and 1,772 employees (net) during this quarter. This goes to show the consistency in the company's long term business prospects. While the full year profits grew by a healthy 29% YoY, the company announced an earnings guidance for FY10 that would be lower by 3% to 7% YoY as compared to FY09 EPS.

Talking of the result season, investors will soon be bombarded with views on stocks based on their quarterly EPS expectations by business channels galore. The same may not always be in the best interest of investors who wish to take decisions that can help them generate long term wealth; because of the myopic nature of the advices. In our latest poll in The 5 Minute WrapUp we had asked readers about the degree of implication that views from channels like CNBC India have on their investment portfolio. It was interesting to note that while 59% of the respondents did not follow the advices at all, 21% invested only 10% of their money based on these advices. Further, 68% of the respondents gave a weightage of 1 to stock opinions presented on CNBC's India channel (on a scale of 1 to 5 with 5 being highest weightage).

About 500,000 central and state government employees that are part of the New Pension Scheme (NPS), have an accumulated pension fund corpus of about Rs 24 bn. Another Rs 12 bn of contributions are expected this year and await allocation to a fund manager. Pension laws assert that annual allocations to fund managers be made on the basis of their performance in the past year. As per an Economic Times report, the biggest chunk of the above sum is slated to go to banking behemoth SBI's pension arm, 'SBI Pension Fund' for management. This is because SBI's fund has outperformed the two other fund managers in the NPS - Unit Trust of India (UTI) and Life Insurance Corporation (LIC). For FY09, SBI, UTI and LIC have clocked in returns of 16.5%, 13.5% and 11.6% respectively on the pension funds allocated to them. As a result, SBI comes out ahead in securing higher fresh allocations too. With the magnitude of the sums involved, it is good to know that the money managers are able to lock in sizeable returns for their investors.

We came across another case of "diworsification" by a company that seems to be incapacitated to generate returns from the excess cash in its balance sheet and does not wish to return the same to the shareholders. Madras Cements' decision to venture into sugar manufacturing business at a total investment of approximately Rs 4.5 bn seems to have no logic other than the temporary reversal in sugar cycle. Further, the improved sugar realisations would be offset by higher cane prices. Such instance of companies diversifying into unrelated businesses despite lack of expertise and insufficient rationale is a case of disregard to the rights of minority shareholders.

Despite some weakness in early trades, the Indian benchmark BSE-Sensex lead the pack of gainers in Asia and closed the day with gains of around 2.9%. The BSE Midcap and Smallcap indices gained 3.9% and 5.3% respectively. The European markets, meanwhile, have opened on a mixed note.

 Today's investing mantra
"Managers thinking about accounting issues should never forget one of Abraham Lincoln's favorite riddles: 'How many legs does a dog have if you call his tail a leg?' The answer: 'Four, because calling a tail a leg does not make it a leg'." - Warren Buffett

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2 Responses to "Minority shareholders deserve more"

mallikharjuna rao akkineni

Apr 22, 2009

Good analysis.


gindimane mruthyunjaya

Apr 15, 2009

ver good!

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