|»5 Minute Wrap Up by Equitymaster|
On This Day - 31 MARCH 2014
Time to discipline the dominant shareholder?
In this issue:
But mostly, the promoters follow their whims with least regard to interests of minority shareholders. The root of the problem in such cases is lack of enough shareholder activism. In this context, the firmness and cooperation of fund managers that blocked the controversial production deal between India's leading auto manufacturer Maruti Suzuki with Japanese parent Suzuki deserves an applaud. The same has eased concerns of many of the minority shareholders who did not have platform to voice their concerns regarding the actions of the management. However, as suggested in an article in Livemint, it is a rare event in the history of Indian corporate governance. In many similar cases in the past, while the promoters' decision has been criticized, it has not been blocked due to lack of enough shareholder activism.
While a high promoter stake increases confidence in a company, many a times the promoter has taken the rights of minority shareholders for granted in the name of shareholder democracy. This event just highlights the need of a formal procedure to make sure that no decisions by the majority stakeholders are in conflict with that of the minority.
There are two entities that need to work together to achieve this - the regulator and market participants. The latter includes investors, both retail and institutional. While enough has been covered on the role and loopholes on the part of regulator, it is time for financial institutions, fund managers and retail investors to wake up to their responsibilities and power.
Unfortunately, investors wake up and question only when the stock price or financials start suffering as a result of poor management decisions. By that time, the damage is done and it is too late to make amends. Ideally, investors should give enough weightage to the transparency and management quality and track record. Before investing in a company, they should apply 'management discount' wherever the management falls short on the required parameters. This will also ensure some self discipline among the management.
There is further lapse on the part of fund houses. For e.g., the fund houses, having significant stake in the companies, have the power to vote against a board decision. However, this often comes with a conflict of interest for them. This is because these very companies contribute to bulk of the former's funds or assets. Hence, they abstain from voting or questioning management on controversial decisions for the fear of losing business from them. One way shareholders can make a difference here is by considering voting records and activism of fund houses while selecting mutual funds.
Meanwhile, the regulator should focus on making markets more efficient. It is time we understand that regulator can not be solely blamed for everything that goes wrong with corporate governance. It is only when market participants work along with regulator in disciplining the dominant shareholder that we can hope for better corporate governance in India.
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But in recent weeks, the rupee has been witnessing a recovery on the back of strong FII inflows. And for the first time in the last eight months the USD-INR rate closed below the Rs 60 mark on Friday. While investors are hopeful of change in leadership at the Centre, the appreciating rupee is proving to be a dampener for exporters.
As the chart of the day shows, the export growth has turned tepid in recent months. In fact, in February 2014, exports declined by 3.7% YoY. Of course, rupee is not the only factor that determines export growth. As an article in Business Standard rightly points out, factors such as global demand, crude oil prices, the government's curbs on gold imports and the resultant impact on gold exports, as well as the regulatory issues engulfing Indian drug players in developed countries are some important factors that have impacted exports.
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