Will this really benefit minority shareholders? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will this really benefit minority shareholders? 

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In this issue:
» Ben Bernanke defends QE
» IOC to bail out government
» China continues to pile US debt
» UPA fails in creating sustainable employment
» ...and more!

In an effort to strengthen the corporate governance standards, market regulator SEBI is all set to clamp down on mysterious related party transactions that create a potential for conflict of interest. In simple words, related party transactions revolve around two parties that have some kind of relationship between them. And when any business transaction is being conducted between such parties personal interest can take precedence over larger interest of public shareholders.

Say for example, ABC Ltd sources raw materials from XYZ Ltd. And the owner of XYZ Ltd sits on the board of ABC Ltd. Any transaction between these two parties can potentially create a conflict of interest which may be detrimental to the interest of ABC's minority shareholders. However, as per SEBI's proposal such related party transactions would now require an approval of minority shareholders.

If such deals compromise shareholders' interests they can vote against the transaction and annul the same. Obviously, this move has not gone down well with the listed companies. Many are opposing the same claiming that such a proposal will inhibit their ability to transact with persons in their know. Rather they are worried that such opaque deals will now no longer be a part of the system where personal interests are given a priority.

In order to get a sense of how transparently business is conducted in corporate India, fathom this. As per an article in Live Mint, roughly 2,326 related party transactions took place within India Inc in FY13. The largest one was of size close to Rs 265 bn involving Reliance Industries. Many other big corporate houses were also involved in similar transactions during the last fiscal.

It is not that all related party transactions have ulterior motives. But such transactions leave scope for slippages on the governance front. This compromises the interest of minority shareholders. Mere disclosure in the annual report is not sufficient tool to bring in transparency.

Requiring an approval of the subject party whose interests are most likely to be compromised can certainly make the process free of suspicion. In fact, it would strengthen governance standards. And renew investor interest in Indian equities. This is exactly what SEBI is proposing to do. If the proposal is accepted, the responsibility of minority shareholders would increase as they will have the right to vote against shady deals.

However, SEBI must draw a line between protecting shareholder's interest and curtailing board independence. Requiring approval for many transactions, not only related party ones, may make the board futile. Also, it should be noted that minority shareholders' view can be easily influenced. And hence they may not necessarily be able to take correct business centric decisions. Giving some amount of freedom to the people who are running the day-to-day operations of the company is necessary. At the same time it also necessary that this freedom does not lead to exploitation of shareholder rights. SEBI should adopt a middle ground that gives board a sufficient autonomy and minority shareholders an assurance that their interest will not be compromised.

Should related party transactions be vetted by minority shareholders? Let us know your comments or share your views in the Equitymaster Club.

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01:50  Chart of the day
Life insurance is generally bought to take care of the financial needs of your dependents. Hence, it is important to choose your insurer with utmost care. However, while choosing any life insurer, most people focus on the premium outgo and expected return associated with that policy. This could be a grave mistake. Remember, insurance is not an investment. It is a life protection tool. Hence, while choosing any insurer, assessing the claim settlement record is of critical importance. Claim settlements ratio indicates the proportion of claims that have been honoured out of total claims that are outstanding. Higher claim settlements ratio indicates that a life insurance company is making the payments when they fall due, in this case an untimely death.

Today's chart shows the claim settlement ratio of life insurance companies. LIC leads the list with highest ratio of 97.7% followed by others. It is interesting to note that private life insurers have claim settlement record of 88.6%. This indicates that about 11.4% claims on an average get rejected by the private life insurance companies.

Most companies cite incomplete documentation or concealment of facts as a reason for rejecting claims. Hence, while buying a life insurance it is of utmost importance that you furnish accurate information and ensure that all paper work is into place. And most importantly, while choosing any life insurer, one must pay attention to the claim settlements record and not get swayed away by higher returns.

Claim settlement ratio

In his usual folksy style, the inimitable Warren Buffett once remarked that you should never ask a barber whether you need a haircut. The message is simple. If you are looking for an opinion on a subject, don't expect an honest feedback from people whose life or livelihood depend on it. Against this backdrop, what do you think the Ex-US Fed Chief Ben Bernanke will have to say on whether the QE has been a success or a failure? Well, no prize for guessing this we believe. Bernanke indeed defended QE recently, saying that it has helped the economy and shows no signs of creating an asset bubble.

Really? Well, we would like to point out that the absence of an asset bubble cannot be taken as the evidence that asset bubbles are absent. Simply because there was a near total absence of bubbles right before the subprime bust. And in the crisis before that. And also in the crisis before the crisis that happened before the subprime bust. Well, the point is simple. It would be dangerous to assume that the current stability would extend well into the future. All we know is that the exact same medicines that caused the previous crisis are being used this time as well. And we would rather listen to history than Ben Bernanke. Therefore, the idea is to not get carried away by Bernanke's rhetoric. And start taking adequate measures.

We know it is questions like these on QE and many other global & domestic economic policies that bother you the most while investing. In order to answer them and many more we have now started accepting registrations for The Equitymaster Conference 2014. With Mr Ajit Dayal being the keynote speaker and the theme being 'Beyond Uncertainty' we are looking forward to an engaging session on 1st February 2014.

China's appetite for US debt seems to have increased. Indeed, as per an article in Moneynews, China's holdings of US treasuries increased by US$ 12.2 bn to a record US$ 1.3 trillion in November. At the same time, the dragon nation's foreign exchanges reserves have also swelled to a record of US$ 3.8 trillion at the end of December, largely led by capital inflows and intervention in the market to limit Yuan gains. Because it is the largest holder of US treasuries, China has not refrained in the past from criticizing the US Fed's loose monetary policy. The latter's move to keep printing money has questioned the status of the dollar as the world's reserve currency. And there have been debates of whether the Yuan will one day be able to assume this role. Not just that, the Fed's QE program has led to the country accumulating debt of massive proportions. Little wonder then that China, which is the biggest holder of this debt, worries about the US defaulting on its obligations.

Being a public sector enterprise in India is a bane. This is because these companies are often forced to bail out the government in times of a financial crisis. Many a times these deals are non-profitable and hamper the future plans of the saviour companies. Oil & Natural Gas (ONGC) and Oil India are the latest among companies that have been forced to shoulder the government's disinvestment target of Rs 400 bn for FY14. The two companies will be required to acquire 10% stake in Indian Oil Corporation (IOC). The move comes as the petroleum Ministry is against IOC shares being sold in the market at current low price levels. The block deal is likely to give a fresh lease of life to the government's divestment plans. But it is likely to adversely impact ONGC and Oil India, particularly as the two are reeling under the subsidy burden. According to ONGC, the mandatory stakes buy of about 5% at Rs 22 bn will result in a shortfall of Rs 40 bn in its capex plans for FY15. Reportedly, Oil India has cash reserves of Rs 80 bn to fund the stakes buy in IOC.

It's common knowledge now that job creation has not been a top priority of the government. Jobless growth has been a defining aspect of the UPA regime. The government has said that social security was of higher importance to them. But what happens when the jobs created are themselves not secure? According to a report by the International Labour Organisation (ILO), 85% of the 17 m formal jobs created in the 2009-10 to 2011-12 period do not have any kind of employment benefits or social security. This means that these jobs are informal in nature. Such jobs do not improve the livelihood of the people engaged in them. This certainly calls into question the government's tall claims that unemployment has come down over the last 10 years. Such reports make it clear that unless tough labor reforms are enforced, the nation faces a serious risk of wide-spread unemployment. This could result in social problems like rising criminal activity.

In the meanwhile Indian equity markets have extended their losses and are trading at day's low. At the time of writing, the benchmark BSE-Sensex was down by 142 points (-0.67%). IT and realty stocks were the biggest losers. All the Asian stocks were trading weak led by China and Japan. The European markets opened on a positive note.

04:50  Today's investing mantra
"You do not adequately protect yourself by being half awake when others are sleeping" - Warren Buffett
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7 Responses to "Will this really benefit minority shareholders?"


Jan 18, 2014

It is necessary to save the interest of minority share holders as their interests are often compromised in such transactions. While I was on a cos. board it was revealed that they were buying costly parts from a unit wholly owned by the CMD. This unit was located in the Co. compound and most of its manpower was on the Cos. rolls. Most of the power consumed was available to it free of cost from the main Co.



Jan 18, 2014

Atleast on major decisions involving say 10 % of sales , purchase or equity or any other appropriate measure, such decisions are to be vetted . In other cases , all share holders are to be informed about such a move


Dr. Arun Draviam

Jan 17, 2014

Just as Directors interested in any item of business coming up at a meeting of the Board are required to disclose their interest in a register kept for that purpose, the management may be asked to report in advance to the Board Members about the impending item of business at the Board Meeting. The independent Directors would then exercise due diligence. Also such cases should get reported in the annual report.
This should serve the purpose of protecting the minority interest as well as advance the cause of business which do require some amount of secrecy in a competitive business.



Jan 17, 2014

Minority shareholders will only hinder.The best course is that any directer having business interest should not participate when such matter is being discussed and decision taken in the Board Meeting.
Business must move.Suggestion is that the explaination can be put in the annual report for information of share holders.


rangan v

Jan 17, 2014

i welcome the decision it ought to be otherwise the way the things are going rogue promoters which now includes also professionals and even yesteryear professionals have all started swindling .

please study the case of igarashi motors where professional md and crompton greaves chief noharia togetehr held shares in holding co of listed co and deliberately made the listed co bleed and not declaring div and forming two companies in the same holding co and then merging and ultimately made the valuation of listed co same as holding co and md mukund took pref allotment for one crore conv debentures by selling the the shares in holding co and again black stone will merge the other co in the holding co and delist the company .all statutory authorites have been bribed .how can a md sell share in holding co and again take pref shares letter and spirit is not followed we minority share holders are helpless since these two professional act like goonda and nohria sold his ahres in holding co and bought shares in the same listed co .when the mater was reported to sebi nothing happened and as you know all had been bribed .for your kind information i took personal interstin removing the so called pcas system followed by bse and nse for last 9 moths and killed the turnover and we minority share holders were not able to sell or buy .i personally spoke to ministry and ministry people saw some sense and wrote to sebi
now sebi is really cheating the shareholders and alligned with corogue promoters rangan longterm



Jan 17, 2014

It is difficult to believe that the prior approval from minority shareholders will be a workable solution as such shareholders are very unlikely to take interest unless some of them seriously pursue such matters. In the long run it may get reduced to a formality without really benefitting the minority share holders as envisaged. Better ways could be thought of to achieve this objective.



Jan 17, 2014

I have some points to mention in case of LIC. First thing to consider is term plan provided by LIC they usually don't sell term plan but trap you in endowment plan. I will like to compare claim settlement ratio with respect to term Plan .

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