Do MNC's care about minority shareholders? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Do MNC's care about minority shareholders? 

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In this issue:
» Is this China's Bear Sterns moment?
» India's 2014 election spend, second only to US record campaign expenditure
» Abenomics is not working
» Global debt exceeds US $100 trillion
» ...and more!


00:00
 
The fact that MNCs have commanded premium valuations over their Indian counterparts is certainly quite well known. The premium, many investors argue, is simply because of the superior quality of these firms. However, a big hole has been bored across this argument in recent times. This is because the promoters of a lot of these MNCs have shown characteristics not in the best interest of minority shareholders.

There has been a spurt in multi-nationals opting to earn more from royalty than equity dividends from their Indian subsidiaries in the recent years. The increased royalty has made many minority and institutional shareholders angry as the net profit of the Indian company goes down substantially. It has also put serious doubts about corporate governance practices followed by MNC's.

Royalty is tied to revenues. The fact that royalty payments are taxed at lower levels than profits pushes MNCs to maximise revenues rather than profits in India. For example, a whopping 94% of Suzuki's returns from Maruti Suzuki in FY13 came in the form of royalty. The corresponding ratio was 78% in the case of ABB, 59.4% for GlaxoSmithkline Consumer and 92% for Cadbury India.

So how can Indian minority shareholders prevent this trend of transfer of economic value? The answer is that it is very difficult if not impossible. There are many ways to ensure that the parent MNC gets a larger slice of the Indian company's profits. Royalty, transfer pricing (in inputs and outputs), transfer of brand to another firm, R & D funded by the Indian unit for benefits to world-wide company are some of the methods to ensure the parent MNC gets more returns than the minority shareholders.

Another major concern is the role of the Board of these companies as the sole authority to approve such increases in royalty payments, with minority shareholders having no say in such matters. There is an urgent need for independent directors on Indian boards to play a larger role in reviewing and approving related party transactions like royalties. Currently, it is not clear whether the directors seek any inputs or question the reasons for the increased royalty payments in such companies. As a good corporate governance practice, companies should put royalty payments for vote at shareholder meetings, which should be passed by a majority of the minority shareholders.

Thus, while many MNCs are great companies, they might not be great stocks given the misalignment in their interests and that of minority shareholders.

Should MNC's get away with poor corporate governance standards? Share your views in the in the Equitymaster Club. Or post your comments below.

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01:20  Chart of the day
 
Here is some news that commercial vehicles manufacturers may cheer; that of the rising truck rentals in the recent past. Given the high interest rates scenario coupled with the economic slowdown, commercial vehicle sales volumes have been falling for about 24 months now. And as per the management of a CV manufacturer, this is one of the worst slowdowns seen in many decades. However, with truck rentals rising since last year's festive season and a strong winter harvest, cargo movement has been improving.

As can be seen from today's Chart of the day, truck rentals rose by of 3% to 4% over a one month period in the key routes of the country. Will this rising trend in rentals do enough to cause a rebound in volumes? Well, it seems difficult to comment at the moment given the many other factors that drive CV volumes. Efforts have been made to propel the sales volumes - by the government and companies - in the form of lower duties and high discounts respectively; but these seem to have not done much to spur demand yet. As report by the Mint, the sales volumes have been on a decline despite a 3% to 4% hike in truck rentals in February, after a hike of 5% to 6% in January.

Rising truck rentals fail to lift sales


02:00
 
The business media is calling it China's Bear Stearns' moment! China's first domestic debt default is expected to force investors to re-asess the credit risks in the economy. It is even expected to set a chain reaction of defaults. But the fact is despite these similarities, China's first debt default is unlike the Bear Stearns bankruptcy in 2007. Bear Stearn's fall came as a shock to the global financial community. Whereas the debt bubble building up in China has been a concern for a while now.

Billionaire investors George Soros and Bill Gross have drawn parallels between the situation in China now and that in the US in the run-up to the 2008 financial crisis. The Chinese shadow banking system, undisclosed bad loans and cheap credit have together help build the case for biggest debt crisis in Asia. With the potential bond default by Chaori Solar Energy Science & Technology Co., not just China's bond yields but global risk appetite could get re-adjusted.

02:40
 
It is no secret that whenever there are elections in India, tons of money exchange hands. And 2014 is going to be no different. As per firstbiz.com, Indian politicians are expected to spend US$ 5 bn on campaigning for elections next month. To put this figure in perspective, this is second only to the most expensive US presidential campaign of all time! What more, it is also three times higher than the money spent in the last national poll in 2009.

Well, if you think this is absurd, we believe there's something even worse than this. And it is the assumption that the election spend will give the much needed boost to the economy. Yes, the money that will be injected into the economy will benefit businesses like media and consumer based firms. But is this good for the economy? Maybe if one takes into account only the benefits that lie in plain sight and that are visible. But what about the unseen effect? Please note that US$ 5 bn spent towards certain activities means the same amount cannot be spent somewhere else. Therefore we don't see any net benefit to the economy. As a matter of fact, election time spending could actually be diverting money from more productive purposes and thus making the economy worse off in the long run.

03:20
 
Does expanding the monetary base lead to an economic recovery? Not really. But central bankers around the world are in no mood to listen. Since the 2008 global crisis, the US Fed has been on a money printing spree in the hopes that more money in the hands of the people would induce them to spend more. This would then give the US economy the much needed boost. But that has hardly happened. What is more, Japan also decided to follow the same flawed plan. Indeed, the current Japanese PM Shinzo Abe unveiled 'Abenomics', which involves expanding the monetary base significantly. This is to stoke inflation and reverse the deflationary trend that has gripped the nation for so long.

But the results have been worse than better. Indeed, as reported on zerohedge.com, Japan has just reported its worst current account deficit on record (1.6 trillion yen) and its worst GDP growth since Abenomics was unveiled. Printing money only leads to the paper currency getting devalued. Now this may benefit exporters initially. But eventually, currency debasement does more harm than good as capital gets depleted and prices in general rise. Indeed, the US and Japan are examples of how quantitative easing does not work. But whether they will learn a lesson from this remains to be seen.

04:00
 
Let us ask you a simple question: If there has been a financial crisis because of excess debt, what should your solution be? Common sense would say that the real solution lies in reducing the debt burden. But what have policy makers across the globe done in the aftermath of the financial crisis and the ensuing recession? They have done just the opposite. To solve a debt problem, they took on even more debt. Consider these statistics reported by Livemint. Between mid-2007 and mid-2013, the total quantum of global debt increased from US$ 70 trillion to US$ 100 trillion. That's a huge 40% jump!

In our view, policy makers have done nothing to address the real problems plaguing the global economy. Their monetary and fiscal initiatives have been largely aimed at hiding the symptoms instead of curing the root problem. But such short term fixes have huge long term costs. The eventual crisis, whenever it strikes, will be much bigger and more devastating than the one we saw in the previous decade.

04:35
 
In the meanwhile Indian stock markets slipped in the red. At the time of writing, the benchmark BSE Sensex was down by 52 points (-0.2%). IT and metal stocks were the biggest losers. All the Asian stock markets were trading lower led by China and Hong Kong.

04:55  Today's investing mantra
"During the Gold Rush, most would-be miners lost money, but people who sold them picks, shovels, tents and blue-jeans made a nice profit."- Peter Lynch
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5 Responses to "Do MNC's care about minority shareholders?"

Philip

Mar 11, 2014

MNC's bribe key personnel in Finance Ministry, SEBI, State-level Authorities since long to maximize their take-away at the cost of all like the HUL history, etc., despite minority shareholders were in an advantageous situation as compared to the dirty practices of other Indian Companies like the fate of Reliance Petroleum Shareholders and the way their shares were snatched away by Promoters to become top Indian billionaires. Lately, MNC's increased their stake, which made their shares unattractive to all others, except them. These are the reasons of making genuine small investors in India the losers of their hard-earned money and the purpose of them being born in this world as well.

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sarabjeet

Mar 11, 2014

Shareholders are to share profits based on the number of shares they hold. if mnc wish to maximise their profit they increase their share holding upto max of 75% and some even delist and become fully owned entity so I have not understood the logic of royalty payment on sales Does that mean a loss making mnc with good sales revenue can siphon off cash to the parent under the garb of royalty. Someone please throw some light on the subject.I think all shareholders must be treated uniformly based on the strength of their holding.Regulators please stop such manipulation.No one is forcing mnc to go public or do business in India or introduce new products.The strength of thier brands or innovative prducts is reflected in the profits they make and their entitlement should be based on their shareholding only

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Manu Virmani

Mar 10, 2014

Why are we talking of Corporate Governance of MNCs only? What about Indian firms where holding company shares were given to Indian shareholders to comply with regulations then prevalent. Now the promoters are using every trick in the book to get these shares back. A glaring example is Reliance Enterprises Ltd which consolidated shares, gave warrants, preference shares and then merged into Farm Enterprises Ltd, a company a tiny fraction of its size, just to wipe out the trail. Faced with a backlash from minority shareholders, FEL has shifted its corporate office to a remote location where no minority shareholders will reach to challenge the promoters.
So let us set our own house in order before we want to reign in MNCs.

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A.V.Ramaswamy

Mar 10, 2014

In my opinion election brings out un accounted money. The unaccounted money gets circulated and kick starts certain sectors of the economy

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Vishwa Nath Ghei

Mar 10, 2014

I agree with the views expresses regarding royalty vs dividend in case of MNC's which is unjust to the shareholders. I would suggest that the dividend and royalty should form a definite percentage of profits, thus if royalty is 20% dividend payout should also be 20%.
This is only for illustration and percentages should be determined so as to properly rerward the shareholders,both majority and minority.

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