'Sweetheart deals' not for only promoters anymore - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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'Sweetheart deals' not for only promoters anymore 

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In this issue:
» China shorts are wrong, says Rogers
» Bank of America's settlement is too little, too late
» Gold and silver prices could fall in near term, says Faber
» Road developers land into another trouble
» ...and more!

----------------------------- A Good Time To Sell Bad Stocks -----------------------------

It's never too late to get rid of 'bad stocks'.

After all, you never know how bad a market crash could get.

But what are these 'bad stocks'? How do you identify them?

For answers to these questions, and more, click here to read on...

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00:00
 
Pharma major Ranbaxy could be a shining example of the rapid strides the domestic pharmaceutical industry has taken. But the company doesn't quite cover itself with glory when it came to protecting the right of minority shareholders. It so happened that a few years back, the promoters of the company decided to sell their equity stake to a Japanese pharma major. And they had the chance to part with all their shares at a certain price. However, when it came to minority investors, the scene was slightly different. This group got to sell only 1 out of 3 shares that they held at the lofty price that promoters got. And the other two shares were left entirely to the vagaries of the market! This certainly goes to show how despite being equal owners in a company, the minority shareholders are often taken for a huge ride.

Mind you, Ranbaxy is not alone. Reports indicate that about 80% of the open offers between 2006 and 2010 were only for the mandatory minimum 20% of company's equity. Unfortunately, such deals had the full backing of the regulators. And public shareholder interests were routinely being compromised under the garb of promoting takeover activity. But perhaps not anymore. A committee responsible for recommendations under the new Takeover Code has gone on to recommend a 100% open offer rule. In other words, as per the committee, the minority shareholders should have 100% access to the deals made by promoters!

It has to be noted that this is just a recommendation and is yet to be approved by the SEBI board. Nonetheless, it is certainly a step in the right direction. It will not only call into question the seriousness of the acquirer but also do complete justice to the interests of the minority shareholders we believe. Thus, it is very important that such a rule sees the light of the day. It will be worth adding here that immediately after the Ranbaxy promoters cashing out, lot of skeletons started tumbling out. This led to a huge reduction in the company share price, causing even more heartburn for minority investors. Hence, all the more important that the new rule or a much improved avatar of the older one comes into play soon.

Do you think it is practically possible to implement this 100% rule? Share your views or you can also comment on our Facebook page.

01:21  Chart of the day
 
The Indian markets may be in the middle of a purple patch as of now. But if the data for inflows into India dedicated funds and ETFs is any indication, it has received the lowest amount of inflows of any BRIC nations during the last three months. As shown in the chart, while net inflows for India stood at just US$ 40 m for the last 3 months, the same for China stood at a whopping US$ 1.3 bn. Even Brazil and Russia received much higher inflows than India. However, we believe that this is just a temporary phenomenon and should the economic headwinds in India recede, the inflows should once again start looking up.

Source: LiveMint

01:57
 
Jim Rogers who is known as a maverick investor, commodities guru is also known to be extremely bullish on China. And he leaves no chance to rebuke his opponents. By opponents, we mean investors who have been bearish on China. Rogers boldly asserts that people who have been 'short' on China, have been proved wrong. Though he acknowledges the problems that the dragon economy is bound to face, he is confident enough that the country will make it through.

He cites the rise of US as the economic superpower for his argument. Despite all the recessions, depressions, the terrifying civil war and many other economic catastrophes during the early 20th century, the US economy was able to get through all of them. So he doesn't deny that China will have an easy ride. There will be major setbacks on the way. But as he eloquently puts it in his own words: "If I see serious problems in China, I'm not going to stop teaching my children Mandarin."

02:33
 
It seems that the transport ministry is all set to further intensify the cash flow crunch faced by the road developers. And this is via altering the timing related to disbursement of viability gap funding (VGF). It may be noted that VGF (40% of the project cost) is given by the government to road developers so that un-feasible projects become commercially viable.

As per the recent report tabled by Mr B K Chaturvedi, government had decided to make an upfront payment of VGF to the highway developers. However, now the government is planning to disburse half of the VGF amount during construction and other half once the project is commissioned.

A shift in stance to disburse VGF in two installments is likely to impact the cash flows of the road developers. Further, rising interest rate scenario will make the situation all the more difficult for them. While an upfront payment mechanism can ease these cash flow issues it may be noted that most of the road projects are facing obstacles related to land acquisition and environmental clearance. Hence, making an upfront payment meant that cash was not getting deployed. Thus, tweaking the law was appropriate to a certain extent. However, considering that credit is hard and expensive to come by timing was a bit inappropriate.

03:20
 
Remember the subprime crisis of 2007? It had caused the mayhem the effects of which are still visible in the recession that has gripped US. Well one of the banks that had issued the residential mortgage-backed securitization (RBMS) securities was Bank of America. And like all others, these securities also lost their value following the crisis. After a long legal tussle with the bondholders, Bank of America (BoA) has finally agreed to pay US$ 8.5 bn to settle the dues. The amount appears quite a lot but it is paltry when compared to the total amount outstanding. The total outstanding on the book was a whopping US$ 424 bn. The settlement would completely wipe out all of BoA's profits that it has made since 2008. To that extent the amount appears to be huge. But if one looks at the amount lost by the investors, the settlement appears to be too little. And even then it has come too late.

03:55
 
With the instability in global economic scenario yet to show any signs of cooling off, the direction of prices of gold and silver is undoubtedly northbound. Legendry commodity investor Dr Marc Faber confirms this view. However, like any other asset class, the upward movement in prices of the precious metals will not be without hiccups. In fact, if one is to go by Faber's prediction, very soon both gold and silver prices could be trailing the fall in other asset classes. At least for a temporary period. The logic for the contrarian movement though is very simple. The very reason that led to the debt accumulation and price bubbles in global economy is set to be withdrawn. After the withdrawal of QE2, the US Fed will be done with its loose monetary policies for the time being. And although QE 3 will certainly come; it will be a while before the Fed decides to print more dollars. At least not until asset prices have cooled off a bit. Hence, while Faber is not yet short on gold or silver; he advises caution to those wanting to buy the precious metals in the near term.

04:37
 
Meanwhile, indices in the Indian stock market have continued with their upward trend of recent times, with the BSE Sensex trading around 90 points higher at the time of writing. Heavyweights like RIL and SBI were seen driving most of the gains. Almost all the major Asian indices closed strong today whereas Europe too has opened on a strong note.

04:53  Today's investing mantra
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." - Warren Buffet
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11 Responses to "'Sweetheart deals' not for only promoters anymore"

n v subramanian

Jul 4, 2011

The 100% open offer rule is practical fair and needs to be implemented immediately

Like 

Ratnakar

Jul 1, 2011

One needs to study how many non-promoter group shareholders own 5% or less of the shares in a company. May be this could be 10% or 25%. Based on this study SEBi could provide that all such shares should be mandatorily offered to be acquired. This should be in addition to 20% offer for the balance shares. This will fully take care of the minority holdings instead of making 100% offer.

Like 

d p fernandez

Jul 1, 2011

It is not only practical but essential to ensure transparency in dealings of promoters who are out to make a killing as and when the opportunity arises. This will ensure professionalism in corporate governance on the one hand and expose unscrupulous accounting and audit processes on the other.

Like 

C K Vaidya

Jun 30, 2011

I recall having read that the promoters of Ranbaxy also received huge amounts as non-compete fees. So, even if SEBI approves the proposal to make 100% offer mandatory, people would find ways to circumvent it one way or other.
Investors have to choose companies with track record of good governance, fairness to avoid being left high and dry in such deals. The Law can only go thus far.

Like 

Subaiah

Jun 30, 2011

I Agree, There is no reason why minority shareholders, should get less. If there is a way by which minority shareholders can make their opinion known to the SEBI, we should do it

Like 

Anupam Garg

Jun 30, 2011

the news really touched my heart, so can't resist myself 4m commenting...sweetheart deal for promoters often becomes heartache for minority investors like me...i just can't understand the logic (if any) behind regulator's continuation of this stupidity...u ask if its practically possible...i ask is this big nexus ever going to allow it to make it possible...both the sellers and buyers hav their personal interests in which my interests just don't fit in...the regulator has been doing a shoddy job so far & i don't expect it to do anything rational in near or long future...the problems are known & can b easily worked upon...but instead of brainwashing itself 4m greedy demands of corporates, will the regulator listen to investor...as rightly stated by agnel, y wait 4 more heartache, the right call 4 me is to exit completely, isn't it?

Like 

Dilip Coulagi

Jun 30, 2011

Cheating the minority shareholders is a game everyone plays in India. At the top are the MNCs who drain the Indian subsidiaries of funds under any garb, like fees and royalties. Next comes the government, who cheat minority shareholders by making the company bear some burden not of their own making, like oil subsidies etc. The Govt's hands are not clean and to expect it to bring forth rules against such cheating (that's what it is) is futile, unless there is class action in a court or enough agitation to force them.

Like 

Sthithapragnja

Jun 30, 2011

Eq.Master Team,
After going through the above article and in response to the question as above(Sweetheart deals not for ONLY PROMOTERS any more ??)I may in all humility fortifed with abundant ignorance observe as under :
I am reminded of a real incident that took place some 2 decaes ago: I had to get some time-bounbd report ready for submission for which I had to engage the services of the stenographer by resorting to overtime work for him. The O T Work got him some bounty of allowances for which he had to pay income tax. He approached me and requeted me to allot some more OT work so that he will be able to pay IT therefrom !!

Then I quoted an adage " YOU FELLOW, FOR EATING SUGARCANE you want labour charges as well ??
"

The Promoters of Companies who follow such a policy of higher value for their own shares and a much lower value for the Minority retail investors' shares,seem to be following the example of Eating SUGARCANE AND GETTING LABOUR CHARGES FOR EATING IT ALSO PAID TO THEM ??

I hasten to conclude !!

Like 

K.J.Poulose

Jun 30, 2011

100% open offer rule is the only way the interest of minority shareholders can be protected. The million dollar question is, will SEBI Board approve it. The hawks of Indian industry are already at SEBI pesuading them not to accept the recommendation -- their justification, it will place M&A activities in jeopardy for want of funds to take over 100%. In other words, let us make merry and let the minority shareholders go to hell. If the regulators are not shedding crocodile tears for the minority shareholders and are really serious to protect the minority shareholders' interest, they should bring in regulations which stipulate that promoters can only sell their shares after giving the first option to the minority shareholders to fully exit at the negotiated price. If this cannot be achieved during the rule of a 100% honest and incorruptible PM like Dr.Manmohan Singh, the minority shareholders of Indian companies are doomed for ever, because, unfortunately, for the majority of the captains of Indian Industry, nothing but their own personal gain matters.

Like 

Dinyar Edulji

Jun 30, 2011

Yes, it is possible. But, the promoters and acquirers will go to any lengths to see that the minority shareholders do not get their due. They will make a deal at a lower price to be paid to the promoters in India than the actual deal price which will be much higher. This difference will be settled by them in tax free havens so they will get their value plus avoid the long term capital gain tax.

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