Case studies presented on,
Need for shareholder activism in India!
Article published as on Monday, 15th
June, 2020 at 10:00 a.m.
Q1) how do companies defraud the investors with
such an ease? Case studies on this topic.
Q2) what are the some of the case studies
reflecting shareholder activism in India
Q3) how to find reliable companies with honest management,
and transparent corporate governance?
Today I want to present some of the case studies relating to our initiative
aiming to bring a positive change in corporate governance of listed companies.
Let’s
discuss the first question asked above -
The need for shareholder activism and small
shareholder director arises simply because of frauds and scams done by
promoters.
To avoid such scenario one must know the intention,
the nature and behaviour of the promoters...
Minority shareholders invest looking onto the
business capabilities, they rarely have time to meet management of each and
every company and understand th
eir nature.
eir nature.
A case study
on how do companies defraud investors?
I once casually talked with an investor named Mr. Anil,
He said he is invested in:
1) Shri aster
silicate ltd - he
explained to me about the company, that it came with an IPO in 2010, it was
managed by a couple, who had both of them graduated from IIM.
Everything
was fine for first few years, this was regarded as Second Best Company after Tata
chemicals in Gujarat, and its products were in such a demand, that JM Hoover a
company in USA instructed company that whatever production will be done will be
bought by the JM hoover company for sure. So it had a product which was in such
a demand so they had to run their plants 24/7 such was the condition.
After few years
suddenly on one day news came out that the couples were missing/absconding and
all of their plants and factories were locked from that day onwards.
Later in
2017 one by one all the directors and KMP resigned by May of 2017 trading had
stopped in the shares and value remaining was around 1.28 rupees from the IPO
price of 115 + in 2010.
Then I researched whether company is into insolvency or not?
It was admitted into insolvency and bankruptcy,
On October of 2018 after a complaint by their
employee who worked as an accountant, he was not paid and to recover his dues
he filled case against the company and it was admitted under insolvency and bankruptcy.
And another such company:
2) Resurgere
mines and minerals India limited. Had a
similar story of launching IPO, They had a solid business in mining, one day
promoters were missing and now this company is also under insolvency process...
One thing we might know that Mr. Anil knew so much
about the business, he did his study about the management of Shri aster
silicate that they are IIM graduates
, he studied the product and business model, and did all his due diligence...
Yet his equity shares will be worth nothing as both
the companies are into insolvency...
This is very sad thing and has happened to many
small investors in many such fraudulent companies. Few examples are
Sterling
biotech (assumptions are that loan fraud is larger
than PNB, estimated around 15,000 crores, click
here to read the source)
Elder
pharma (bribery corruption and loan default)
Plethico
pharma (frauds and default in repayment to FD holders)
Helios
and Matheson (H&M - accounting frauds and non-payment to FD
holders now under liquidation)
First
leasing company of India (yes it’s a company name- now under liquidation for
bank frauds.)
Ankur
drugs and pharma (under liquidation, business failure mysteriously)
Tulip
telecom (mismanagement and insolvency due to excess debt)
Varun
industries (2500 crores wilful defaulters)
Kingfisher
airlines (biggest loan Defaulter Company at its time)
(All these companies have been delisted)
The shareholder also do not protest against such wrongdoings,
as they are normally salaried people and have to concentrate on their jobs,
another thing is they are unorganised and not aware of course of actions to
take against the company, such as sec.245 – class action suits.
Answering to
the second question.
There is limited case studies as there has not been
any such major movement in the area of shareholder activism in India and this
is one the reason why fraudulent companies and promoters still prevail even
after so much policy making by SEBI and other Agencies.
What has
happened in the past and present is:
Whenever minority shareholder differ from the
policy and decision making of the company, the only option for them is to sell
the shares and go away as they did not have sufficient voice to be heard by
management.
The case of Unifi capital provided a ray of hope: let’s
understand the case
Unifi
capital v/s Alembic ltd.
Alembic limited is holding company of Alembic pharma.
And like most of the holding companies alembic
limited is also trading at a huge discount to the value of cash and investment
it has.
To unlock value Unifi wrote letters to Alembic
limited stating to take some steps regarding value unlocking.
In July 2017 Unifi capital finally prepared a draft
suggesting to appoint their vice president Murali Rajagopalachari as the small
shareholder director on the board of alembic ltd under the sec.151.
On 18th July the alembic published in newspaper an
additional item to be put on vote in AGM
'Appointment of Murali Rajagopalachari to the
office of director'
Now four days later Unifi capital wanted the item
to be considered only under sec.151 of
companies act. This requires a separate ballot voting and will allow only
small shareholder to vote and by a simple majority he can be appointed on the
board.
(Application was made under sec.151 specifically as
it only allowed small shareholders to vote, thus leaving no power in the hands
of promoters)
The board rejected their plea on the ground that
they have their personal interest and want to push their agenda on to the
board.
Is it also believed that they had 3% stake in
alembic ltd. (this was not verified)
They had considered writing the matter to SEBI and
moving to the NCLT (national company law tribunal) as the last resort for
getting justice.
This case was the first one when 1000 or more
minority shareholders gathered to nominate their representative on the board of
the company and sadly this was rejected.
(In my opinion they are a fund house and manage
shareholders fund, so if they are asking for some kind of value unlocking for
shareholders then it’s a very positive sign for all the shareholders.)
After that day there was no update on Unifi capital
and alembic limited case. Maybe they lost their hope of bringing a change.
Such incidents lead to a hope of revolutionary shareholder activism but it remains a dream
till date.
This incident also discourages anyone to seek their
rights from the company and encourages becoming silent spectator by letting
management do what it wants to.
Other case
studies relating to minority shareholder
Florintree
v/s PTC India.
In the same year 2017, in September.
Florintree wanted their representative on the board
of PTC India limited, under sec.160 which allows anyone to nominate themselves
and get elected through democracy.
The resolution was added into the list and finally
on the result of voting all resolution passed except for this resolution as
promoter themselves voted against this resolution.
Voted against the resolution which recommended Mathew
Cyriac as their nominee director.
And the thing to wonder is that PTC is a PSU,
government would now have even less than 20% stake yet this is considered as a
PSU. This send out a signal that even government companies don’t want minority
director and voted against their appointment.
These two
are the main case studies which reflects that
1) In the case of PTC India nomination of Mathew Cyriac
for director under sec.160, the promoter voted against in the resolution and
the attempt failed.
2) In the case of alembic limited as the request
for application was made under sec.151 the board and promoter knew they could
not use their huge voting power to stop the appointment of Murali Rajagopalachari,
hence before putting resolution to vote, the board rejected the resolution
preventing any further voting procedure.
Here in the example, Government Company as well as
private company, election under sec.160 and election under sec.151 is
covered.
Yet no
attempts were successful.
As explained until there are some solid shareholder
movements we have to be cautious while investing in companies with our main
focus on quality of management above everything.
Answer to
the third question:
you cant change the management but you can chose a reliable management.
How to find reliable companies with honest
management.
My basic understanding through my learning and
experience is that most of the scams and frauds are done in promoter led or
family run business....
Whenever there is professional management in place,
there are business failures most of the times and not frauds.
Even in family run business look for companies
encouraging professionalism and in which promoters are willing to step down and
let professionals handle the business...
One of the best example is Infosys: all original promoters have stepped down and have
allowed the professionals to run the business.
(IIAS study has regarded Infosys in top 10 with
regards to corporate governance)
Another example is TTK prestige where also company is transformed into professionally
Run Company.
Mahindra
& Mahindra is another
example in the list and many more.
These companies are to represent that with more
professionals the corporate governance improves, but still there is possibility
of business failure, but again professionals will try their best to overcome
those challenges.
Another way
to find reliable companies with honest management is by reading annual reports!
There is an important section called ‘management discussion and analysis’ which
gives an overview of the state of business and another important section is letter from chairman/managing director.
These letters are mostly forward looking statements
yet one can know the vision of the management and whether they are fulfilling their
vision or just making hallow statements and promises....
To highlight its importance I will share an
incidence...
I was reading Bata
India FY17 annual report just casually and read that they now want to
focus on women and child wear segments also along with their traditional men’s footwear.
After few months I saw a new TV. Commercial of
Kriti Sanon promoting the Bata red label shoe collection
Then I remembered reading something about women’s
shoe by Bata, in their annual report...
This proves the capability and delivering on
statements by the management of Bata...
(I don’t hold Bata shares it is an MNC, but every
year along with their annual report they also send a 20% discount coupon
to their shareholders - happy investors and happy customers.)
On the other side I clearly remember PC jeweller. Once considered only
next to titan.
Pc jeweller in one of their presentation in 2018
mentioned plans to reduce their debts.
And after a year what I see is that they haven’t
made ANY efforts to do so.
On the contrary they posted a mysterious 500 crores
loss due to discounting on bills receivable from some business in Dubai...
This obvious to the shareholders was a red signal,
indicating some serious accounting frauds and hence avoid such companies.
And they even won’t disclose the name of the debtor
citing confidentiality clause.
By this method we can ascertain the track record of
management, how much they have kept true to their words, by reading letters to
shareholders and "management discussion and analysis" segment.
While doing our analysis we shall avoid taking
Printed words on their face value and dig deeper and inspect their past
commitments and promises and question ourselves have they delivered on their words?
Another
incidence:
Reliance
ADAG which is promoted by Anil Ambani, in his older statements had made big promises relating
to his business and after few years we see the condition, he failed to deliver
on promises made, investors who were already invested should at least stop
fresh investment in such companies and avoid the urge of averaging at lower
rates.
Don’t take
words from management on Face value!
Fun fact: this was found in Shri aster silicate
FY15 annual report.
(link
for annual report , page number 31)
Even they said they were working on corporate
governance, but it was put on annual report just for ‘decorational’ purposes.
There is a difference between reading printed words
and reading the nature of person....
To understand the nature of person, we need to
interact with them, be with them, this could be achieved through provision of
small shareholder director (SSD), for which investors need to be educated and
made aware of such provisions.
Conclusion:
1) Management can’t be trusted based solely on what
they present in annual reports and investor presentations
2) Companies with lower risk of frauds are MNC's and
companies which are usually professionally run.
3) A successful first step towards shareholder activism
would be to get a director appointed by minority shareholder on to the board,
this would mark a historical step for a future revolution in our Indian capital
markets.
So, what do
you think?
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