Maruti Suzuki Feb 2014. India
Top fund houses in India acting as Custodians of retail investors' funds have jointly questioned the decision taken by a Maruti Suzuki. The plan of the company is to have Japanese parent Suzuki take over the plant at Vitthalapur, produce cars and sell them to Maruti
However, experts also admit that in many cases, the minority shareholders can do little except to dump the shares of the company. Indeed, this is what is happening to Maruti too. "We redeemed some of our holding in Maruti a couple of weeks after the announcement, in late-January and early February," says a fund manager. "However, we are still holding on to some shares till more clarity emerges." Mutual fund brokers say that fund managers are ready to sell Maruti shares as there is no confidence that the company will review the decision on the back of shareholders' feedback.
From January 8, 2014, when it quoted at Rs 1,839.15, the Maruti stock dipped to Rs 1,563.2 on January 28. It closed at Rs 1,581.75 on March 3. Between January 8 and March 3, the stock lost almost 14 per cent; investors have lost as much as Rs 5,000 crore in market capitalisation.
But dumping stock isn't an efficient strategy either, says J N Gupta, founder and managing director of another proxy advisory firm, Stakeholders Empowerment Services. This can be effective only in a system that has high standards of corporate governance. In the Indian market, governance is an issue that crops up regularly.
When investors dump the stock because of perceived governance issues, it can actually hurt investors. There is a decrease in the number of companies that are seen as investment-worthy. As a consequence, all investors chase the same limited number of companies, causing volatility and increase in share prices. The increased demand and higher prices drive up price-to-earnings (PE) ratio of the stock, increasing risk and reducing returns on investment. This makes the markets unattractive for investors.
On the other hand, if the investors engage with the companies, governance standards will improve and the pool of companies worthy of investment becomes enlarged. This will lead to a reduction in risk, increase returns, reduce volatility and improve the confidence of investors. "Participation by investors in company meetings and engaging with promoters and management is, for these reasons, a must," says Gupta. Anil Harish of legal firm DM Harish & Company advises shareholders to either "take part in the voting on the resolutions proposed by a company or raise questions and apprise the promoters of their concerns in annual general meetings".
The general acquiescence of mutual funds in boardrooms is telling - as the InGovern figures show, they abstained from voting on 13,037 resolutions in 2013. This may have been the reason why the Securities and Exchange Board of India, or Sebi, is said to be exploring the possibility of creating a platform for non-controlling shareholders. (Non-controlling shareholders are individual or institutional stakeholders who are neither promoters nor have board representation.) This will help to protect the interests of minority shareholders and improve corporate governance.
Till such a time as such platforms and measures are adopted, minority shareholders may have little leverage against corporate decisions, to the disadvantage of retail investors. The fact that mutual fund investors in Maruti are disposing of their stocks seems to indicate that the protest of the sort they carried out may not yield much dividend, at least at this point of time.
Zee Entertainment Sep 2021
Zee Entertainment's largest
shareholders, Invesco Developing Markets Fund and OFI Global China Fund LLC,
have called an extraordinary general meeting (EGM) seeking the removal of CEO
Developing Markets Fund and OFI Global China Fund LLC, which together hold
17.88 percent of the total paid-up share capital of the company, have sought to
appoint six new independent directors.
Zee likely to see a change in management, will it spell good news for the media
to analyst Karan Taurani, Senior Vice-President, Elara Capital, new management
will mean a new strategy for the company, which is need of the hour.
Institutional Equities too has put out a note saying that this “development
calls for a valuation re-rating.” It has upgraded its recommendation on the
stock to buy from ‘reduce’ earlier.
brokerage has pointed out three scenarios which can play out.
The minority shareholders could play a more meaningful role in companies once the Companies Bill, 2012 is renacted to replace the half-century-old Companies Act, 1956. The Bill incorporates some sweeping changes related to minority shareholders.
Board representation: The new Bill mandates representation in the board for minority investors. Currently, any appointment of a director to represent the small investors is at the discretion of the company. It also says that at least one-third of the total number of directors in listed companies should be independent directors. (An independent director is a person who is not related to the promoters or other members of the company). Having independent directors may not be a proven method of deterring malpractices, yet could ensure greater accountability. The new Bill also warrants that in case of a company with more than 5,000 members, a shareholders' meeting should have the personal attendance of at least 30 members, failing which such a meeting should be adjourned.
Class-action suit: The Bill has a provision for class-action suit to allow shareholders to seek damages from the company and its directors for any fraudulent act. Shareholders will also be able to seek damages from auditors and audit firms in case of mis-statement of facts.
Exit option: The new Bill says that if a company has funds remaining unused after being raised in an initial public offer and wants to change the objectives for which the funds were raised, it has to provide an exit opportunity to shareholders who do not support such a step. It also decrees that such an exit should be offered at a price specified by Sebi to help shareholders move out at a reasonable price. This is of special significance for stocks that plunge below offer price soon after listing.
Protection for whistleblowers: Under the new Bill, an independent director of a company or any employee who brings a company's malpractices to light will be protected from unfair treatment by the management. The new legislation requires all listed companies to establish in addition a mechanism through which employees can report to the chairperson of the audit committee their apprehensions about the conduct of the business, its accounting methods or any other aspects of business. The companies have to provide details of such a system on their website.
Insider trading: The new Bill prohibits insiders of a company from trading directly or indirectly in shares both in the cash and futures market. Any person who violates the clause will face a cash fine or imprisonment or both.
Fund house officials, who did not want to be named, said that they will now approach Sebi to address their concerns. Seven mutual funds including ICICI Asset Management Company, Reliance Asset Management Company UTI, HDFC and SBI Asset Management companies had recently written to the Maruti Suzuki's management, saying that the proposed move was not fair and not in the interest of local shareholders. They said that it will lead to erosion in the company's value.
Reflecting the concerns of investors, the Maruti stock lost 4.5% to close at Rs 1,586, a share on the BSE on Friday, the lowest close in one month. The market cap of India's biggest car maker has lost Rs 7,700 crore since January. The stock is likely to be under pressure as analysts continue to debate on the mark-up percentage that the manufacturing entity will keep to maintain a robust operational performance.
While an earlier notification said that Maruti was expected to bear only the cost of production and depreciation expenses of the Gujarat plant, the new clause which provides for deploying funds generated through the Gujarat plant to fund Suzuki's capital expenditure has added another layer of invisible costs. The company's clarification on Thursday has caused more dismay and confusion among investors than its original intention to explain and simplify the new structure, fund managers and analysts said. The most disruptive element from a Maruti shareholder's perspective would be the percentage of margins to be ploughed back to the Gujarat plant to fund incremental capital expenditure requirement for the car maker.
Among the three sources of financing, the capital expenditure of the Gujarat plant includes the mark-up levied on Maruti Suzuki. It is negative on two counts. Firstly, investors did not reckon any mark-up to be included in the transfer pricing earlier. Secondly, it only factored the cost of production and depreciation to be charged to Maruti Suzuki. The inclusion of mark-up now implies that vehicles made at Gujarat plant will have lower margin then the existing facility in Haryana. Thus, higher the amount beyond 33% of net surplus, it would lower margins for Maruti. The company's statement did not elaborate on the how the markup would be calculated.
A CLSA note by analysts Abhijeet Naik & Nitij Mangal after the clarification was issued to the stock exchanges said that if incremental capital expenditure requirement in Gujarat over FY20-24 is split 50-50 between Suzuki an Maruti, it would imply that the Gujarat plant would need to charge 4% of revenue as mark-up on vehicles on Maruti over and above the depreciation charges. In this scenario, the margins accruing from vehicles produced in the Gujarat plant would be on an average 6% lower than the Haryana plant. Even the clarification on the transfer of assets in Gujarat at fair value to Maruti after 15 years, if the contract is not renewed, will add to investor concerns, given that it would be construed as an indirect route to increase the holding in the company. This instance could be quite similar to what eventually happened in Suzuki Powertrain in June 2012, which resulted in the Japanese parent's shareholding going up by 2%.
The statement has also been silent on two critical issues. One, what would happen in case demand is lower than production. What would be critical in such a scenario is clarity on which of its subsidiaries will bear the burden of reducing production. Secondly, determining the precedence of capacity utilisation and the vehicle models to be manufactured from which plant will be another moot point to ponder over.
The basic question still remains unanswered: What merits the setting up of a new plant under the aegis of Suzuki considering that Maruti has strong cash surplus. Is there a real advantage, when it appears that most officials of the new entity are expected to be drawn from Maruti, especially when even the vendor sourcing would be done by the Indian entity.
Jefferies analyst Govindarajan Chellappa and Rajasa, in a note written on Friday, said that "investors worried about Maruti's independence today. This is hardly reassuring. We wonder why this structure is needed in the first place. If Suzuki has excess cash on its balance sheet which it wants to utilise to help Maruti, there are other cleaner ways to extend a loan or give one-year credit on royalty".
Stock Analysts turn as Activists
Cautious investors have new friends — analysts from brokerages. Mainstream brokerage analysts, once happy writing about the rosy picture of the India growth story, are venturing into some not-so-clean areas of corporate India.
While companies at the receiving end have either ignored or rubbished them, such reports have gained momentum.
In a space of a few days, at least five companies from diverse sectors have faced the wrath of brokerage analysts, who questioned their accounting practices, utilisation of cash and other governance-related issues. In a few cases, they even downgraded the company in question to a “sell”.
|ANALYSTS ON THE FRONT FOOT
|Companies rubbished reports in all cases
Towards the end of May, Portugese broker Espirito Santo slammed Biocon and Educomp Solutions. In Biocon’s case, the accounting treatment of a couple of deals was questioned, while Educomp was accused of certain conflicts of interest in the appointment of auditors.
Even Sensex firms such as mortgage lender HDFC and IT major Infosys have not been spared. Earlier this month, Macquarie Securities downgraded HDFC on charges of dodgy accounting practices — charges the company trashed. Infosys’ Rs 20,000-crore cash drew concerns from analysts at Kotak, Motilal and Barclays.
While scams and scandals over the past few years, beginning with the Satyam Computer scandal, have sensitised investors to such issues, over the past year the income stream of brokerages has seen a shift from the traditional corporate to investors, say analysts.
“In tough market conditions, only the good and clean companies can survive. With public issues drying up, equity research has become the bread and butter of brokerages. What is keeping brokerages afloat are the investors, who are also buying their research,” said one.
Saurabh Mukherjea of Ambit claims to be among the earliest to spot this broader drift towards corporate governance a while ago. Rightly so, because Mukherjea had started the India practice of the UK-based Noble as its research head. As early as 2009, Noble had published a report on creative accounting practices and promoter tricks such as “pump and dump” and “blab and grab” soon after the Satyam and Pyramid Saimira scandals.
Noble was later bought by Execution and became Execution Noble. In 2010, Execution Noble was acquired by Espirito Santo. While Mukherjea moved to Ambit Capital, some of his team members stayed back.
Espirito Santo says it has “benchmarked reporting standards in India versus developed markets and found several areas where reporting and corporate governance can be improved.”
Both Espirito and Ambit have been rating companies on corporate governance and accounting practices for a while. The Canada-based Veritas, which has come up with occasional, sensational reports, has been routinely criticised for allegedly one-sided views.
Though most companies routinely rubbish or ignore them, some experts say they contribute to the diversity of opinion in the markets, which even regulators prefer. Recently, the regulator itself set up a forensic accounting cell to monitor accounting practices.
Some brokers like Nirmal Bang have gone beyond financials and research reports by arranging for investors to talk to the union leaders of Maruti and Arvind facing labour trouble. Rahul Arora, CEO, institutional equities, Nirmal Bang, said, “We have reached a stage where people want to know every side to each story.”
Varatharajan S of ICICI Securities, SVP and head of research, said, “Companies have always been rated (by the market) on their disclosure level. This wasn’t as talked about as now, possibly because in the past it was largely with relatively small companies.”
N Sundaresha Subramanian & Malini Bhupta June 21, 2012 Business Standard
Examples of some SEC Comments Related to Goodwill