Thursday, November 29, 2007

Corporate Governance...? Mr.Damodaran, you must be kidding...

Remember Swaraj Paul…? The raider that stalked companies like Escorts and DCM in 1983…? It has indeed been the first such event that shook up the staid Indian promoters from their slumber, made them review their marginal holdings and think up defenses including issue of warrants.

Now Lord Paul’s then broker, Harish Bhasin is back in the game. He has taken the CLB route, alleging that the promoters of DCM Shriram Industries Ltd. are issuing warrants to themselves at (Rs.52) steep discounts without offering them to other shareholders. Each warrant entitles the holder to buy 3 equity shares. The advantage for the promoters is that they can just remit 10% of the price of the warrants and pay the rest over 18 months. If they find the share prices have zoomed, they will happily subscribe to the warrants at the earlier discounted price. ( Scope for raising debt to pay the remaining 90% by pledging the warrants that are in-the-money is easy, especially in these ultra liquidity times.) If they don’t, they just let the offer lapse. Is this corporate governance, Mr.SEBI chief…?

Mr.Bhasin, eyeing the huge land bank the company has at various locations, have challenged this and has come up with an Open offer to other shareholders (at Rs.70/-). This had prompted DCM promoters to react by raising the warrant prices (to Rs.90/-) by 75% at once (and extending subscription period by another 18 months, of course), meaning their still exists tremendous upside to the stock’s intrinsic value. Here's HB's latest counter offer (at Rs.120/-). The game is heating up... Given the fact that sugar industry is facing a mix of bad fortunes (supply glut, state administered prices, cane costs are higher than market price of sugar etc.), the stock prices have slipped a lot and what best time to shore up and consolidate? They know, bad times don’t last forever and for sugar, it's lasted long enough…

Dear Mr.Damodaran, if you are serious about enforcing corporate governance, let SEBI focus on the warrants game. That’s where there’s no transparency. The promoters issue warrants after passing a resolution u/s 81(1A) of the Companies Act, 1956 (notice that year…good lord !) which is a farce. Hardly 1% of the shareholders (in numbers) attend AGM and even postal ballots, nobody bothers to mail in. That’s clearly not working. I have a suggestion. Make it compulsory for warrant holders to pay up 50% of the issue price of warrants upfront and shrink the overlay period from 18 months to just 3 months. This would let in only serious players to take this route and will not permit share price arbitrage game.

Dear shareholders, I’ve been telling you guys to buy sugar stocks, now. Sugar business is cyclical and it’s on the cheap now. Most of the sugar mills carry large swathes of land that could be sold / developed in the current real estate boom. From hereon, I can see only upside for sugar industry since all things that can get worse, already has.
Warren Buffet said, when others are fearful, you be greedy. In sugar stocks, you've a good reason to be greedy. Buy it. Buy it all… It’s not lost on you, just yet… Why let only promoters or a takeover raiders to make a killing? It'll be too late once the raid is launched. Be there, before the event....Will ya...? (Full disclosure : I and my family hold KCP Sugar Industries shares).
[Update : Reader Dnyanesh has sent this link to an excellent article by Anil Singhvi on corporate governance. Thanks Dnyanesh.... Hat Tip !]


Dnyanesh said...

I think this excellent article by Anil Singhvi compliments the issue you have raised.
Anil probably has realised that if you can't beat 'em, join 'em. His firm Notz Stucki has subscribed to warrants issued by Camlin recently.

Anil has also gone on record that his firm will provide mgmt inputs and will be a passive investor. The pray why not a rights issue and benefit minority investors? If time taken is the excuse, SEBI should act and make the Rights issue as straightforward like the Follow On Public Issue guidelines recently issued.

Krish said...


Thanks for the link. Good article, nicely written. Coming from someone like Anil Singhvi, I guess SEBI and all others should seriously take note.

This anomaly has been brooding my mind for quite some time now, precisely for the reasons Anil has listed out in that article. But now that there also is a relatable context, I thought of chronicling it by way of a blog post.

"Why not a rights issue and benefit minority investors" you ask. Besides the concession of time overlay, acquisition of more than 5% of a company in a year will trigger the takeover code, that means public offer, resultant stock price spike-up, higher cost of acquisition etc.

If there's an easy way out for promoters, why wouldn't they take it...?