Tuesday, June 23, 2009

Mothers and Corporate Governance

How complicated can the RIL-RNRL dispute get? Very. Well, that’s what it looks like if you look at the arguments from both sides.

RIL’s legal team likes to make it seem like a business dispute between two companies and not a family affair, which I guess is right. RIL also feels that the High Court order has adverse financial implications for the company besides national implications and it gave an unfair advantage to the ADA group based on a family agreement in 2005. Besides, company sources have argued that the ruling, in a way, would override the government’s gas allocation and pricing policy. Then there is the scope for miscarriage of justice since RNRL will get gas at half the cost ($2.34 per mbtu) of what it costs ($4.65) for other gas buyers of RIL. So which way the dice is loaded ?
For RNRL, it's the MOU that's sacrosanct. Nothing more, nothing less. End of the argument.

Yeah, then there is the mother factor. Kokilaben is also drawn in to mediate in case the brothers get around to it. Given that both companies are widely held joint stock corporations where there are millions of other shareholders involved, how fair it is to leave business judgments to family members that have never held executive positions in the company or are not adequately trained or exposed (I mean first hand, not of the kind *I-had-been-at-the-dinner-table-with-my-husband-and-sons-as-they-discussed-business*) ? Is that good corporate governance leaving the fate of millions of shareholders to mother of just one among them?

Why not let mothers be mothers for a change? It’s not like wandering into the kitchen sniffing for hot Dhokla and Khandavi that Kokilaben will be happy to engage with all her heart and soul.

Tuesday, June 02, 2009

Allow listing of unsecured debt, but mark it "with recourse"

Somasekhar Sundaresan in Business Standard points to the area of ambiguity in SEBI’s latest concoction [SEBI (Issue and Listing of Debt Securities) Regulations, 2008 - (“Debt Regulations”) ] - whether every bond that is sought to be listed has to necessarily be secured to the extent of 100 per cent. He insists SEBI should clarify the issue since Regulation 17 calls for the issuer to simply make a disclosure of intention to create a charge or security and further under schedule 1 of the Regulations (prescribing the contents of the offer document) requires the offer document to contain a summary term sheet that includes “brief information pertaining to the “secured / unsecured” debt securities – meaning the Regulations also envisage issue of unsecured instruments as well.

But Merchant Bankers take the extreme path fearing SEBI reprimand. They advise the issuers that only Debt securities that are fully secured are only allowed to be listed. Quiz them more and they point to Regulation 26(6) that requires the issuer and merchant banker to “ensure that the security created to secure the debt securities is adequate to ensure 100 per cent asset cover for the debt securities.”

Sundaresan says it just means if the issuer is desirous of issuing fully secured instruments, then it has to be secured by assets to an extent not less than 100% of the issue size. Implying in the process, others that are intending to list unsecured debt are free to do so (as there are references to unsecured debt elsewhere in the Regulations and its schedules).

I am concerned. Should SEBI permit unsecured debt to be brought to public market where the participants are not so erudite? Will it not lead to emergence of con artists from the woodwork that will list everything including the toilet paper? Haven’t we learnt anything from the recent two trillion dollar global meltdown? Have we forgotten so quickly that it had its origins in the subprime ( unsecured, junk) bonds that got listed and recklessly palmed off by Wall Street swindlers ? Who has heard anything about a once venerated institution by name “Lehman Bros” lately? The CEO’s first name was “Dick” (Fuld) – incidentally.
I am no throwback and I certainly don’t believe listing of 100% secured debt would mean guaranteed repayment. Neither do I have any faith in swift realization of underlying security if the debt obligation is defaulted because enforcement of Indian laws isn’t so easy thro our overloaded Courts. But I have a great faith in the agility of the con men in our midst that will rise swiftly to the occasion and exploit a loophole. The expression “unsecured” is enough to make them sit up and take notice. And when their junk papers eventually get listed, they are safely absolved off all their liabilities since the risk is widely distributed [sometime later even credit derivatives (like credit default swaps) will also have to be allowed] and SEBI will gleefully point to the disclaimer that states “SEBI merely ensures disclosure and does not vouch for the soundness of the scheme” etc….. Next what – CDS, CLO, CDO, ABS on the doomed Wall Street lines? Just the way residential mortgages in the US became grist for quantitative portfolio management after they had been re-engineered into instruments that looked much like tradable bonds. The investment efficiencies generated large benefits for both investment banks and consumers but were quickly carried to dangerous extremes. Soon we will be forced to subscribe to the pretense that all of finance can be mathematized. Do that and the next credit bubble won’t be far behind.

By all means, allow unsecured debt to be listed. I am all for liquidity in the debt market. But do build in enough checks to make sure the it stays well within the repaying capacity of the company or at least block so much of its borrowing power from banks and other institutions to the extent to which the company has already geared its balance sheet debt. And most importantly, mark that listed debt "with recourse" – meaning in the event of a default, the issuer and it's founders/promoters will be liable to the holder (in due course) of the instrument and not just the primary allottee.