Escorts merger - sleight of hand...?

Kudos to investor activism in Escorts merger...

Let me elucidate it with an easier example.  Let's say I, you and 48 others own a company -XY Farms Ltd.  Imagine I and you hold 5% shares each and 48 others own the remaining 90%.  Some time later,  to help sell the products of the company, we set up a retail store - XY  Retail Pvt. Ltd -  in a nearby city, using the company funds.  In this case, XY Retail is a subsidiary of XY Farms ( Parent Co. or Holding Co.).  As such, I, you and 48 other shareholders have identical interests in both the companies.

A few years later, I and you feel that our shareholding in XY Farms Ltd. is only 10% put together and worry that if a few shareholders from the minority get together, they can throw us out of the management control using their collective voting power far in excess of 10% that I and you hold.. So the option before us is to buy out some of those shareholders and boost our stake in the company.  But what if nobody wants to sell..?

So we storm our brains and come up with an idea. Since XY Retail is a subsidiary of XY Farms, why keep both companies as distinct entities...?  Let's merge the two and run the business of XY Retail as a division of XY Farms instead of as a separate company, with a separate management.  It helps reduce  many functional overlaps in accounting, inventory, sales etc., that consume capital. 

All corporate actions should be seen in the light of how it helps increase the shareholder value.  Here since XY Retail is 100% owned by XY Farms, the parent company need not `pay' any consideration to merge it back with it. Only regulatory approvals need be obtained and accounting entries passed to validate the transaction.

Here is where Escorts Ltd., tried to play foul.  While it seeks to merge its 100% subsidiary with itself, it wants to allot shares as "consideration" to its subsidiary that will eventually merge with itself and cease to exist. And then it wants to transfer those shares (treasury stock) into some company owned Trust, controlled by Trustees that include CFO of the parent company.  This arrangement is a foul since it leaves out the minority shareholders (who are also part owners of the subsidiary and therefore entitled to the proportionate treasury stock) without any say on how to administer the treasury stock. 

Proxy advisory firm IIAS has called the bluff... Let's hope the institutions vote against this proposal in the interest of upholding shareholder democracy.

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 ?

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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.
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Was ICICI Venture CEO Ms.Renuka Ramnath dozing at Subhiksha Board meets?

India’s premier PE firm ICICI venture (I-Venture) with more than $2 billion fund size can’t be so naïve.

I-Venture CEO & MD, Renuka Ramnath says the management of flagging retail chain Subhiksha (in which the firm has a 23% stake and has the power to appoint majority directors in its Board) kept it in the dark regarding the goings on. (She was one of the Board members then). She goes on to add "As a responsible investor, despite being minority shareholders and not having management control, we are talking to all players concerned and trying to seek a possible solution which will be in the best interest of all, including the employees”.

Here is the punch line "We didn’t know what to trust and what was the real intention of the merger” (with a listed NBFC Blue Green Constructions with which Subhiksha sought to reverse merge for widening its shareholder base).

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Oh, really? A firm in which a leading PE firm has a 23% stake and the firm knows "nothing" about decisions as critical as a reverse merger? It was all over the media back in June, 2008 when Subhiksha acquired 40% stake in the little known listed entity Blue Green Constructions. The Board (in which I-Venture has majority) Meeting in which the acquisition was to be ratified was reportedly held on June 30, 2008 and then Ms.Ramnath didn’t seem to object.

The fact is, had the back door listing strategy worked well, I-Venture would have exited the firm lock, stock and barrel thro divesting its stake either in the open market or thro a secondary exit to other PE firms. The manner in which it “quietly divested” 10% stake for Rs.230 crore to Azim Premji’s PE arm Premji Invest back in September 2008. While I-Venture could dupe Azim Premji, it couldn't dupe the public investors since the merger didn't go thro.

Now why would a PE firm exits in a hurry if it wasn’t in control of the company and wasn’t aware of the murky goings on? Normally if there is a listing possibility, PE investors would rather wait for the market to discover the price. Even if one were to buy Ms.Ramnath’s argument – that Subhiksha did not submit audited accounts beyond March, 2007, it should have disclosed the fact to Mr.Premji which it clearly did not. I-Venture looked after its own interests, to hell with the company, co-investors or employees. But no one would blame the PE firm for that because it just cashed out on an opportunity. But you can’t excuse it if it says it was kept in the dark by the investee company management, despite wielding majority control of its board and in a company where it has a substantial 23% stake.

It’s a little too naïve – to expect the world to believe Ms.Ramnath. It’s ok if she chickened out fearing prosecution when legal notices (from unpaid vendors, employees, EPFO) started flying in. That's when she along with her colleague exited the Board of Subhiksha. But then it also means she wasn't exactly awake all the while at those Board Meetings leaving Subhiksha MD Mr.R.Subramonian to run the business as he did.

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After SATYAM-MAYTAS, it's HIRCO-HIRANANDANI

It's the scam season, no doubt... First came MADOFF that made-off with billions of $ of investor funds, then closer home it was SATYAM COMPUTERS being sought to be shortchanged by its founders currently holding 5.3% minority stake by exchanging their loss making businesses in lieu of huge cash in Satyam balance sheet. To hell with valuations, due diligence or even corporate governance.

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After SATYAM-MAYTAS fiasco, here's another; Hiranandani (Builders) attempts to take co-investors for a ride by opting for a merger with loss making family business HIRCO Developments with its AIM listed outfit HIRCO. The investors are irked because the decision is taken without undertaking appropriate valuation of the target, eerily similar to the Satyam deal that fell through because of shareholder revolt. In the Satyam deal, the promoters of SATYAM COMPUTERS (later found to be holding less than 6% stake) had decided to buyout their family concern MAYTAS infrastructure and MAYTAS properties both real estate businesses heavily in debt by using $1.6 billion cash in SATYAM's balance sheet. Later all the independent directors in its Board had to tender resignations owning up moral responsibility for their tacit concurrence by remaining passive during the Board meeting at which the issue was hush hushed.

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Why does the expression chutzpah come to my mind...?

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Art of getting independent directors to act

Why do independent directors discard independence? Protecting minority investors yield them nothing. That’s why.

If they dance with the founders/incumbent management, they get generous sitting fees, commissions, occasional foreign junkets, vacation homes and transport free for them and family. For ex-B School faculty and bureaucrats that deck up as independent directors (just to check the columns in the compliance sheets) these freeloads are incentive enough not to disturb the peace and quiet at Board Meetings.

Few have the courage to transcend political correctness (at Board level, read "Promoter Correctness") and strive for human righteousness. Character is doing the right thing when nobody's looking. There are too many people who think that the only thing that's right is to get by, and the only thing that's wrong is to get caught – like the independent directors in (A)SATYAM COMPUTERS recently realized. In the end, if you have integrity nothing else matters and if you don’t have it, nothing else matters as well. So why load up excess baggage?

To the regulators, I would say please don’t slap more laws. We have enough. Laws control the lesser man. Right conduct controls the greater one. Have the courage to blacklist independent directors when they fail. Deprive them of all their Board seats and disqualify them straightaway. Companies Act has provisions for disqualification of directors already. Go enforce them.

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Or better still, let the minority shareholders pool in and give them freebies :-)

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ASATYAM COMPUTERS ?

“Satyam” in Sanskrit and a host of Hindu Dravidian languages like (Tamil, Telugu, Kannada and Malayalam) means Truth / Honesty.

“Asatyam” means just the opposite.

With the investor backlash over the attempted skullduggery by its management (with just 8% stake) to bailout the slumping Raju family group (Satyam founders) concerns MAYTAS Infrastructure and MAYTAS Properties (MAYTAS incidentally is SATYAM spelt reverse) for $1.6 billion (that's all the cash in its balance sheet!) and the subsequent calling off, there seems to be a good case for renaming the company as ASATYAM Computers. It’s not its first attempt by the minority management to oppress other minority shareholders. The group is known for its several dubious pursuits committed with impunity earlier.

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Something is gotta' give

As I sat listening to that lilting Phil Collins number – "One more night...."



"Please give me one more night, give me one more night
One more night cos I can't wait forever
Give me just one more night, oh just one more night
Oh one more night cos I can't wait forever...."

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Something rhymed deep inside... A chime....?

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Yeah, got it! My friends working in I-banks have just one prayer these days - God, give us just one more bubble - like that famous Phil Collins song... First, some M&A deal stats –

No. of transactions - 663 in the H1-07 to 467 in H1-08, with a sharp slump in deal value dipping by over 40% from US$38.4 billion in H1-07 to US$21.4 billion in H1-08. The active sectors include Pharmaceuticals, IT&ITeS, Banking & Financial Services (BFSI) and Real Estate. The outbound investments accounted for US$ 8.2 billion of M&A activity spread over 96 deals.

Financing overseas acquisitions has been tougher owing to the global market conditions and high interest rates. The global crisis sprang from expanding credit squeeze, high oil prices and rising inflation and now they cause slowdown in M&A activity in H1-08.

Even the macro numbers aren’t giving room for hope. The Prime Minister’s Economic Advisory Council (EAC) has revised the growth rate down to 7.7% for 2008-09 from its earlier estimates of 8.5% (and last 4 year average of 8.9%). Rubbing salt in the wound, It also expects inflation to scale 13% soon. Takeaways –

Trade deficit is likely to widen to 10.4% of GDP in 2008-09 compared to 7.7% in 2007-08. Merchandise imports would grow to $332 billion, Exports would grow to $205 billion, leaving a deficit of $127 billion. Export growth could be $22.5% while import growth would be higher, thanks to high crude prices.

High oil import bill and a decline in capital flows are pushing current account deficit to an all-time high of 3.2% of GDP during 2008-09. The estimated deficit for the year is $41.5 billion. In Q1/Q2 of 2008-09, deficit could be over 4.5% of GDP. The estimated 3.2% current account deficit for 2008-09 is more than double the deficit of 1.5% in 2007-08. The only year when it crossed 3% was 1990-91 — when it touched 3.1%, as we were facing a major foreign exchange reserve crisis. The silver lining now is that forex reserves stand at over $300 billion — far above the comfort level.

Capital flows would decline to $71 billion in 2008-09, far lower than the previous year’s $108 billion. Despite the decline, the net addition to forex reserves would be $30 billion.

Now to fiscal mismanagement. The government comes down heavily on private sector for not being transparent about its currency losses. But when it comes to its own affairs, it sweeps a lot under the carpet – think off budget Oil / Fertilizer subsidy funded by bonds that pose serious risks to the extent they are unfunded in the budget. But then you can’t speak much about that.

Just hope something is gotta’ give! Another bubble...? I don't mind... ;)
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Unjust enrichment - ESOPs for nominee directors?

Has SEBI yielded to the pressures of IAS lobby? It seems likely.

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Financial Institutions (FI) and Banks that take direct exposure in companies nominate their representatives in the Board of the assisted companies to safeguard their investments. They ensure that no decisions affecting the interest of their employers or that as might jeopardize the return on their investments should be taken by the company boards. So to the company concerned, these people offer no strategic value. In reality, they just pocket the sitting fees and incessantly nag the company managements with requests for availing company guest houses (or shamelessly ask for hotel accommodation where no guest houses are available) for their family vacation or call for their cars for their family trips. At the board meetings, they are busy devouring the fried cashew nuts and feeding on anything that looks like food while the managements play havoc with the enterprise (declaring dividends even as the company is reeling under high cost debt, siphoning off company funds by way of unsecured inter-corporate loans to below investment grade (promoter) group companies at low interests, passing liberal executive remuneration resolutions, writing off personal expenses of directors). Remember, the appointment as nominee flows directly from their employment with the investor institution.

Now these nominees are being allowed entitlement for ESOPs from the companies where they are nominated. Here is a funny story of two LIC directors on the Board of L&T fighting it out :-)

Last year, there was a two-month face-off between LIC and GIC and their nominee directors, B P Deshmukh and Kranti Sinha, on the board of Larsen and Toubro (L&T) after the nominee-directors refused to return shares allotted to them by the construction major in spite of directions by both the institutions that its nominees should not accept any Esops. Sinha and Deshmukh held 20,000 and 30,000 L&T shares, the market price of which was Rs 3.5 crore and Rs 5 crore, respectively, at the time.

The two financial institutions moved the Bombay High Court to bar their nominee directors from dealing in these shares. Both directors lost their jobs on the L&T board. The matter was later settled out of court after the former directors returned their employee stock option shares to the company. After this, all financial institutions that hold equity stakes in various companies had written to them asking them not to issue Esops to their representatives to avoid a similar situation.

I have a few questions –

a) Aren’t nominees just what they are - employees of investor institutions? How can they be entitled to a perk that is available to the permanent employees and non-wholetime directors of companies even as their attendance at the board meetings are only to protect the interest of their employer?

b) Where does the loyalty of the nominee (post ESOPs) lie? To the management of the company that enriched him or to the PSU employer that pays him a piffling salary in comparison?

c) How can the employer expect the ESOP awarded nominee to protect their interests? Why would they go against the company that enriched them?

d) What strategic value could the nominees offer to the assisted company that belongs to an entirely different vertical? Let’s say an IDBI nominee (a banking professional) in the Board of a power company - can he ensure leakproof transmission and distribution of power? (Now don't tell me he could suggest low cost financing measures - we know how financially savvy they are; just take one look at earnings growth of their parent institution itself. You get the picture?

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Sleight of hand or indifference?

Ah, well there you have it. Companies reporting financial results in ways as are most convenient.

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Under the Indian laws, Companies prepare accounts for two different purposes under two different set of regulations. The one under Schedule VI of the Companies Act, 1956 for statutory purposes and shareholder review. Another is in compliance of the Income Tax Act, 1961 that is recognized by the Income Tax authorities. While the former lays emphasis on disclosure and shareholder information, the latter stresses on revenue recognition and tax compliance. Often there are divergences between the two because of which the financial results are often at a variance.

For example, Schedule VI of the Companies Act permitted companies to adjust the exchange gain/loss to the cost of fixed asset. So if a company bought a fixed asset for $10 (Rs 400) with a forex loan and suffered an exchange loss of say Rs 30, it could add this loss to the cost of the fixed cost (Rs 400 + 30). They get to claim depreciation (read tax savings) on that inflated cost of the asset as well.

And then there is the accounting standards prescribed by ICAI that falls somewhere between the two. ICAI AS-11 calls for recognition of this loss of Rs.30 by charging it to P&L account without adjusting the actual cost of the asset (which is eligible for depreciation). The existing treatment allowed companies that had foreign currency borrowing for acquisition of assets to inflate their assets position on account of adjustment of exchange differences every year. The companies that did not resort to foreign currency borrowing for acquisition of assets had a disadvantage as they were required to write off their financing cost in the profit and loss account.

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As of now, the first-quarter results of several big companies such as Reliance Industries, Reliance Communications, Bharti Airtel and Jet Airways would have been a lot worse had they followed the Accounting Standards (AS) 11 rules prescribed by the Institute of Chartered Accountants of India (ICAI).

Even under the International Accounting Standards (IAS), Prior to the 2003 revision of IAS 21, an exchange loss on foreign currency debt used to finance the acquisition of an asset could be added to the carrying amount of the asset if the loss resulted from a severe devaluation of a currency against which there was no practical means of hedging. That option was eliminated in the 2003 revision. ICAI too followed suit in 2003.

But reading that news item gave me scope to laugh a lot. The excuses of Reliance Industries, Bharti, Jet, sound so flimsy. Most of them have taken refuge under legal opinions (many retired judges depend on it for their livelihood) that are available for a price. Reliance Communication chose not to respond. When you are living in denial and trying to fool yourself, silence is the best option.

Or is it indifference?

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"ICAI, cast the (AS-32) net wide"

Ok. After the goons make away with the loot, the police arrive. Reads like a climax of a celluloid potboiler? In a way, it is. I am referring to the ICAI’s late awakening to the realities of forex derivative exposures (AS-32) by companies. Here are my safety net guidelines I gave almost two months back. (Me pretty fast, you see :-)

Industry chambers oppose it because they say MTM losses are notional (obligations don’t crystallize until the contract matures or is canceled by the party exposed to it) so long as the positions are open and hence cannot account for it accurately. But they miss the point. Disclosure of MTM losses have only the effect of a provision and not that of a definite charge against profit. So even if those losses don’t crystallize (or it ends in a profit if the sentiment reverses) they can be written back and added to the revenue account as prior period profits (just like tax credits). The only downside is for a trader that sells out fearing dent in share prices over the short term. But then that is their risk reward, so no tears to shed.

But I worry another aspect. Exotic swaps that have a multi-currency structure (fixing the $/Re.rate on the basis of prevailing price of Japanese Yen or Swiss Franc) may not find takers in the event of a crisis. For such products, literally there is no market during such downturns. So MTM would mean bringing the value of the contract to absolute zero or having to make 100% provisioning. These structured products are often sold by foreign banks and the swaps are traded in overseas markets. Now my question is, would it be prudent to MTM the exposure on a cut-off date (say 31st March) or right from the date a party enters into a contract on a daily / weekly basis? Would they have to be accounted for in quarterly results as well?

ICAI will have to explain to avoid any factual distortions in financial presentations. By the way, does AS-32 cover these shenanigans too? I think they should.

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Squeeze the bastards and wreck'em into submission

Finding brokerage houses going cheap now? Not exactly. They are probably hiding more than what they should. The stock prices of Motilal Oswal, Geojit Securities, Indiabulls Financials, Prime Securities all should be actually quoting at just 5% of their existing prices as is being speculated because they are not making adequate provisions for the huge losses they suffered (during the recent Jan 08 market reversal, when stocks declined by over 70%) on their margin lending exposures to their clients.

"It's surprising to know that provisioning and losses announced by brokerage houses do not form even 1 per cent of the entire margin funding business. And, this is at a time when the market has fallen so drastically and the liquidity crisis is still looming large over the system," says investment advisor S P Tulsian.

Their balance sheets show these losses (unpaid dues by clients because of teminals shutting down due to margin pressures) as “loans” instead of “defaults” as they actually are. A loan could be recovered in future. A default is a quantified loss and is a charge against profit. Since reduced profits mean lower EPS, the stock prices could be influenced. Hence their aversion to make full provisions.

But you don’t get caught. Just stay clear of that sector for a while. The lack of demand could pull down stock prices to realistic levels. Squeeze the bastards and wreck them into submission. Remember the period after Harshad Mehta scam when these firms went down the drain? Give them that sense of Déjà vu now that they are asking for it!

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[Update : Just four days later, here’s proof. The market’s got them [brokerages] by the balls. Update 2.0 - Edelweiss Group Company ECL Finance with an exposure of Rs.9.14 billion to its clients lent against securities (that quote at deep discounts now) waiting to be recovered. They call it loans, without disclosing how much is margin funding and how much has been defaulted. Yet they make a provision for only 0.5% of the exposure (Rs.45.50 million). Did you say financial prudence or worse, corporate governance? What is ICAI doing? Is SEBI reading this?

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Boys cancel capital; Men own treasury stock

Not too sure whether I could stomach this. Share buybacks in India totaled $1.1 billion from nine deals so far this year. True spunk in times of inflation, crude price spiral and liquidity concerns. Boards must be having wholesome breakfasts I guess :)

Besides the recently concluded Madras Cements buyback, the others that have been lined up are of Reliance Energy, Great Offshore, Mastek, Patni Computer, Gujarat Flurochemicals, JB Chemicals, Sasken Communication and Goldiam International.

But I wonder why Indian laws mandate "cancellation" of shares bought back. Is earnings beef-up (because lesser no. of shares now stake a claim to enterprise earnings) the only motive? I think that's a very myopic outlook because you are compromising on long term resources. It betrays a lack of enterprise long term vision. Is there a guarantee that the company could raise capital in future at a lesser cost than the portion that got canceled? What about time taken to raise it? Will opportunities wait till you raise capital? Enterprise is all about sudden opportunities. Capital adequacy helps swift exploitation of an opportunity. The shareholders (both existing and those cashing out) may be enriched in the short term but they are also giving up quite a bit of future capital productivity.

So why can’t companies be allowed to hold at least a part of capital bought back as Treasury stock in their balance sheet?

The significant advantage could be that treasury shares have the potential to restore the distributable profits used when shares are bought back. The distributable profits used to buy back shares are lost when the shares are cancelled. Purchases into treasury still count as a reduction in shareholders' funds but, on the sale of shares out of treasury, the sale price will replenish the distributable reserves up to the amount lost on their acquisition. Any profit made by the company on a sale of treasury shares must be credited to the share premium account. This ability to recreate distributable profits, not available on a share buyback and cancellation, means that it is likely that shares bought back in future will be held in treasury up to the permitted levels.

Just as in the laws of UK, allow it with some restrictions –

- seek shareholder approval

- prevent companies from buying shares into treasury during close periods or when they are in possession of unpublished price-sensitive information, other than in certain limited circumstances;

- express ban for insiders to buy or sell stocks from or into treasury portfolio;

- prescribe ceilings based on net worth

- treasury stocks are denied the right to vote, dividends but are entitled to bonus shares;

Another benefit from treasury holdings is that these shares can be later applied towards employee stock options to reward talent. In the U.K., transfer out of treasury stock towards Employee stock option programs are exempt from stamp duty unlike employee stock option trusts where the company has to bear the trustee fee besides bearing the burden of stamp duty on transfer of shares held by the trust.

SEBI chief C.B.Bhave is known to be a man of action. I suggest he should check out procedures with UK Listing Authority for allowing treasury stock treatments. I hate the expression “cancel”, especially if it is used in relation to capital - not so easily found nowadays :-)

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Man up, brokers....

Warren Buffet said “You only learn who has been swimming naked when the tide goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight." He was referring to Wall Street I-Bankers pummeled by liquidity crisis.

Closer home, we've got something brewing of the sort... Some of India’s leading brokerages that suffered huge losses in the recent market crash are postponing declaration of Q4 results. Why do they hide behind legally permissible extensions...? Is it not the same tribe that talked down many a stock and businesses that delayed publication of quarterly numbers? Now how ugly they look in the mirror?

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It's time the big boys learned to man up!

Here are some of the big names (Motilal Oswal, Edelweiss, Religare and so on…) struggling to cover their asses :)

Here you have some of my takes on their analysts.

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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.

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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).

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[Update : Reader Dnyanesh has sent this link to an excellent article by Anil Singhvi on corporate governance. Thanks Dnyanesh.... Hat Tip !]

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Marking up on earnings guidance

In the US, increasingly companies are doing away with earnings guidance. The volatile times for business, a crashing dollar, market uncertainties, growing competition makes it increasingly difficult for CEOs to come up with reliable earnings forecasts.

The difficulty of predicting earnings accurately, for example, can lead to the often painful result of missing quarterly forecasts. That, in turn, can be a powerful incentive for management to focus excessive attention on the short term; to sacrifice longer-term, value-creating investments in favor of short-term results; and, in some cases, to manage earnings inappropriately from quarter to quarter to create the illusion of stability.

Instead of providing frequent earnings guidance, companies can help the market to understand their business, the underlying value drivers, the expected business climate, and their strategy—in short, to understand their long-term health as well as their short-term performance. Analysts and investors would then be better equipped to forecast the financial performance of these companies and to reach conclusions about their value.

Do you think the benefits of earnings guidance justify devoting precious management attention…?

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