A new threat

Apart from the rocky transition to a rule-based economy,

Indian companies have to brace for smear campaigns

Besides facing headwinds of cyclical demand, out-dating of technology, regulatory changes and shift in consumption pattern, companies have now to brace for another kind of storm: allegations of impropriety. The battle between promoters and activists over compensation packages of top managers is a cause of much grief to the small investors. Crimping on the quality of processes and products is another source of wealth destruction. Giving unsecured loans and favorable terms of trading to related parties is not uncommon. These corporate governance issues can occur without warning unlike industry-specific rumblings that can be heard before they hit the boardrooms. Investors get a whiff of the dodgy practices only from auditor’s qualifications or stock exchange filings. Of late, whistle blowers are playing an important role in shining a light on how companies are run. The problem is ascertaining their motive. Many might be risking going to the authorities due to genuine concern about the effect of the toxic environment at the headquarters on the health of the company. Some might be acting out of spite for some perceived wrong. Another worry is if the informant has fully comprehended the systems and procedures that are causing distress. At the receiving end of undue attention recently has been ICICI Bank. The directors do not feel the CEO and Managing Director acted improperly by clearing a loan as part of a consortium of banks to the Videocon group, whose promoters had invested in her husband’s company.

Whether it was a knowing abuse of power or there was ignorance of what constitutes a conflict of interest will eventually be established. Or it might not as the case winds up through various layers of investigation. The important issue is what happens in the meantime. The erosion in market value in most cases is halted if the protagonist steps down till conclusions are established. Yet there is a loss reputation (of the boss) and opportunity (for the company) as much of the energy and time of the successor is expended in putting the embattled enterprise back on track. The dilemma for those caught in such a rotten situation is whether to make symbolic sacrifices or fight it out.  Credibility of a brand is not based on following established procedures to the letter. Perception of trustworthiness is a combination of tangible (financial performance) and intangible (treatment of various stakeholders) acts over the years. The crux is how quickly it takes for those at the centre of the storm to acknowledge the problem, initiate steps to make amends, and establish communication with the shareholders to shape the narrative. Many times there is diffusion between transgression of moral boundaries and violation of law, making taking a stand difficult. There might be temptation to find scapegoats as impatient institutional investors build pressure on the company to adopt an arm’s-length distance from the controversy to cap any more slide in the share price. Though ICICI Bank is off from its March high and has under-performed the private bank index, the underside has been limited. The message from the market is that the damage is not irreparable.

What the unspooling of the episode tells is that a new type of threat has emerged: smears. The shocking decision of a global technology investor’s founder to bypass his heir-apparent, it is now understood, was influenced by a campaign launched to tarnish the contender’s image. For companies, the danger of theft of intellectual property seems to have been taken over by insidious attempts to spread misinformation in the market place. In the pre-social media days, scorned analysts would rip companies by knitting together pieces of information to paint a portrait of rapacious promoters.  A few years ago, a new-age real estate group with interest in financial services filed a criminal complaint against an overseas research firm for depicting a vivid picture of window-dressing.  Handles, anonymous and known, have to post a few ambiguous tweets to raise doubts about a stock to spur investors to exit till a clarification is forthcoming. In a way, companies have to take some of the blame for increasingly becoming susceptible to accusations of cover-ups in the smug belief that their attempt to trapeze between what is acceptable and what is not will remain private. If the digital era has made conducting business easier, it has also enforced transparency and heightened scrutiny. The recall of high-value notes in November 2016, the roll-out of the goods and services tax from July 2017 and the implementation of the bankruptcy law are steps to a rule-based economy. Those who fail to adapt to the transition will end up losing investors’ confidence.      

Mohan Sule

Shots fired

The new-age wars are about self-preservation by altering the economic, trading and regulatory landscape

After a year of a secular bull-run fuelled by global liquidity, equity and debt are facing headwinds. The first worldwide selloff after the cessation of the bond-buying program by the central banks in the US and Europe was ignited by US and North Korea trading threats of missile strikes in August 2017. Even as the market was recuperating from the thrashing, the US Federal Reserve’s hint of three rate hikes during the course of 2018 and the Indian government’s inability to stick to the fiscal deficit target sent yields on government paper surging and stocks skidding. Oil prices spiked to the US$60-a-barrel level after the Saudi crown prince’s move late last year to jail some of his close relations, many of whom opposed his gradual liberation. Financial markets caught a cold as President Donald Trump stepped up to implement his America First promise. The unspooling scenarios featured a cast of characters in quest of self-preservation. No blood was spilled. Instead of loss of life, the outcome will be loss of jobs. Earlier, trade embargo was slapped on unruly nations to achieve political objectives without firing a shot. Recently, the instrument of trade barrier, junked after the creation of the World Trade Organization in the 1995 and becoming all-pervasive after China’s entry in 2001, has been dusted and polished to meet in-house compulsions. If proof is required that there are no gainers in any clash of egos, the tit-for-tat exercise of the US and China to protect local manufacturers and punish dumping should be an illuminating example. In retaliation to US imposing 25% duty on steel and 10% on aluminium, China has drawn up a list of 128 US products for higher tariffs. America’s manufacturers will gain at the cost of the agriculture sector.

An equally high-stake game is unfolding between Indian and Singapore stock exchanges. Whether the formation of a cartel by the domestic bourses to stop export of real-time data, except for exchange traded funds, will bring volumes back is still early to tell. Instead, the question is why there is craving for investment-grade sovereign rating when we do not care for foreign investors. Competition based on ease of trading, low fees and superior infrastructure, instead of building a wall, should boost revenues. Undeterred, the Singapore trading platform will introduce new products to provide access to Indian equities. Another example of how the battle to control liquidity can end up with liquidity being the chief casualty is being played out between the Securities and Exchange Board of India and brokers using artificial intelligence. Ever since the scandal over the misuse by some intermediaries of the NSE servers located on their premises to gain first-mover advantage, the market regulator had been grappling how to provide access fairly to all classes of traders. Big-ticket investors use algorithm-based transactions, programmed to act in split second. Their bulky orders impart liquidity. A congestion charge might result in splicing up the voluminous orders and distorting price discovery. The moot point is if Sebi wants stock values to reflect their strengths or a sluggish market for the risk-averse investors.

It is not only countries, regulators and market players that go on the war path to shape the environment. Enterprises expand market presence by innovating, diversifying and expanding. Of late, promoters of even those companies on the brink of extinction are showing a fighting spirit to retain their kingdoms. A war of nerves between the lenders and defaulters over control is a source of amusement. If the intention of banks is to recover as much of their outstanding dues, then whether the promoter remains in the driving seat after repayment should not be a matter of concern. If the aim is to eject crony capitalists who came to own the assets because of their fancy for easy money, then financial institutions are perfectly justified in ensuring that the ailing unit is passed on to capable hands. In which category does Binani Cement fits? It wants to revive with the help of big player UltraTech Cement but the National Company Law Tribunal is in favor of the resolution plan submitted by Dalmia Bharat-Bian Piramal Resurgence Fund. In view of the bitter PSU divestment experience of successful bidders eventually disposing of the trophy later for a tidy profit, the dithering is understandable. What is not is that there are no winners in the Reserve Bank of India’s war against misuse of import facilities by outright banning the issuance of letters of undertaking and comfort. In the war of the rebels searching for a cause, the entire class of tax payers will lose if the fake and selective alarm on privacy sounded by Pied Pipers, enthusiastically embracing the leaky social media to amass followers and embark on populist causes, overrides Aadhar’s efforts to bust ghosts.

Mohan Sule