Scorned and furious

More than setbacks due to economic challenges and changing marketplace, governance missteps damage stocks

If 2018 was remarkable for the sudden change in the bullish sentiment that prevailed for most part of the year to bearish in the last quarter, it also marked a year when the joy of bumper returns provided by many stocks turned into disappointment not so much for their financial performance as for their governance missteps. The rise and fall of IL&FS is the latest addition to a long list of companies that apparently had everything going for them but eventually ended up bust. The business model that investors loved in the first place was also responsible for their betrayal. Niche segment, limited competition, captive market, huge potential and willing lenders dissolved into lax supervision, opaque operations, asset-liability mismatch, unwieldy organizational structure and bumper managerial compensation. More than a downturn in the economic cycle, the market is wary of unexpected company-specific shocks. Changes in market tastes and technological obsolescence are taken in their stride but not window-dressing of accounts. Those attracted to PSU banks for their wide reach felt let down on learning the enormity of bad loans after the Reserve Bank of India carried out special inspections in August-November 2015.Eleven PSUs and one private bank have been restricted from opening new branches, pay dividend and lend. The NSE PSU Bank index has shed nearly 13% in the 21 months since the tightening of the guidelines after their introduction in May 2014 and has lost about 30% from its peak end June 2015.



Irrational exuberance in undertaking growth plans tends to be forgiven but not market manipulation. The headwinds facing Sun Pharmaceutical seem to stem from questionable practices rather than intensifying competition in the US generics market. Allegations of related-party transactions have piled up on top of patent litigation woes. The stock is down 35% in the five months since its recent high. The large cap with the highest weight among its sector constituents in NSE’s Nifty 50 index is not the first giant to be smeared by accusations that are typically the preserve of mid and small caps. Hindustan Lever was indicted for insider trading after purchasing shares of group company Brooke Bond Lipton India from UTI about two weeks prior to a proposed merger between the two in the first quarter of 1996. RIL in 1994 issued non-convertible debentures with convertible warrants to 38 entities to raise Rs 300 crore. The warrants were converted into shares early 2000. Two years later, the company admitted these firms were acting in concert. An investigation by the market regulator found that all of them were dummies with a common address. Sluggish capital appreciation is often brushed aside but not theft of cash. Ramalinga Raju, founder of Satyam Computer Services, used more than 300 shell enterprises to siphon off money to invest in real estate so as to enable the flagship to record healthy profit growth. The Singh brothers were accused of taking out US$78 million out of Fortis Healthcare that they controlled without board approval and at least US$300 million from the lending arm of their financial-services firm.



Cash accumulation evokes mixed feelings of security and lost opportunities but dodgy corporate actions trigger anger. Power trader Reliance Natural Resources wiped out more than a quarter of its market capitalisation after an unfavorable share-swap ratio with group firm Reliance Power. The promoters later excluded themselves from a bonus issue. Reliance Mutual Fund pared by half its exposure to Escorts after the tractor maker undertook a complicated merger that resulted in the transfer of the shares of three group units to a trust floated by the promoters, thereby indirectly consolidating their grip. Investors voted with their feet when Fortis Healthcare bought Singapore-based Fortis Healthcare International, wholly owned by the promoters, at nearly 13 times operating profit. The stock plunged in proportion to the spurt in the valuations of competitor Apollo Hospitals. World's biggest paint maker Akzon Nobel NV annoyed the shareholders when it amalgamated three unlisted in-house outfits to ramp up control in Akzo Nobel India to 67% from 56.4%, because of sketchy disclosures, dubious valuations and disproportionate dilution of public stake. Two mutual funds, together owning 2.39% equity capital, reduced their holdings in the following quarter. Real estate developer Hiranandani Group had to call off plans to combine Hiranandani Development and Hirco, listed on the London Stock Exchange's Alternative Investment Market, owing to opposition from foreign investor Laxey Partners, who fought for a rollback before parting ways.

-Mohan Sule