Whistleblowers, companies suddenly changing their business
profile and regulatory challenges are risks facing investors
The dangers to the well being of companies are no longer
restricted to economic headwinds and familiar governance missteps. As
disclosures become more rigorous and access to information improves, the
traditional tools of cover-ups and divergences are being pushed aside by newer
threats. Unlike clashes of opposing opinions on issues such as use of idle cash,
diversification into unrelated areas and share-swap ratios, that can at worst
bruise investors, recent eruptions have left behind a trail of havoc. Of the
three contributors that have damaged stocks of late, whistleblowers have caused
the most destruction. Revelations of links of the promoters of the Essel group
to firms being probed for money laundering post demonetization, loans by
promoters of DHFL to shell companies and handling of the distribution business
of Sun Pharmaceuticals by the co-founder have created doubts about the
credibility of those at the helm of these companies. Sun has now replaced the related
party with a subsidiary and dismissed accusations such as ties with manipulators
and handling of overseas capital-raising exercise by a related entity as old
events. The Essel group and DHFL have denied the allegations. Sebi was in the
midst of examining and seeking explanation from Sun when the complaint was released
into the public domain. The result was asymmetrical dissemination of the
compilation of misdeeds, going against the basic principle of maintaining the
sanctity of the market. Some institutional investors resorted to panic selling.
To plug motivated leakages, without giving the company a chance to defend, the
watchdog has to ensure that those who benefit from such selective disgorging of
information are made to compensate the small investors to the extent of loss
caused by their trades. A whistleblower in 2016 had charged not only the MD and
CEO but many board members of Infosys of knowingly undertaking a costly
purchase of two Israeli firms. Eventually, the regulator mid 2017 issued a
clean chit in the absence of supporting evidence. Undeterred, a whistleblower has
approached the SEC to point to delay in filing some forms by the tech solutions
provider. Whether the recurring snapping at the management is to harass or trigger
a clean-up is not clear.
If vanishing companies dominated headlines at the turn of
the century, vanishing businesses are likely to be the talking point at the
turn of the current decade. Earlier, promoters latched on to a fad, came into
the market with pricey issues, got the shares listed and forgot about them. The
stock exchanges did their duty by delisting them for not keeping up with the
disclosure requirements. Though those behind
these ventures are banned from entering the capital market, the
shareholders have been left holding worthless paper. The new-age entrepreneur
is smarter. He prefers to eject the core business and embarks on another
adventure, without a thought to the investors who had bought into the original
idea. Prabhat Dairy has got out of the milk-processing business that contributed
98% of the revenues, turning to cattle feed instead. How much of the Rs 1700 crore
that the transaction has garnered will trickle down to the non-promoter shareholders
is not known. The organization has been structured in a way that the
cash-generating operation was run by unlisted subsidiaries. The turn of events
has brought to the surface the risk of investing in companies with marginal
retail presence and a web of holdings that ring-fence the beneficiaries.
Healthy companies thrown into turmoil by owners leveraging their
holdings for personal gains is one side of the coin. The other is made up of
promoters who create an overhang of uncertainty over their stock. Uday Kotak was
supposed to reduce his 30% stake in the private bank he set up in phases, by
10% end December 2018 and 5% end March 2020, when it completes 15 years. The current controversy hinges on how the
Reserve Bank of India’s guidelines on control should be interpreted. The matter
is now in court after the central bank turned down the issue of perpetual
non-convertible preference shares that would have increased Kotak Mahindra Bank’s paid-up capital
and brought down the founder’s holding to just below 20% without diluting the
voting prowess. In the process, Kotak seems to have followed the letter but not
the spirit of the law that aims to discourage concentration of power. The
Kapoor and Kapur families, who established Yes Bank a year later, have already cut
their presence to around 20% of the equity capital. Why institutional investors
have not stepped in to compel a closure is a mystery.
-Mohan Sule
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