16 November 2020
The Amazon-Future
Group tiff has exposed the downside of foreign investors’ lifeline to Indian
companies
There are many
reasons a company feels compelled to issue shares to non-promoters. The need for
funds to undertake expansion to grow is among the chief. Resorting to debt has
limits. Servicing chips away large chunks of cash flows. The IPO expands the
equity base. It is an expression of confidence that the earnings per share will
not only keep pace with the dilution but will justify the discounting. Listing
provides an exit route to angels and venture capitalists, who have reposed
faith in the promoters, at hefty gains. Tucked in at the end is the benefit of visibility.
A good financial performance and a bright outlook attract more investors. The
increase in demand helps to market future offerings at a still better premium. Even
an offer lower than the ruling market price goes to fortify reserves to dip
into during emergencies or reward loyal shareholders during difficult times. Corporate
actions can range from buybacks to bonus shares. A high dividend yield can stem
a stock’s slide that might be due to macro factors. These upsides are
accompanied by responsibilities. The first is complete transparency by disseminating
information that can be trivial as well as grave. The need-to-know can span changes
in senior managerial personnel, plans for mopping resources, restructuring and
launch of new products besides deliberations of board meetings and interaction
with big-ticket investors. The idea is to put in public domain anything that
might influence price movements.
Many
segments come under the purview of two regulators after a float. Banks operate
as per the guidelines issued by the Reserve Bank of India and the Securities
Exchange Board of India. The Department of Telecommunications and the Telecom
Regulatory Authority of India as well as the market regulator have oversight on
telecom services providers. The Competition Commission of India weighs in on acquisitions
and Sebi on open offers to take the process forward. Ensuring uniform treatment
to all classes of investors is expensive. Some of the grumblings about the cumbersome
procedures have been acknowledged. The playing field now factors the problems
of issuers apart from investors. Truncated balance sheets are permitted to capture
the salient financial features instead of cramming with inconsequential data to
meet reporting requirement. Funds can be raised in a matter of days unlike the
earlier drawn-out drill. The period from closure of issue to debut has been shortened.
After weighing the cost-return of staying in the trading ring, some eventually
decide to retreat from public gaze. They delist. A majority are at in mature
industries. The business model is not a cash-guzzler. If companies are discovering
the downside of access to easy money, of late they are realizing how dangerous
the charm of foreign investment can be. Currency fluctuations knocking down
dollar-denominated returns and tightening of liquidity back home can trigger a
sell-off. International participants demand compensation to claw back the loss
suffered on revelation of governance missteps. Drug producers have been dogged with
patent infringement litigations. Tech solution majors have faced class action
suits for concealment of frauds and depreciating costly buys. ADRs on Nasdaq
and NYSE require additional compliance with the SEC.
The arbitration
court in Hague end September ruled against the Union government on retrospective
taxation including interest and penalties amounting to Rs 22000 crore levied on
Vodafone for not deducting tax source on the US$11-billion payment for 67% equity
of Hutchison Whampoa’s India mobile business in 2007. The latest flashpoint is the
enforcement of contract between the Future Group and Amazon of the US, with about
5% stake in Future Retail after it bought 49% in holding company Future Coupons
for Rs 1500 crore in August 2019. The US e-commerce giant has contended the Rs
24700-crore deal to sell the brick-and-mortar outlets and the logistics and
warehousing businesses to Reliance Industries contravened non-compete agreements.
The ramifications of the case will be felt beyond the two squabbling partners. A
prolonged legal battle will put a spoke in the plans of India’s most valuable company
to expand the physical presence and merge the synergies with the digital
prowess to emerge as a formidable cyber market-force. Crucially, the valuations
demanded from foreign investors for exposure to the retail venture might have been
based on the recent acquisition. For investors chasing companies pulling in
dollars, the stakes could not be starker: riding the exuberant sprint or
fearing the pain of a sprain.
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