The mistreatment of minority shareholders of Rayban Sun Optics India Ltd is an ideal case study on the extent to which companies will go to deprive shareholders from getting a fair exit price. The issue has been festering for seven years, when Sebi first ordered Luxottica, the current parent company, to make an open offer for acquiring 20 per cent of minority shares. Luxottica contested the order and dragged the issue to the Supreme Court, which also backed Sebi’s order and asked the company to make an open offer. Although the company has complied, minority investors are still at the losing end. They have been deprived of any capital appreciation in an unprecedented four-year bull run and the stock trades at the same price it did seven years ago. In the intervening period, it did not declare any dividend and has steadily accumulated cash and depressed returns. Its market capitalisation is Rs 204 crore and it has Rs 63 crore in its balance sheet. Investors say the ultimate blow is the acquisition of a ‘no objection’ certificate from Rayban to set up a wholly-owned subsidiary to distribute and sell non-Rayban products. Worse, the listed entity loses its exclusivity over the Rayban brand after five years. This means anyone who chooses not to tender the shares may end up with a dud investment. At a time when large industry groups are trying to delist their group companies, the Luxottica story paints a depressing picture of how far companies will go to get rid of minority investors.
The flip side
There is no public debate over this issue, but the fact that minority investor activism forced DLF Ltd to cough up an unprecedented Rs 1,300 crore worth of shares to investors who clung on to their holding even after the shares were delisted, has sent tremors through India Inc. Last week, informed sources said the Essar group’s investment bankers were warning it against any over-zealous attempt to suppress the exit price that would have to be paid to minority investors. The group, whose shares have been languishing on the bourses for over a decade, wants to delist and get rid of the minority investors just when the prices had begun to look up and investors were looking forward to dividends and more capital appreciation. Meanwhile, Sebi postponed its plans to tinker with the delisting rules until its next board meeting. Its original proposal was unanimously opposed by investor groups as being against the interest of minority investors, especially the move to scrap reverse book-building as the price discovery process for companies that wish to delist.
The Indian capital market, we found last week, is no longer immune to turbulence or panic in the global market. So, one would expect large Indian investors to keep an eye on international developments to avoid nasty surprises; unfortunately they don’t. Some smart market operators used this fact to engineer panic in the last half hour of trading on Friday, sending an already weak Sensex crashing another 150 odd points. Around 3 pm, a television channel began airing what it claimed was ‘breaking news’ on a US insider trading scandal and a SEC (Securities Exchange Commission) indictment of a husband-wife team and officials of several top brokerage houses (Morgan Stanley & Co, UBS Securities LLC, Banc of America Securities). In fact, SEC had officially released its findings and the information was available on websites and wire services since morning. Yet, a powerful bear group used the TV report to create panic by suggesting the scam would cause US stock prices to stumble again, triggering a domino effect across world markets. This was clearly untrue. US markets later opened steady but subdued, but some bear operators made a lot of money.
In an unusual development, an outfit called the Centre for Corporate Responsibility (CCR) — apparently an “initiative for securing rightful behaviour of corporate citizens”— launched a strong attack against unit-linked insurance plans (Ulips). While the investment benefits of Ulips have been in question for sometime, this group alleges they are “promoting money laundering and are a hotbed of false-selling”. CCR’s key allegation: Ulip agents, or advisors, collect cash, deposit it into their own accounts and issue cheques or drafts to fund the policies of those handing over black money. CCR says some banks too have offered drafts against cash received. While CCR has not backed its allegations with specific evidence, it has dashed off letters to the finance ministry, RBI and the insurance regulator to initiate action.