Sucheta Dalal :Improvement needed
Sucheta Dalal

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Improvement needed  

Sep 17, 2006

The new, improved Malegam Committee on disclosures and accounting standards constituted by the Securities and Exchange Board of India (Sebi) merges two earlier ones headed by the well-known and respected accountant. But its terms of reference also extend its ambit into that of the primary and secondary market committee in interesting ways. Malegam is expected to look at “operational and systemic risks” in the primary market and also “the mode of mass communication, used by the issuer, for protecting the interest of investors”. This has two significant dimensions. First, India is the only country where investment advisors are not registered or licensed, nor do they need any qualifications. Almost anybody can spew out investment advice through the mass media on the basis of superficial details of an investor’s portfolio or investment timeline. They also get away with perfunctory disclosures about their own interests. Although market intermediaries sneer at such instant advice, Sebi has never attempted to regulate investment advisors. Will the Malegam Committee recommend some action? A second aspect to the “mass communication” issue is the publication of paid editorial content by companies as well as mutual funds, usually coinciding with their fund raising effort. Some media companies even demand shares in lieu of expensive advertising space. These are tricky issues that need wider discussion. It will be interesting to see what the Malegam committee has to say about these and the poor on-going disclosures by companies.


Protection needed


The number of companies that seem determined to keep minority investors from sharing the rewards of capital restructuring suggest that the Malegam panel will have its hands full in creating effective disclosure norms. A case in point is Morepen Laboratories, which has not paid a penny to fixed deposit holders under the three-year-old settlement structured by the Ministry of Company Affairs. It was recently in the news that Spinnaker Capital, Sabre Capital and Deutsche Bank plan to acquire a 40% stake in the company. Responding to this, Morepen blandly told stock exchanges that its corporate debt restructuring proposal has been approved and its negotiations with a group of investors are at an advanced stage and will be furnished “only when the matter is finalised”. Since fixed deposits are unsecured investments, depositors are holding their breath and hoping that the MCA will ensure that their dues are part of the new corporate plans.


Valuation methods


Indian Charge Chrome is another case that would fall within the committee’s domain. Its amalgamation proposal with IMFA before the Orissa High Court has been opposed by a shareholder on the grounds that the swap ratio of 14:1 is not fair to the minority and will reduce their holding from 48% to 4% while increasing promoters’ share from 52% to 56%. The shareholder says that a fair valuation ought to be more like 4:1. This is a common complaint in most mergers/amalgamation schemes. Shareholders invariably allege that companies manipulate general body resolutions and the High Court is not competent to examine valuation issues. Will the Malegam committee suggest a much-needed change in the Companies Act? An MCA representative on the committee ought to see some progress in this patently unfair situation for minority shareholders. There is also the case of Kothari Products, a highly profitable company that has decided to delist from the stock exchanges, made a public announcement about its intention and did nothing to follow it through. Investors are now unclear if they should hold on to their shares or dump them.


Looking inside


When the Reserve Bank halted the branch expansion of several banks as punishment for flouting Know Your Customer (KYC) rules, many banks re-discovered that increased focus on existing customers can pay rich dividends. Citibank, for instance, put its ‘Fly-for-sure’ debacle behind it and focussed on improved customer services. The bank paid the price (a whopping Rs 18 crore) for the ill-fated scheme making sure that all card holders who qualified for the scheme were given free tickets — that too mostly to their first choice of destination. It has had a big addition of new customers in the last couple of months. The bank says that strict Know Your Customer (KYC) norms and high service tax has made it unviable to sell through Direct Selling Agents (DSA); instead, it is increasing its business by cross-selling to existing customers; increased partnerships with vendors and effective use of an internal call centre. The giant State Bank of India (SBI) is apparently reaping the benefits of former Chairman A.K. Purwar’s focus on automation of all branches and the 5500 ATMs he set up. It allows the bank to sell more effectively to its own customers and has caused the SBI-GE credit cards to race to the leadership position. This observation about SBI comes from the bank’s most aggressive rivals. Things are set to change again with IDBI Bank’s acquisition of United Western Bank. The central bank can hardly stop branch expansion for others when one of those punished for the same IPO scandal gets a 230-branch bonanza.


-- Sucheta Dalal