Sucheta Dalal :Increasing Public Holding - (MoneyLIFEIssue 9 Oct 08)
Sucheta Dalal

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Increasing Public Holding - (MoneyLIFE,Issue 9 Oct 08,)  

September 23, 2008

Exclusive news, the stories behind the headlines and the truth between the lines Edited by SUCHETA DALAL


Increasing Public Holding


Every few years, the government appears to take note of the fact that companies enhance promoters’ net worth through a stock listing and then attempt to keep control by ensuring that the floating stock is barely in line with the listing requirements. So the government or the Securities and Exchange Board of India (SEBI) make noises about asking companies to increase their public shareholding to 25%. Recently, the media reported that the government is planning to ask companies with low floating stock to increase their public shareholding by 3% to 5% annually until it reaches a ‘minimum threshold of 25%’. Today, companies need a float of just 10% to remain listed. If the goal is to give meaning to the concept of shareholder democracy by increasing the free float to 25%, then shouldn’t SEBI start by ensuring that companies with low floating capital are not allowed to mop up further with share buybacks that are aimed at keeping the market price higher?


For instance, on 5th September, SEBI permitted the promoters of DLF Limited to increase their voting rights in the company from 88.16% to 89.32%, through a buyback. This was just a shade below the 90% level, which would have triggered a compulsory open-offer to the remaining shareholders and possibly de-list the company. In fact, DLF had to seek an exemption from the takeover committee from making an open offer for 20% of the outstanding capital, since they already hold over 55% of the capital – the threshold limit.


Ideally, the promoters too ought to have tendered their shares in the buyback so that their voting rights remain constant. With their stake going up to over 89%, the company is once again a whisker away from the trigger for de-listing at a time when realty stocks are in a huge decline. This has to be seen against the background of DLF having de-listed its shares once earlier, within a short time after listing. It is not quite clear why SEBI would not signal the seriousness of its intentions to increase public float by refusing to permit DLF to go so close to the 90% cut-off, especially when an open offer is triggered as soon as promoter equity crosses 55%.


The Monkey and the Media


Sandeep Parekh came into SEBI as the blue-eyed, special appointee of its former executive director (law). He is credited with such innovations as the ‘disgorgement order’ that was issued against several market intermediaries without any unjust enrichment on their part and without even concluding the process of establishing guilt. Not surprisingly, the order was struck down. Parekh left SEBI immediately after M Damodaran’s tenure ended. He has now started a blog which is a trenchant critic of SEBI’s actions and offers some insights into SEBI’s decision-making. A post in September says, “The inimitable Dr. T.C. Nair, member of SEBI, has dozens of animal stories up his sleeve – here is one reported in DNA and The Economic Times which has neither regulators nor journalists amused.” While Nair’s story about how journalists and regulators are useless – told through a parable of monkeys – may have been mildly amusing, it is the sniping by a former SEBI legal hotshot that is attracting more attention. Personally, I think it is a healthy trend. If everybody who leaves SEBI immediately turns into a blogger and a critic, it will be the fastest way of making the organisation more transparent.


SHCIL’s New Chairman


In an extremely unusual development, the Stock Holding Corporation of India (SHCIL) has split the role of its existing chairman & managing director,

RC Razdan, at a recent extraordinary general meeting. Bannanje Babu Ravindranath, an executive director of IDBI, has been made the chairman, while Razdan is now the managing director and CEO. What is unusual about this action is that SHCIL has given the marching orders to its former CMD, R Jayaraman Iyer, for gross abuse of his powers as well as rampant destruction and alienation of the company’s assets. Yet, the board made no attempt to split the post in order to bring more transparency as well as checks and balances. Although the change was done quietly, it seems to indicate that SHCIL has not been able to stem the rot that set in during Jayaraman Iyer’s tenure. For instance, long after Iyer’s attempt to cheat the company along with his co-conspirator S Ramanathan was exposed (see cover story Loot & Scoot, MoneyLIFE, 5 July 2007), there is no serious attempt to clean up. The meeting also led to a decision to grant the first right of refusal to SHCIL’s existing shareholders during any change of shareholding with a 24% cap. Ironically, the company’s biggest attraction is its 7% stake in the National Stock Exchange which is apparently worth Rs1200 crore today.


In Defence of FDs


How many times in the past five years, have you been sneered at by financial experts for parking money in plain old bank fixed deposits (FDs)? How often have you been told that only losers invest in FDs because interest income is fully taxed and even the best returns do not beat inflation? Well, it seems you may finally have the last laugh. Not only are the days of high returns on equity-heavy mutual funds over but many funds have even destroyed your principal. In fact, in 2006, as markets turned increasingly volatile, mutual fund companies began to launch ‘capital protection’ schemes that were focused on debt. They failed in that too. These gave you terrible returns. But, clearly, the mayhem unleashed by the collapse of Lehman Brothers in the US and the financial troubles of other titans of the US and global financial markets will continue to wreak havoc on Indian stock prices for a while. As for the US, The Daily Reckoning, a popular investment newsletter says, “From the peak of 2000 till today, stock market investors have earned nothing for their trouble. In nominal terms, stocks are about where they were 10 years ago. Adjusted for inflation, they are down 25%-80%, depending on how you measure it.” Yet, every fund manager will tell you that “over the long run, equity offers the best returns on investment.” Nobody mentions that price, timing and judicious churning of stocks (something that few fund managers are able to do) alone will give you good returns over the long term. As things stand, fund managers have run out of ideas. Five of the largest Indian mutual fund schemes are reportedly sitting on Rs12,000 crore of cash, because they don’t dare to invest in a falling market. Things are only going to get worse as foreign institutional investors (FIIs) are forced to sell to meet redemption pressures. The irony is that the MF industry is structured in such a way that asset management companies will continue to earn fees even as your returns evaporate. At times like these, FDs look great because you get a decent risk-adjusted return and your principal is protected.


Investors, however, need to remember that FDs are safe only as long as they are parked in large banks, preferably public sector ones, while deposits in small cooperative banks, which are poorly regulated, remain extremely risky. Fixed maturity plans (FMPs), which are touted as being better than FDs, also carry risks and a prudent investor will closely question where the FMP plans to park your money. Already, there are reports about one-year FMPs putting their money in 18-month papers, or investing in risky papers with low credit rating.



-- Sucheta Dalal