Philips: Parent taking undue advantage

S. Vaidya Nathan

IN THE last week, Philips India's parent, Royal Philip Electronics NV, Netherlands, has enhanced the size of the proposed open offer to 49 per cent.

The offer is scheduled to close in a week's time and at the last available opportunity this hike in the offer size has been made.

Initially Philips proposed an open offer to raise its stake from 51 per cent to 74 per cent through an offer for 23 per cent at Rs 105 per share. This was then cited as an enhanced commitment to the Indian outfit. Now the enlargement of the offer to 49 per cent appears to be a clear attempt to raise the stake to 100 per cent as the global parent already holds 51 per cent.

This would mean the delisting of the company. The company has indicated that the enlargement is designed to offer shareholders an exit route and at a better price than the stock has been trading in recent months. While there may be some merit to this line of argument, one cannot escape the uncomfortable feeling that this is a carefully designed move to have a fully-owned unit.

Instead of having a new company, taking complete control over Philips India is a better option for the parent. Globally Philips is losing its sheen in the traditional consumer electronics business, but is expected to be at the forefront of cutting edge technology products. With India likely to be a big market, the parent company would perhaps feel more comfortable if these were introduced through a unit over which it had complete control.

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Philips future prospects are a lot brighter than that of the present and it is in this context that the move appears disturbing. It is an extension of the behaviour of MNCs taking the 100 per cent-owned entity route. And in doing so here, Philips appears to be getting away with an offer that is priced rather low when viewed in the context of the dramatic change in ownership pattern on the agenda.

Philips India shareholders should resist the offer and seek a better price, or better still, the long-term plan for Philips India and the kind of businesses it would be in. If it does not get 100 per cent control, the parent may well have an option of a separate entity or using Punjab Anand Lamps (where an open offer for a 26 per cent stake has been made to raise ownership to 100 per cent).

In that case too, shareholders of Philips would be better off bargaining for a better price, and that may be possible only by steadfastly refusing to the offer now underway. Shareholders should not be swayed by the deliberate manner in which this has been sprung on them at the last minute. Stalling Royal Philips to get a better price should be the thrust of the move of shareholders. At a macro level, this also highlights the need for a policy that would require all MNCs to offer at least 10-15 per cent of equity in the Indian outfit to the investors in India.

No more `no delivery'

Last week, the Securities and Exchange Board of India (SEBI) made some proposals that could be significant to capital market development. By and large, the changes proposed by the apex regulatory body are of an investor-friendly nature. At the core of the changes is the reduction of time involved in announcing corporate actions and effecting to them.

Once these proposals are formally notified by SEBI, a concept that has held significance in trading strategies would largely be wished away. That is the concept of `no delivery'.

Paperless benefit: This period was perhaps necessary at a time when stocks were held in paper form and trading was also done on the same premise. Now there is a notable change with stocks held in dematerialised form (paperless mode). A high level of dematerialisation has been achieved. Close to 90 per cent of delivery in the weekly settlement is done in the paperless mode.

Since ownership changes are recorded instantaneously in the demat mode, the `no delivery' period is an anachronism. Even without such a period, it should be possible to determine a list of shareholders eligible to benefit from a corporate action as of the record date. The NSDL is also offering facilities to directly distribute corporate benefits though it is still to take off in a big way. In this backdrop, the SEBI move to remove the `no delivery' mode brings the system in line with changes ushered in by the technological advancements in the market place.

The benefits in store: As a consequence of the proposed move, the more important long-term benefit would be in cutting down the time frame in which the benefits of corporate actions flow to the investors. The trading would also go on in a seamless manner on an ex-dividend or ex-bonus basis from the record date.

Over the years, the `no delivery' period has become a speculator's haven. Price trends tend to get very volatile in this period as traders take positions given the relaxed framework with regard to settlement obligations. And once this period is over, it is followed by price trends that move to remove the distortions brought in during this period.

So for close to 20 trading days for every corporate action, there tends to some kind an artificial abnormality in the price formation process. Since it has become common to have at least two or three such periods in a year, the number of trading days for which an extraneous variable enters and distorts the pricing process as a proportion of total trading days is fairly high. This discontinuity would now be removed. With it costs paid by genuine investors who take exposures in such periods (with or without being aware of the no-delivery period) would go down.

The move along with other proposals made by SEBI are of a welcome nature. One caveat is that SEBI has done with the no delivery only for dividend and bonus. The sooner it does so for stock splits (the omission here appears to be an oversight), rights offers (the omission here is inexplicable) and ritual book closures annually, irrespective of corporate actions, the better it would be from the markets point of view.