Oh, for an FI hand in reviving the market!

D. Sampathkumar

FOR the second year running, the financial institutions have been delivered a resounding slap in the face, so to speak, by Shaw Wallace.

At the 54th annual general meeting of the company, held recently, the former's resolution opposing the adoption of the accounts was defeated in a poll on the subject.

A similar situation prevailed at the general meeting in March last year to adopt the previous year's account. Then too, the FIs' resolution opposing the adoption of accounts met with a similar fate. This is only to be expected, considering that the promoter-management controls, directly and indirectly, 51 per cent of the total stake in the company. The voting percentages of those in favour and those against clearly bears this out.

The FIs' discomfiture over the defeat of the resolution opposing adoption of accounts merely compounds their embarrassment over their attempts to secure representation on the Board being thwarted by the promoters. Their resolutions to nominate two members on the company's board were similarly defeated.

The Company Law Board, too, on its part, had ruled that conditions exist in the company to warrant the nomination of independent directors on the board. The CLB ruling must be seen as an indictment of the management to warrant a review of the exposure. None of this would have mattered much if the company was seen as delivering shareholder value. As it happens, the company has failed on this count as well. Five years ago, the company's shares were worth Rs 150 each. Since then the shares have gone down to a fifth of that value.

In the normal course, the occurrence of any one of these events would itself have signalled an FI review of the desirability of continued exposure in the stock of the company. But in the financial sector, where the Government exercises a stranglehold, the `normal' has no place in the FI lexicon.

In what must rank as a striking example of self-flagellation, the FIs continue to hold on to their stake in the company as though nothing has happened. If institutions can be perceived as possessing masochistic tendencies, India's Government-controlled FIs must surely rank at the top of the list. They doggedly persist in turning the other cheek for every slap the promoter managements administer.

The contrast to the behaviour of foreign institutional investors, when faced with adverse developments involving companies in which they have a stake, is striking. They would think nothing of dumping the shares of the offending company, even if the action results in a loss of investment value.

One recalls in this context the decision of Reliance Industries' years ago, to make a private placement of equity with UTI. The decision, with all its implications of a diluted per share earnings in the near term, reportedly prompted Morgan Stanley Dean Witter, or Morgan Stanley as it was then called, to offload shares of Reliance that it held, in the market. In mature markets, institutional investors often resort to what is termed as `voting with one's feet' _ an expression suggestive of an investors' lack of confidence by the simple expedient of walking away from a continued exposure in a company whose management policy they are not in agreement with.

Would the FIs' cause have been served better by liquidation of their holdings in the company? It just possibly might have. They, after all, control close to 26 per cent of the total stake in the company. The entire block of shares is certain to attract considerable buying interest from competing players in the industry, if offered for sale. The prospective investor, would then make a bid for the public shareholding in the company. If the price is right, it could succeed in mopping up the entire public holding.

In the instant case, the prospective acquirer may well end up acquiring a stake close to that of the existing promoter. An immediate consequence of this would be that the share price would start moving up from the abysmal levels at which it is languishing currently. That should benefit the minority shareholders.

Later on, in the contest for corporate control between the incumbent management and the new acquirer, an agreement could result in a new open offer at an even higher price for the minority shareholders. The quality of oversight that the new acquirer brings to the enterprise may actually see the enterprise scaling new heights of performance. That, too, can only benefit the minority shareholders.

If the problem is confined only to Shaw Wallace, nothing more need be said though, of course, the losers are clearly the minority shareholders. They have lost considerable wealth with little prospect of recovering it in the foreseeable future. But the fact of the matter is that this problem cuts across the spectrum of industrial investments by the country's leading public financial institutions. They have been wedded to a policy of not disturbing the existing management structure in companies in which they have a significant stake.

Of course, there might have been some justification for this policy at a time when these institutions acquired shares at a considerable discount to their intrinsic worth, given the policy of conversion of loans into equity. Should these now be handed over to an acquirer at a price lower than they were really worth at the time of conversion, it could be viewed as a State-mandated expropriation of wealth of the promoters in favour of an outsider. But if the cost of these investments is worth more than the discounted value of all cash-flows from the investments from inception together with the current worth, the FIs need have no compunction about liquidating their investments. In any case there need be no such constraint in the case of acquisitions from secondary market operations. By setting off a war for corporate control, the FIs might just provide the much-needed boost to market sentiment.