Dhiraj Relli
MD & CEO, HDFC SecuritiesWith a career spanning over two decades, Relli brings to the table a wealth of experience in banking, wealth management and financial services. Previously, he has worked with ICICI Bank and Centurion Bank of Punjab. Relli is a qualified chartered accountant and has also studied at the prestigious Indian Institute of Management, Bangalore.
Refreshing change in attitude of company promoters helps shareholder value creation
Gone are the days when promoters acted as lords of their companies, oblivious of the requirements of changing times or suggestions from lenders or minority stakeholders.
Today, the power of market capitalisation is all encompassing. Keeping an eye on market-cap (and protecting or pushing it up) seems to be one of the unwritten functions of promoter shareholders in an era when dynamism, disruption and changes in the business environment are rules rather than exceptions.
Laws for protecting lenders or minority shareholders’ interests have become stricter and more stringent.
We have observed the following on their part recently:
Mergers: Merger with listed or unlisted subsidiaries or associate companies to bring in synergies and cut costs (EID Parry – Parry Sugar, Camphor & Allied - Oriental Aromatics, OCL India – Dalmia Bharat, Borosil Glass with its recently-acquired companies) , although this may at times result in an increase in promoters’ shareholding in the merged companies. However, they are careful not to overpay/overvalue the merging companies, and also gradually bring in value for other shareholders due to the event by actually delivering accretion to EPS.In situations where the intent of corporate action is unclear, the proxy advisory and corporate governance companies are doing a great job advising shareholders about the view that they should take while voting for such proposals. As the promoters are wary of bad press, they are careful about drafting the scheme in a manner that is not unfair to the minority shareholders.
Acquisitions: Acquiring other companies in a similar space to achieve size and new skill sets, offerings or customer relationships (example - a recent large merger / acquisition in the private insurance space). The selling companies are also willing to play along, as their sustenance and growth is assured under a larger umbrella (eg HCL Tech – Geometric). Later, these acquired companies may be merged with the acquiring one to offset the accounting for goodwill and get all the benefits of synergies etc. (Suprajit Engg – Phoenix Lamps)
Demerger: Promoter shareholders of companies that are debt laden have begun the process of identifying businesses that could fetch a good price, demerge them so as to bring down the overall debt levels in their books and lighten the balance sheet (JP Power Ventures). A few years ago, this was unheard of or unthinkable. Promoter shareholders are also willing to demerge diverse businesses into different companies so as to give each business space to grow and unlock value by allowing different valuation rules to be applied to them and avoid conglomerate discounts. (Max India demerger into three companies, Orient Paper-Orient electrical, Tube Investments, Reliance Capital - Reliance Home Finance, AB Nuvo demerging financial services after merging with Grasim).
Even now, many listed holding companies quote at a price which is a fraction of their derived NAVs. This is because the shareholders are unsure if the shares held by the holding company will be sold at all or the timing thereof. In 2015, Kirloskar Group undertook a restructuring exercise of demerging its travel services undertaking along with various investments in Kirloskar Brothers Investments (KBIL) into Pneumatic Holdings (PHL), and merge the residual KBIL with Kirloskar Oil Engines (KOEL). By virtue of this scheme, the shareholders of KBIL will directly hold shares in PHL and KOEL. Hence, the shareholders of KBIL procured shares of two different listed companies, resulting in total value unlocking of the holding company valuation. If more companies follow this example, minority shareholders will benefit immensely.
If the promoter shareholder undertakes these corporate actions repeatedly (with a single-minded focus on market cap), it could result in comparisons becoming difficult and lenders being misled. Investors have to be cautious about such promoter shareholders.
Conclusion: One of the reasons that the participation of retail investors in the country is not very high in direct equities is their mistrust of the promoters’ intent and ability to care for minority shareholders due to their actions in the past/past records.
However, if the trend of the abovementioned corporate actions continues, equity valuations of a host of small and midcap companies could rise, attracting retail investors in large numbers to the direct equity route. A combination of dynamic disruption, regulatory pressure, generational change and fear of bad press are leading us there.
(Dhiraj Relli is the CEO & Managing Director of HDFC Securities. Views expressed in this article are his own and do not represent those of ETMarkets.com. Investors are requested to consult financial advisers before taking any investment decisions based on the contention of this article)
Today, the power of market capitalisation is all encompassing. Keeping an eye on market-cap (and protecting or pushing it up) seems to be one of the unwritten functions of promoter shareholders in an era when dynamism, disruption and changes in the business environment are rules rather than exceptions.
Laws for protecting lenders or minority shareholders’ interests have become stricter and more stringent.
We have observed the following on their part recently:
Mergers: Merger with listed or unlisted subsidiaries or associate companies to bring in synergies and cut costs (EID Parry – Parry Sugar, Camphor & Allied - Oriental Aromatics, OCL India – Dalmia Bharat, Borosil Glass with its recently-acquired companies) , although this may at times result in an increase in promoters’ shareholding in the merged companies. However, they are careful not to overpay/overvalue the merging companies, and also gradually bring in value for other shareholders due to the event by actually delivering accretion to EPS.In situations where the intent of corporate action is unclear, the proxy advisory and corporate governance companies are doing a great job advising shareholders about the view that they should take while voting for such proposals. As the promoters are wary of bad press, they are careful about drafting the scheme in a manner that is not unfair to the minority shareholders.
Acquisitions: Acquiring other companies in a similar space to achieve size and new skill sets, offerings or customer relationships (example - a recent large merger / acquisition in the private insurance space). The selling companies are also willing to play along, as their sustenance and growth is assured under a larger umbrella (eg HCL Tech – Geometric). Later, these acquired companies may be merged with the acquiring one to offset the accounting for goodwill and get all the benefits of synergies etc. (Suprajit Engg – Phoenix Lamps)
Demerger: Promoter shareholders of companies that are debt laden have begun the process of identifying businesses that could fetch a good price, demerge them so as to bring down the overall debt levels in their books and lighten the balance sheet (JP Power Ventures). A few years ago, this was unheard of or unthinkable. Promoter shareholders are also willing to demerge diverse businesses into different companies so as to give each business space to grow and unlock value by allowing different valuation rules to be applied to them and avoid conglomerate discounts. (Max India demerger into three companies, Orient Paper-Orient electrical, Tube Investments, Reliance Capital - Reliance Home Finance, AB Nuvo demerging financial services after merging with Grasim).
Even now, many listed holding companies quote at a price which is a fraction of their derived NAVs. This is because the shareholders are unsure if the shares held by the holding company will be sold at all or the timing thereof. In 2015, Kirloskar Group undertook a restructuring exercise of demerging its travel services undertaking along with various investments in Kirloskar Brothers Investments (KBIL) into Pneumatic Holdings (PHL), and merge the residual KBIL with Kirloskar Oil Engines (KOEL). By virtue of this scheme, the shareholders of KBIL will directly hold shares in PHL and KOEL. Hence, the shareholders of KBIL procured shares of two different listed companies, resulting in total value unlocking of the holding company valuation. If more companies follow this example, minority shareholders will benefit immensely.
If the promoter shareholder undertakes these corporate actions repeatedly (with a single-minded focus on market cap), it could result in comparisons becoming difficult and lenders being misled. Investors have to be cautious about such promoter shareholders.
Conclusion: One of the reasons that the participation of retail investors in the country is not very high in direct equities is their mistrust of the promoters’ intent and ability to care for minority shareholders due to their actions in the past/past records.
However, if the trend of the abovementioned corporate actions continues, equity valuations of a host of small and midcap companies could rise, attracting retail investors in large numbers to the direct equity route. A combination of dynamic disruption, regulatory pressure, generational change and fear of bad press are leading us there.
(Dhiraj Relli is the CEO & Managing Director of HDFC Securities. Views expressed in this article are his own and do not represent those of ETMarkets.com. Investors are requested to consult financial advisers before taking any investment decisions based on the contention of this article)
