Public Sector – follow corporate governance

The financial express has a piece today on the listed public sector companies. A third of them still don’t follow the most basic of corporate governance norms of one third (or one half where there is no split between Chairman and MD) independent directors. This is five years after the law mandated the requirement and two years after SEBI sent them a notice asking them why penalty not be imposed upon them. Violating the provision can invite serious penalties and delisting from the exchanges. Can the g0vernment pull up the babus who are not doing their job in the appointment process? As I pointed out one year back, it is not the fault of the public sector companies, as the appointment is done by the government and not by them.

See my post of last year for the full context.

SME stock exchange – bad idea

There is a lot of talk going on about a stock exchange for small and medium enterprises (SMEs). Much of it is politically right (in the short term), but bad economics. While it is true that small companies often have access only to bank loans and equity investment by friends and relatives, giving access to the public capital markets is a poor idea for many reasons.

Investors will lose massive amounts of money out of genuine failure as is common in much of small business. This will then be erroneously named fraud and people running these companies persecuted. At the same time investors will be disillusioned because this new beast of an exchange will have 95 failures for every 5 successes. Even private equity investments which not only do a thorough due diligence, but also sit on the investee company’s board and even get them business lose their entire investment in 9 out of 10 investments (they do hope to make it up in the 10th company though).

Without deviating from the recognition that SMEs have a crucial importance to the Indian economy, it would therefore be a bad idea to introduce a classic exchange for SME companies. Even introducing a minimum lot size of say Rs. 10, 00,000 (1 million rupees) as investment will not take away the stigma such an exchange will pose – though much of the losses will be suffered indirectly by mutual funds and insurance companies. It will thus be a bad political move to introduce such an exchange – in the medium to long term. The equity infusion in small companies will necessarily have to continue from traditional sources and governments should aim to improve access to bank loans to such enterprises besides giving whatever incentives are needed to grow the private equity and venture capital industry.

Takeover regulations – what a mess

If you have any doubts that the SEBI takeover regulations are a royal mess, check out the following chart, which tries to unravel the mind numbing complexity (and nearly all of it wholly pointless complexity) in the trigger for a compulsory tender offer. To add to this sad story is the sadder story of regulations being changed almost every moment (SEBI regulations incidentally need to be tabled before the parliament, and thus ought to have some level of permanence). Even as I type this blog post, another amendment is in the works, or rather in the press. So which is worse? Between the two, in my opinion, the frequent changes make the worse story – though there is no reason why both don’t need to improve. If there is no philosophy behind a regulation, it is bound to be changed frequently and randomly – it’s like the adage, if you don’t have a destination, any road will take you. Witness, the US regulations have virtually not been touched in the last 40 years since their introduction.

Note: the chart below will be inaccurate in a few days time. Note also that this is not a comprehensive chart.

Prior holding (%)	Acquisition (%)	Post acquisition holding (%)	Is a compulsory tender offer triggered (?)
0	5	5	No
0	14.99	14.99	No
0	15	15	Yes
10	4.99	14.99	No
10	5	15	Yes (though absurd because a 5% acquisition with 15% holding is exempt)
14	5	19	Yes (also absurd)
15	5 in one year	20	No
15	6 in one year	21	Yes
49.99	5	54.99	No
50	5	55	Yes
55	One share (not through open market purchase or buy back)	55 + One share	Yes
55	One Share (through open market purchase or buy back)	55 + One share	No
60	Consolidation by tender offer	75% or 90% (depending on the min public shareholding	Yes, but offer can be for less than 20%
70	4.99 (through open market purchase or buy back)	74.99	No
75	One share (where minimum public shareholding per listing agreement is 10%)	75 + One share	Yes
75	One share (where minimum public shareholding per listing agreement is 25%)	75 + One share	Prohibited
85	One share (where minimum public shareholding per listing agreement is 10%)	85 + One share	Yes
–	Change of control	–	Yes

Serious Fraud Investigation Office – tries seriousness

The SFIO was thought of as an apex investigative body for complex economic offenses when it was set up in 2003. Unfortunately, it can do little investigation or enforcement. In a story in Mint their complete irrelevance is demonstrated:

SFIO has written to capital markets regulator Securities and Exchange Board of India (Sebi), Reserve Bank of India (RBI), National Securities Depository Ltd (NSDL) and the income-tax (I-T) investigation wing in Ahmedabad and Mumbai asking for records of all the proceedings against key financiers and entities allegedly involved in the scam.

“In August, we wrote to the agencies asking for all the information required for investigation, but no one has responded yet,” said the official. He declined to be identified as he is not authorized to speak to the media.

Government agencies don’t even bother to reply to its queries. It has been given no real investigative powers by parliament and tries to eke out some meager powers under a dozen sections of the Companies Act. If someone refuses to co-operate, it can do little except make a reference to other agencies of the government/statutory bodies – the same agencies which refuse to even reply to their letter of August.

It is time to either empower it or to disband it.

See the Mint piece here.