GAMES PEOPLE PLAY

Context: When complex inter-corporate relations exist in a group, irregular transactions are more easily facilitated. Is this a text-book case of skilfully ignoring the interests of minority stakeholders?

  • An unlisted public company “A” was a significant shareholder in two other unlisted public companies owned by the same Group. One of these companies, “B” was a media and publishing company, and the other, “C” was into real estate.
  • “A” owned 24.41% in each of the other companies.
  • “A” was an investment holding company, and its revenue came from distributing publications of “B” in some major cities of India.
  • “A” was listed on Calcutta Stock Exchange (CSE) in March, 2015.
  • For many years, 22 minority shareholders of “A” had been filing complaints before SEBI and on the SCORES platform (SEBI’s complaints redressal system). While the complaints filed with SEBI are still pending (on the date this case is published), those on SCORES were disposed of without deciding or settling the issue raised in the complaint.
  • The case was regarding incorrect disclosures on promoter shareholding by “B”. In addition to “A” which held 24.41% shares of “B”, there were 2 more promoter owned companies that held 9.29% and 13.3% each in “B”. The shareholders also contended that the minimum public shareholding of 25% by a listed company was not followed by the 3 companies.
  • They further contended that the promoters "exercise total control over these three companies and are the ultimate beneficial owners of the company and have wrongly classified themselves as public shareholders of these companies which facts are so glaring, but for the reasons best known, SEBI has turned a blind eye and has disposed of the complaints in a cursory manner".
  • Since CSE was derecognised, the shares were transferred to the Dissemination Board of NSE in February, 2019. As per relevant regulations, the Board of the company in such a situation could undertake a buyback, to provide an exit to public shareholders.
  • In June, 2019, the Board of “A” approved buyback of 21,791 shares of the company, at a price of INR 11,229 per share. This was as per the valuation done by an independent valuer appointed by NSE. Some media reports indicated that the price should have been approx. INR 2,31,186 per share.
  • The Board at that time had 5 Directors, with 2 IDs and 3 Non-IDs.
  • In June, 2019, the company issued a special resolution through postal ballot seeking shareholders’ approval.
  • While this process was on, 2 shareholders with 0.0007% shareholding in “A”, filed a petition in Delhi High Court. They wanted the postal ballot notice declaration to be termed void. Until the passing of the final order, the Delhi High Court directed the company to not declare the results of the postal ballot.
  • In the petition, it was alleged that
    • The core business of “B” was highly profitable.
    • “C” owned several land parcels, buildings, flats and properties in prime locations in most key cities and states in India. These were acquired at very low cost, and their market price was in excess of thousands of crores.
    • “A” held 24.41% of both these companies.
    • The valuation report did not reveal the fair value of the shares of the company, and in some places admitted to lack of information and documents. In spite of observing that the company held investments in certain operating as well as certain non- operating companies, besides holding investments in mutual funds, shares, corporate deposits, the report had failed to demonstrate the fair value of the shares of the Company.
    • Further, even though the company was a major shareholder of “B” and “C”, the report stated that the company did not have access to detailed information about these companies.
  • In response to this, the valuer stated that it had no access to the complete information about the investments. For “B” and “C”, it had considered the consolidated audited accounts, reported for FY 2017-18, which was the latest audited accounts at the time of preparation of the report, as provided to it by the company. The valuation had been done on the basis of the financials alone, since no discussions had taken place with the managements of “B” and “C”.
  • The valuer further mentioned that in the case of “B”, value was derived by segregating its value of operations, and the value of non-operating/ surplus assets, and those had been considered and added separately, after appropriate adjustments.
  • As per media reports, in end June, 2019, a group of minority shareholders of the company had sent multiple complaints to SEBI against the proposed buyback, which grossly undervalued the stock. Investors had asked SEBI to stall the buyback process, investigate the matter and appoint an independent valuer.
  • As per media reports, the complaint filed with SEBI mentioned the following:
    • The company was trying to artificially depress its share price.
    • The valuer seemed to have used incorrect data, faulty logic and inappropriate discounting in the valuation report to reverse work the valuation back to the company’s approximate book value only. SEBI had prescribed the use of fair value method to calculate share price, which had not been followed.
  • The company responded to these allegations by stating that it had followed all the guidelines laid down by the concerned Regulators, and denied the allegations.
  • In August, 2019, the Delhi High Court dismissed the petition.
  • Also, the shareholders approved the buyback. The buyback offer was initiated in September, 2019 and it closed in October, 2019, at INR 11,229 per equity share.
  • In November 2019, SAT rapped SEBI for poor handling of investor complaints on SCORES and termed the 'platform as a mere eyewash'.
  • In its submission, the CSE had told the SAT bench that "this issue was submitted to SEBI, which prima facie showed that the three companies had violated the SEBI LODR Regulations, 2015, which provides for requirement of maintaining minimum public shareholding of 25% by a listed company, and the company wrongly had shown it as public shareholders."
  • SEBI approached the Supreme Court against the order passed by SAT.
  • On January 30, 2020, while refusing to go in to merits of a case, the Supreme Court directed SEBI to deal with complaints of investors of “A” positively and objectively within four months in accordance with law.

Points to ponder -

  • Should the opaque arrangements have not alerted the retail investors?
  • Can the grievance redressal mechanism move faster?

TIMING ONE’S DEPARTURE

Context: The resignation from the Board, of an Independent Director, who was also the Chairperson of the Audit Committee, raised major doubts in the minds of shareholders of a large mining company. They wanted to know the true reasons for her resignation, and listed a number of possible reasons. Was there a role for the Stakeholders Relationship Committee to step in and clear the air?

  • An Independent Director (ID) and Chairperson of Audit Committee (AC) of a large listed entity resigned from the Board citing the reason “to balance her work and other family commitments”.
  • The Small Shareholders Welfare Association, in an open letter posted on a blog, mentioned that “Madam, you were our representative on the Board, you owe it to us. Please give us the true reasons for your resignation. We have stopped expecting anything from other so called Independent (sic) Directors. No so-called independent director of the company has your spine and uprightness to let go such huge personal benefits that too post retirement”.
  • They also asked her to disclose the “true reasons” for her resignation since
    • She was getting paid handsomely, and received Rs. 85.50 lakhs from the Company.
    • She had not resigned from any other companies on whose Boards she was a Director.
    • Her final term as an ID was to come to an end in 9 months.
    • In FY 19-20, there were only 7 meetings of the Board and the AC.
    • Statutory Auditors had qualified the Audit report stating that the parent company was facing material uncertainty relating to going concern, owing to a $ 956 million inter-corporate loan to the parent company, and the probability of its repayment was questionable.
    • Questions were being raised on violation of the Company’s Dividend Distribution Policy.
    • There could have been differences or other issues such as issues of compliance, governance and audit that could have compelled her to resign or whether she was asked to resign.
  • The Small Shareholders Welfare Association went on to add that she was their representative on the Board, and they had tremendous faith in her. They also called her the “torch bearer of Corporate Governance”.
  • They also requested her to inform MCA, SEBI, Stock Exchanges, Life Insurance Corporation and small shareholders about the true reasons behind her resignation.
  • The Stock Exchanges sought clarification from the Company on grounds that there were no other material reasons other than those provided by the Company for the resignation of the ID. The Company accepted that there were no other reasons, and attached her resignation letter.

ANSWERS THAT RAISED QUESTIONS

Context: A Founder of a bellwether IT company, raised issues regarding an acquisition made by the company. His complaints led to the company’s Board and management claiming that there was nothing wrong in the decision. Continuous questioning by the Founder led to the company making a strange regulatory filing. Could both sets of protagonists have handled this matter better?

  • Vide an email in July, 2017, one of the founders of an IT company had asked the Board of the Company to publish the reports relating to the acquisition of one company. This included 3 investigation reports by 3 law firms, and the independent valuation of the Company. He also raised issues relating to whether any employee or his/her relative had benefitted from the deal, and whether the reported objections of the then-CFO had been addressed.
  • The Co-Chairman of the Company replied to the email declining to publish the reports stating that there was no evidence of any wrongdoing by the Company in the said acquisition.
  • Vide another email in August, 2017, the Founder reiterated his concerns, and raised some additional issues on Corporate Governance. He added that the points raised in his earlier email were based on a whistleblower complaint, which were available in public, wherein the Chief of Legal, Chair of Board, Chair of Audit Committee, Chair of Remuneration Committee, all Independent Directors (except 3 of them), the CEO, 2 of the law firms, and the auditors being involved in some manner or the other.
  • He felt that it would have been appropriate for the Board to put the 3 investigation reports and the valuation report on the website of the Company, and provide a point-by-point denial of the whistleblower accusations fully supported by data and facts. He felt that the whistleblower had made serious allegations, and just a top-level press release would not be sufficient.
  • The MD and CEO resigned in August, 2017, and the company blamed the Founder’s “assault” as the primary reason for this. They stated that the Founder’s letter contained factual inaccuracies, already-disproved rumours, and statements extracted out of context from his conversations with Board members.
  • The Founder denied this. He stated that he just wanted answers to the questions posed by him as a shareholder. He however did not attend the AGMs held in 2017 and 2018.
  • The Company had, in a filing to US Securities and Exchange Commission (SEC) in 2016-17, classified activist shareholders among its many risk factors that could negatively affect its business and stock price. The Company had said that "Responding to actions by activist shareholders can divert the attention of our Board of Directors, management and our employees and disrupt our operations. Such activities could interfere with our ability to execute our strategic plan. This may also require us to incur significant legal fees and public relations costs. The perceived uncertainties as to our future direction could affect client and investor sentiment, resulting in volatility in the price of our securities."