Small investors look to raise concerns about undervalued holding companies




Unifi said it would want to adopt the path of consensus rather than confrontation. NSEBSEZensar TechnologiesLoading data…

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                    ChartsValuation & Peer ComparisonCommunity BuzzPEER COMPANIESkama holdings ltdkama holdingsKalyani InvestmentInfosysBharat ForgeAlembic PharmaceuticalsEXPAND TO VIEW ALL When the minority shareholders of Alembic Pharmaceuticals moved a resolution seeking a board seat at one of the country’s oldest pharmaceutical companies last month, they were setting a precedent.

                    The spotlight is now shifting to other corporates such as RPG, Kalyani Group and SRF Industries. Small shareholders led by activist asset manager Unifi Capital are planning to join forces and raise concerns about governance standards, especially in listed holding companies.

                    “Most holding companies have little or no transparency with regard to either dividend distribution or capital allocation. This has led to terribly sub-optimal value for minority shareholders,” said Sarath Reddy, managing director, Unifi.”This situation can be rectified only by compelling managements to be accountable and unlock the huge value of their investments.”

                    Alembic’s promoters, who own a 66 per cent stake in the company, defeated the move that was led by Unifi. The company also questioned the motive behind the move.

                    “Having bought the holding company at a so-called discount to its intrinsic value, he (Unifi) may not now crib about this valuation difference,” said Alembic chief financial of ficer Rajkumar Baheti. “We already have four independent directors of high repute, knowledge and integrity. We would welcome another director if he is genuinely sponsored by small shareholders, but Unifi is a large shareholder of Alembic and has inducted new shareholders to make its case. A director nominated by Unify will be pushing a vested agenda on the board.”

                    But that hasn’t stopped small investors from eyeing other targets. Under the scanner are Kama Holdings Ltd, the promoter holding company of the diversified SRF Ltd; Kalyani Investments, through which Baba Kalyani and his family own 13.60 per cent of their 45.75 per cent stake in flagship Bharat Forge; and Summit Securities, one of the promoter entities of Harsh Goenka that in turn owns shares in all listed group companies -Ceat, KEC International and Zensar Technologies.

                    The fund has already written to two and plans to write to Kalyani Investments, urging them to take steps and address valuations that are low in relation to the underlying value of the operating companies in which they themselves own shares.

                    Unifi has said in its communications that these holding companies could use the cash for a buyback, pay dividends or distribute stock of the investee company to increase the value of the shares.

                    Buoyed by new legal provisions, a proactive regulator and recent headlinegrabbing boardroom battles involving some of the most respected corporate names, issues such as “holding company or a conglomerate discount” are no longer holding small investors back. Far from being mute spectators, they are willing to go the extra mile and seek out what they feel is rightfully theirs.

                    Companies Act and Securities and Exchange Board of India regulations empower minority shareholders and assign responsibility to independent directors to achieve this objective, said Reddy.

                    Barring Alembic, the companies cited above declined to comment. An executive close to one of them said that it was a blackmail tactic and there was no legal ground for Unifi to pursue action.All stocks have moved in tandem with share price movements of investee companies and have yielded returns higher than bank deposits. The cash held by his company is reserved for further investment, he said.

                    Rallying Point

                    Till date, the most powerful tool in the hands of minority shareholders has been bringing a suit for oppression and mismanagement, said Suhail Nathani, managing partner, Economic Law Practice. “Under the 2013 Companies Act, Section 245, over 100 shareholders can also file a class action suit but its application and enforcement is still nascent,” he said.

                    Among the most high-profile battles of this nature was that of Cyrus Mistry’s ouster from Tata Sons, which went in favour of the promoter. Around three years ago, Unifi started a fund dedicated to investing in listed holding companies with majority or significant minority stakes in other operational units but having no other business activity. It invested in 10 such companies, including Alembic, Kama Holdings, Summit Securities and Kalyani Investment.

                    Over time, Unifi came to the conclusion that these companies were trading at a discount of as much as 80 per cent to the value of their cash and shareholding in other companies. Typically, holding company shares trade at a discount due to inefficiencies of tax, lower volume of trading and a greater dependence on promoters. However, on the Nasdaq, most of them are at most 30-35 per cent discounted, said an investment banker in the capital markets space, asking not to be named.

                    “One of the main reasons for this unfortunate state of affairs is the abdication by independent directors of their role as protectors of the interests of minority shareholders,” said Reddy.

                    Invoking a clause of the Companies Act isn’t enough, said Anil Singhvi, chairman of Ican Investments, another activist firm.”Minority shareholder action needs a lot more engagement with other shareholders, institutions and independent directors,” he said. He cited the example of Infosys, where NR Narayana Murthy worked away at the problem for over two years before he succeeded.

                    Singhvi believes such cases need be pursued doggedly to succeed, possibly through class action suits -a practice popular in the US -like the ones filed against Infosys.

                    The Watershed Case

                    In July, more than 1,000 shareholders of the 110-year-old Alembic moved a resolution to appoint a director on their behalf at the annual general meeting (AGM), seeking better investor returns through reorganisation moves in the Chirayu Amin-led company.The shareholders all came under the Unifi banner and asked that Murali Rajagopalachari be appointed under Section 151 of the Companies Act 2013.

                    Under this, only shareholders with holdings of a nominal value less than Rs 20,000 can enforce governance and decisions in a company or elect directors through a postal ballot –an unprecedented move that had stunned lawyers and company secretaries alike.

                    Unifi represented a total 6.5 million shares across 1,025 accounts as of July 15, worth about Rs 26 crore. Unifi itself holds 380,000 shares valued at Rs 1.5 crore at current prices.

                    “The Alembic case will not only define the equation between companies and its investors, but significantly assess the protection regulations,” Shriram Subramanian, MD, In Govern Research Services, a proxy advisory firm that works with institutional investors on corporate governance standards, had written at the time. “This is a seminal case as it is the first time a set of sophisticated domestic investors are taking a firm stance.”

                    For its part, Unifi said it would want to adopt the path of consensus rather than confrontation.

                    “We trust that given time for reflection you will recognise that the interests of the minority shareholders are completely aligned with that of the promoters,” it said in an August 3 letter to Alembic. “We reserve our rights to protect and enforce the rights granted to us under law but would hope that we would not have to take a confrontational path as we remain interested in working with the company in securing the optimal value for the investments by the small shareholders in the company.”




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