Corporate disclosure rules are meant to be like a torch that can be used to pierce the darkness in which a lot of company managements operate. They thus help investors see clearly before they decide whether to buy or sell a stock.
The revelation that German insurer Allianz holds options to increase its stake in its joint ventures with Bajaj Auto in insurance shows how dim the torch can sometimes be in India. Investors and analysts have been valuing the two-wheeler company assuming that it will continue to own 74% in the insurance joint ventures. Now they have been told that Allianz could increase its stake from 26% to upto 74% by the year 2016, and that too at a specified price that gives the Indian partner an annualized return of 16%. That, in effect, means that Bajaj Auto’s claim on the insurance companies’ growing future cash flows is far lower than earlier assumed. Or, in other words, the fair value of its traded shares is far lower than anticipated. Many investors are outraged.
Bajaj Auto is almost certainly not alone in structuring such closed-door deals with foreign companies. A similar arrangement was evident when Hutchison Telecom gave control of its Indian telecom joint venture, Hutch-Essar, to Vodafone. It was then revealed that the stakes held by Asim Ghosh and Analjit Singh were being indirectly funded by Hutchison, which also had an option to buy the stakes at a later date and at a price that is fixed. A call option, again. It is very likely that a majority of insurance joint ventures have similar structured deals, where high-return debt masquerades as equity capital.
Since Hutchison Telecom is listed in the US, it had to disclose these call options to the Securities & Exchange Commission, the US market regulator. The call options held by Allianz, too, were made public only because Bajaj Auto is demerging, and the true value of each business is an important parameter in demergers. In other words, both disclosures have been made under special circumstances rather than as a matter of course.
Ordinary shareholders of companies need clear information on the investments and expected returns in (among others) insurance joint ventures.
Here’s where the Securities and Exchange Board of India’s Disclosure and Investor Protection Guidelines come in. The capital market regulator’s guidelines, and the listing agreements companies have with major stock exchanges such as the National Stock Exchange and the Bombay Stock Exchange, specifically require disclosure of ‘all material facts’ to shareholders. Given the multi-crore investments Indian companies have made in the long-gestation insurance business, without any prospect of dividend income anytime soon, all such agreements need to be put in the public domain.
These joint venture agreements have been disclosed to the Insurance Regulatory & Development Authority (Irda), the insurance regulator. Irda is not bound to open the agreements to public scrutiny—that is not its job.
Then who should force companies to light the torch of public disclosure? India does not have a financial sector super regulator, like Britain’s Financial Services Authority, which oversees all financial markets. Each regulator manages its corner of an increasingly integrated financial system. But the major financial regulators in India do have a coordinating committee that meets regularly to exchange notes. Sebi should take up the issue of secretive call options in insurance joint ventures with Irda, but only if there are listed companies involved.
As of now, these matters seem to be falling between the gaps in the regulatory turf. All investors should have equal access to the main ownership clauses in any joint venture deal.
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