The time has come to force promoters out of companies where appropriate
Promoters are now experiencing a threat to their God-given right to run firms while leaving lenders high and dry
Indian business is quite akin to Indian politics where heredity rules rather than talent. However, unlike politics where incumbents can be voted out, Indian promoters tend to be like royals and cannot be forced out regardless of competence or character. (Obviously, there are a large number of exceptions to this.)
The first threat to the happily established convention that management and ownership is the same and there is no way an incumbent can be removed regardless of competence or shareholding came through the Insolvency and Bankruptcy Code. For the first time, Indian promoters are experiencing a threat (and have in some cases lost their companies) to their God-given right to run their companies and milk them whilst leaving their lenders high and dry.
I believe we need to take this to the next level by encouraging a market for control which does not exist in India.
We have evolved in our culture where employees lost their lifetime loyalty to companies and promoters followed and have lost their loyalty to their companies and are willing to sell. However, the latter happens only by their choice and I would believe that the time has come for forced exits where appropriate. This will put managers on their toes and ensure that the banks and financial institutions are not left high and dry and take massive haircuts later.
This would be a boon to public shareholders (directly and indirectly as a lot of the financial institutions’ stake is public money) who need not wait for change of control to happen post bankruptcy and a huge loss of wealth.
If another corporate group believes it can run and generate better returns than the incumbent management, it should bid.
In this context, if we take a live current example: Could Fortis Healthcare Ltd have had a different story today if someone had attempted a hostile takeover say in December 2015 when the shareholding of the promoters dropped to about 18% effectively (they had pledged almost 75% of their shareholding of 73%). I have been writing every year for about 14 years in my foreword to the annual issue of Dealtracker of Grant Thornton that this year I hope that we will see hostile takeovers.
India has seen very few attempts at hostile takeovers and fewer successful ones. Unfortunately, whenever we talk of hostile takeovers we hark back to the 1980s when Swraj Paul was defeated in his attempt to takeover Escorts and DCM by the government of India. The only other instance that comes to mind are VST and GESCO where raiders and John Band of ASK Raymond James tried to do a hostile takeover.
This article is a call to action for all the participants in the market. For a change, the ball is not in the court of the government or Securities and Exchange Board of India (Sebi). The regulatory aspects are reasonably comfortable and may just need some tweaks. They are not major impediments to a hostile takeover and I am sure the tweaks needed will be put in place once they are brought to notice. What is needed are some attempts at hostile takeovers.
Financial institutions (FIs) and foreign institutional investors (FIIs): FIs and even FIIs have traditionally backed incumbents for a variety of reasons. They need to start messaging that if they find a situation to back a raider in any company where they have a significant shareholding, they would evaluate and support such cases on merits.
Independent directors: They have a key role in advising shareholders on the suitability of the hostile offer and they need to evaluate and advise shareholders acting as true independent directors in the interest of all shareholders. This is a tricky situation as sometimes, the takeover may fail and they will have to evaluate continuing on the board.
Proxy advisory firms: They need to increase efforts in pushing managements to perform and identify cases of poor management and governance—a task they have commenced and doing well— much more.
Investment bankers: I believe this can be a new area of practice for bankers. I-bankers, (we need more John Bands) need to identify potential targets and take it to the appropriate promoters/funds and trigger offers.
Private equity (PE) funds: Large PE funds should consider supporting such attempts and as this area develops, I am sure some dedicated funds focussed on this will be created. Let me repeat my oft-repeated quote: “Hope to see hostile deals in the Indian market soon.”
Harish was part of the India Leadership Team of Grant Thornton India wherein he focussed on corporate finance among other things. He is now on a jobbatical
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