Institutional EYE

Commentary on Corporate Governance Issues

The 'here and now' boards

March 6, 2017

 

Myopia at the boardroom can be unhealthy and leave stakeholders confused about the company’s strategy. Making structural changes and then going back on these decisions just as soon as shareholder approval is received displays a certain lack of understanding about the business dynamic and its external environment. Boards are expected to be thoughtful and provide investors comfort in the predictability of their behaviour.

Boards are responsible for taking actions that are in the best interest of the company – both for the short-term and for the long-term. Structural changes are typically taken for the long-term interest of the business – either to mothball unsuccessful verticals, or to create separate structures that enable strengthen control and oversight. Yet, when boards recall their decision to undertake structural changes even before the ink (on the shareholder approval) is dry, it raises several questions on the boards ability to provide strategic oversight.
 
Recently, decisions taken by the boards of Hathway Cable and Datacom Limited (Hathway) and Triveni Engineering and Industries Limited (TEIL), were recalled, leaving investors concerned about the strategic direction of these companies.    
 
Hathway Cable & Datacom Limited.
Hathway’s board decided to separate the Cable TV and ISP business into two separate entities. The Cable TV accounted for 74.3% of FY16 revenues while the ISP business accounted for the remaining 25.7% of revenues. There is no clarity regarding the profitability levels of these businesses.
 
Hathway first decision in October 2016 (CCM) was to demerge the ISP business and transfer it to Hathway Broadband Private Limited (HBPL), a wholly owned subsidiary, at a valuation of Rs.980.5mn. While the shareholders approved the resolution, the petition is pending with the High Court of Judicature at Bombay (Bombay High Court).
 
The board now wants to withdraw its petition filed with the Bombay High Court and proposes a new scheme – to demerge the Cable TV business via a slump sale to Hathway Datacom Central Private Limited (HDCPL), a wholly owned subsidiary. Hathway’s current market capitalization ranges at around Rs.30 bn, yet it set consideration for the dominant business at a minimum of Rs.3.0bn. Setting the floor for a valuation does not provide sufficient information for shareholders to make an informed decision. Further, the reversal of the decision itself lacks sufficient explanation, and there is no clarity on how HDCPL will finance the consideration (once it is set).


Triveni Engineering & Industries Limited.
At its 19 December 2015 CCM, Triveni Engineering & Industries Limited (TEIL) had proposed a scheme to separate the sugar and engineering business. The scheme involved two subsidiaries - Triveni Sugars Limited (TSL) and Triveni Industries Ltd. (TIL).
 
The company had proposed a structure where five of the sugar manufacturing units were proposed to be held within TSL for a consideration of Rs. 1.4 bn in the form of TSL shares. TEIL was to transfer two sugar plants to TIL for a consideration of one equity share of TIL for every share held in TEIL. TIL would be a wholly-owned subsidiary of TEIL, while TSL would in-turn be a subsidiary of TIL. The engineering business would continue to be held within TEIL.
 
The scheme was approved by shareholders. However, the company came up with another CCM on 3 September 2016 proposing a new scheme.  The new scheme proposes to house all 7 sugar plants and sugar related businesses in a single wholly owned subsidiary – Triveni Industries Limited (TIL). In exchange, TIL will issue and allot one equity share of Re. 1 each for each share held by shareholders in TEIL.
 
Although the new structure is cleaner, the board’s rationale for suggesting this structure as an afterthought remains unclear. The only rationale provided by the company is that the scheme has been changed because of “the improvement in the sugar industry”.  

IiAS Comment
Both companies have provided scanty information to shareholders regarding the rationale for this change. Given the extremely short gap between bringing the two proposals to shareholders, the companies should have been more forthcoming.
 
Markets change and companies need to react. But, making frequent changes to the more enduring structural aspects belies a certain hastiness that is best avoided. Changing the group structure at such frequency adds to the cost of the transaction to say nothing of the time and energy dispensed. Worryingly, it reflects poorly on the management and boards, signalling that they have not done their homework before approaching shareholders.
 
In the long run, we are indeed all dead. But, companies must endure. Therefore, boards have a responsibility towards the future.

 

 For entire report click here

 

 

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