After an adverse report on Indiabulls’ governance by Canadian firm Veritas, experts said the shareholding structure at Indiabulls firms left room for improvement.
Shriram Subramanian, founder and MD of InGovern Research Services, a corporate governance advisory firm, said, “In the past year, InGovern has issued recommendations on a few shareholder meetings of the Indiabulls group. In general, the group undergoes capital structure and corporate restructuring very often.
Also, there are frequent warrant issues and preferential allotment of shares to promoters and related parties. In addition, shareholders have given blanket approval to the board of directors to give loans to related parties. Swap ratios are easily manipulated and shareholders readily approve them. Because of these, it is not easy to follow the money, and see whether value is being destroyed or created. The above issues leave a lot of ground for raising governance issues.”
| BAD GOVERNANCE OR ULTERIOR MOTIVE | |
| Veritas charge | Indiabulls response |
| IIDL’s merger with Indiabulls Power (IB Power) transfers value from the public shareholders of IB Power to a select few | IB Power benefited through enhanced networth of Rs 1045 crore through IIDL merger |
| Ownership of Indiabulls Real Estate (IBREL) and by extension its public investors in IB Power declined from 62.34% to 52.54% | IBREL share-holding in IBPOW actually increased from 53.20% to 53.97% through the merger process |
| 41.6 mn shares in IIDL sold to private companies FIM and Hexagram at Rs 10 per share in May 2011 valuing IIDL at Rs123 cr | KARRICK and FIM as per deal on Jan 26, 2007 picked 12.25% in IIDL for Rs 447 crore |
| IBREL’s application convening a meeting of equity shareholders – dated March 3, – in the Delhi HC contains statements that can be characterized as misleading | Casting aspersions on decisions of honorable high court approving the merger tantamounts to contempt of Court |
| During FY-12, Indiabulls Financial Services recognized Rs 120 crore of income on its P&L for a loan extended to its Employee Welfare Trust (EWT). EWT is unable and incapable of servicing the loan | EWT is being levied interest @12% per annum and the total interest income is Rs 99 crore and not Rs 120 crore. EWT is Esop trust and employees will pay the interest costs when exercising the options |
| Inclusion of interest income from EWT resulted in increase in profit before tax for FY-12 by 33% | Net Interest Income is Rs 18 cr given that IBFSL has cost of funds of 10.1% for FY12. Rs 18 cr is less than 1% of NII of Rs 1,866 cr earned by the firm in FY12 |
A former research head with a domestic brokerage said, “To some extent, the prices have already taken care of these companies which are highly leveraged. The market follows the simple metric of enterprise value/market cap and wherever this is steep (1-2 times is considered safe), the stock prices have corrected. This is the fourth large group Veritas has raised concerns against in the recent times. While their take is not totally unjustified, such issues can be raised in practically every company in the market. Then nobody should invest in the Indian market.”
Indian firms were far more transparent than their American counterparts, he added.