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The contents of an American diplomatic cable sent from Mumbai in the early part of 2009 suggests acquirers routinely make clandestine payments to promoters to reduce their cost of acquisition — avoiding regulatory scrutiny.
The tactic is used to favour the promoters at the expense of minority shareholders, in circumvention of the Securities and Exchange Board of India (Sebi) regulations, according to allegations in a cable sent by American Diplomats in India, made available by WikiLeaks.
The cable (09MUMBAI85_a), dated March 2, 2009, quoted an unnamed Indian financial services executive talking about an acquisition where two companies conspired to reduce acquisition cost through back-door payments to the promoters.
“….a senior manager at an Indian financial services company — who is himself the son of the company’s founder, and whose family owns 51 per cent of the company — alleged financial inappropriateness in a large Indian company, which recently purchased another company on which his company served as broker,” said the cable.
It went on to detail the scheme, whereby the promoters were paid 60 per cent more than the disclosed price through money transferred into a Swiss bank account.
“According to the senior partner, the acquiring company publicly offered Rs 1,000 ($20) per share to buy a majority stake in the company, but paid an additional Rs 600 ($12) per share privately into a Swiss bank account to the acquisition’s owner, for a total of Rs 1,600 ($32) per share,” it said.
The reason why the two companies decided to do this, according to the cable, is that Sebi rules require a company buying a large block of shares from a promoter to offer to buy an additional 20 per cent of shares from other public shareholders at the same price as offered to the promoter (or large shareholder).
“The acquiring company didn’t want to buy an additional 20 per cent of shares at Rs 1,600, so ensured the publicly offered price was at a much less attractive Rs 1,000 — thereby cheating the shareholders of the purchase price, as well as the revenue department,” noted the cable.
This is not said to be a one-off incident; in fact, it may even be quite widespread. “The senior partner claimed this was “common practice” in such deals,” according to the cable.
The cable does not specify the date of the transaction with the alleged wrongdoing.
Bloomberg data show an additional 452 acquisitions were announced in the five years up to 2008-09, apart from the 125 that year. There were a total of 577 transactions, worth $42.7 billion during the five-year period.
The cable is marked from Mumbai and has been sent to a wide variety of American government entities. These include innocuous ones, such as the Department of Agriculture and the Department of Energy. But these also include the Central Intelligence Agency(CIA), the Department of the Treasury and the National Security Council.
Interestingly, the cable sought to examine the challenges to improving corporate governance following the Satyam scandal. The summary, based on meetings with Indian experts, noted that the corporate governance was still at a nascent stage in India. A comment at the end of the cable noted how the status of founding promoters often acted against good governance.
“As long as promoters of the company play a direct role in management, Mumbai interlocutors view good corporate governance as more of an illusion rather than a reality. In older companies, where company heads are treated as celebrities and heroes — on a par with film stars — movements to force change at the top are unlikely to work. As Indian companies increasingly aspire to be global companies, they face the inconvenient fact that transparency and good governance matter to investors. Whether the fallout of Satyam forces them to concede this remains to be seen,” it said.
