Frankly I think in the next one year, a few companies will be taken private. Whether Punj Lloyd will be one of them I don’t know. But it is a tempting thought.” These are some of the thoughts that Atul Punj, chairman and founder of the Punj Lloyd Group expressed in a recent interview to a newspaper. Mr Punj is upset about rumours floating around about his company that have got analysts asking too many questions. His company’s shares, he believes, have been shorted in the market. Some of these rumours appear to have surfaced because his company has been in a bit of a spot lately — it has had to make a Rs 215 crore provision for an order from Sabic, to its overseas subsidiary Simon Carves, and the case is now being heard in court.
Atul Punj’s outburst is to some extent justified because of late there seem to be that many more rumours doing the rounds. But these are tough times for everybody and after the Satyam fraud, everyone’s edgy; it’s understandable that people want to be more cautious. When a company is listed and has used shareholders’ money to grow, the management is answerable and must suffer some inconvenience. In India, in any case, managements have been let off far too easily in the past both by shareholders and analysts.
So a few questions shouldn’t discourage or put off unlisted companies from wanting to go public or those already listed from going private. All said and done, being listed does have its fair share of advantages though in times like these it may seem that the negatives outweigh the positives. A quick check with a couple of entrepreneurs who made an initial public offering (IPO) a couple of years back revealed that they’re quite happy with their newfound status. Ashok Soota, the founder of software firm Mindtree, clearly has no regrets. Apart from the visibility his software enterprise has got, he’s happy the world can now see exactly how transparent the company’s operations are. And of course, he’s thankful for the money that fuelled the company’s growth. As is Sanjiv Bikchandani, founder of InfoEdge, who too doesn’t have any complaints about analysts asking questions. He believes more questions would only help him run his business more efficiently.
It’s possible entrepreneurs may have more options to access capital these days but even banks are far less forthcoming when a company is privately held. And even private equity players, at the end of the day, want an exit route. While we now have ample evidence that there can be exceptions to the rule, corporate governance is perceived to be far better in public firms. Over the last six years close to Rs 96,000 crore has been mopped up through IPOs by nearly 300 companies while another 56 companies have picked up about Rs 47,000 crore from the equity market through follow-on issues.
Much of this money constituted the premium portion of the issue price because, in a roaring bull market, companies were able to command high premiums. It seems somewhat unfair to shareholders to take the company private at a time when the stock market is somewhere near a bottom. While promoters may be able to afford it, delisting the company doesn’t help shareholders who may be willing to wait it out. If promoters have cash they could do a creeping acquisition. Or even convert warrants that they allotted to themselves. There are many promoters who are not converting such warrants into shares because the market prices of these shares have now collapsed. Punj Lloyd is one such company. It has let warrants, which were to be converted into shares at Rs 254, lapse. Since the penalty for not converting the warrants was just 10 per cent (before the new 25 per cent rule was enforced) and the current market price is way below the conversion price, most promoters can’t really be blamed for not buying the shares. Although it was an indication to shareholders on the part of the management — that they would fund the company’s capital needs at a certain price — since they were only making a 10 per cent upfront payment, it was more like an option. That’s why even though the penalty has now been increased to 25 per cent, investors shouldn’t take managements seriously when they say they will bring in money. What shareholders need to ask is doesn’t the company need that money now and if so where is the management going to find it? Since the economy is slowing down, most companies will see their cash flows shrink and that could mean smaller dividends and less money in the hands of promoters. So, what are most companies likely to do? Push back their expansion plans, wait for the market to turn and then ask investors to subscribe to another equity issue. Public memory tends to be short-lived; in a good market, the same investors will rush to buy shares. So even if means a bit of inconvenience, it pays to stay listed.
