The independent researcher applies an innovative 50% “governance discount” to the intrinsic value of Rs30
Reliance Communications Ltd (RCom) the crown jewel of Anil Ambani (if there is indeed any such jewel in his crown of thorns) should be valued at just Rs15, against the current market price of Rs65, according a new report by Veritas, the Canada-based independent research firm. Veritas has taken stunned the excel-driven and management-guided Indian analysts and institutional investors with its searing reports on R Com, Reliance Industries, DLF and Kingfisher among others.
How has Veritas arrived at the figure of Rs15 for RCom? It has introduced a new idea called "governance discount." Veritas suggests that investors should apply a governance discount of as much as 50% to the intrinsic value of the stock.
According to Veritas, the approximate value of stock is around Rs30. Applying a 50% governance discount, it values the core business at Rs15, "suggesting 77% downside from current levels."
In its calculations Veritas has refused to include any "other income", a favourite tool for management manipulation. According to Veritas, RCom "has a tendency to report high levels of other income which is not sustainable on a long term basis, given the significant drop in its current cash balance. Furthermore, based on the Company's inclination to book expenses to reserves and include other income in its EBITDA, reported EBITDA is an unreliable indicator of the Company's operating prowess. Therefore we ignore other income in our valuation."
This is the second report by Veritas on RCom. The previous one was in July 2011 when R Com was quoted at around Rs100. The stock is down 35% since then.
The SIDBI (Amendment) Bill, 2012, would streamline procedure for loan recovery and also seek to confer power upon the SIDBI board to specify investment limit for small units
The Small Industries Development Bank of India (SIDBI) will be able to take speedier action against defaulters after Parliament passes a Bill to amend the SIDBI Act, although its business model would remain same and it would continue to finance Micro, Small and Medium Enterprises (MSMEs), a top official was quoted in a PTI report.
Last month, the government introduced SIDBI (Amendment) Bill, 2012, in the Lok Sabha to amend certain sections of the Act under which the bank was set up. The Bill would streamline the procedure for recovery of loans by SIDBI and also seeks to confer power upon its board to specify by unanimous resolution the investment limit for small units. It also enables SIDBI to accept repayment of foreign currency loans in foreign currency and maintain foreign currency loan accounts. The amendment would also empower SIDBI to render financial assistance by way of venture capital, risk capital, factoring and discounting.
Earlier, during the Union Budget, the Finance Minister announced a Rs5,000 crore India Opportunities Venture Fund with SIDBI, in order to enhance availability of equity to the MSMEs.
The official said the new Bill will not result in any change in SIDBI’s business or activities but would empower it and its board of directors to take speedier action against defaulters and dispose off cases through authorisation by the district magistrate or the chief metropolitan magistrate.
SIDBI's domain consists of small scale industrial units, which are defined as those where investment in plant and machinery does not exceed Rs1 crore. In addition, SIDBI’s assistance flows to the transport, healthcare and tourism sectors and also to the professional and self-employed persons setting up small-sized professional ventures.
SIDBI was set up in 1990 as the principal financial institution for the promotion, financing and development of the MSME sector and for co-ordination of the functions of the institutions engaged in similar activities.
Good corporate governance requires people of integrity and personal integrity. It cannot be regulated—it needs to be internalized and practiced, especially by those who preach these values to others
The conviction of Rajat Gupta has sent shock waves throughout the business world globally. How could an achiever so brilliant and talented as him, manage a fall this steep? If there was no direct evidence against him, then was it fair and just to convict him based on circumstantial evidence? These and many other questions continue to bother many of us including myself.
That said, for any organization—profit or non-profit or mutual benefit—directors (or board equivalent) have to act honestly and in good faith and ensure that their actions (intended and unintended) are always in the best interests of the organization. They also need to ensure that they exercise the care, diligence, attitude and skill that a reasonably prudent person would exercise in comparable circumstances.
Now, when Mr Gupta telephoned Raj Rajaratnam several times after board meetings and brazenly discussed about what had transpired at the various board meetings, I am not sure that he was acting in the best interests of the concerned organizations. That breach of trust and abuse of position, in my opinion, is certainly something that Mr Gupta is guilty of—he should have never done this in the first place.
That said, there are so many captains of the Indian industry who are unabashedly supporting Mr Gupta. Fair point as Mr Gupta has had significant success in the global corporate world, perhaps somewhat unparalleled, at least in terms of achievements by other Indians globally. Now, my question to all of them is how they will react if they were to find out that one of their high profile directors (independent or otherwise) has been routinely sharing confidential information with someone else? Will they condemn this breach of trust and confidence or will they cite the achievements of the key informant (the concerned director) and state that his stature puts him beyond such actions? This is a question that ‘the friends of the Gupta’ club certainly need to answer.
Irrespective of the fact that circumstantial evidence was used to nail Mr Gupta, the key point in this case is that he shared confidential information (willingly or unknowingly, whatever may be the case). Now that is downright bad governance practice as far a director of any organization or corporation is concerned. And without any doubt, it is unacceptable practice from anyone, especially from a person of the calibre of Mr Gupta, who used to provide strategic advice to CEOs and was widely acknowledged a leader and role model globally.
Now, there are many professionals who enter boardrooms of listed corporations as independent directors or otherwise. Imagine if they all were to engage in such practices—the consequences would be disastrous for the corporate world and investor confidence would be completely eroded (it already is by Mr Gupta’s actions). And this is something that all captains of the industry (in India especially) need to recognize explicitly. Without question, the fact that Mr Gupta—despite all of his brilliance and achievements—discussed what went on at the boardrooms with a rank outsider and manipulator such as Mr Rajaratnam needs to be condemned unequivocally. That single action of bad governance, in my opinion, is what Mr Gupta is clearly guilty about…
We all talk so much about corporate governance, good/best practices when we go to investors and otherwise. Ultimately, however, good corporate governance requires people of integrity and personal integrity cannot be regulated—it needs to be internalized and practiced, day in and day out and especially by those who preach these values to others. And this is where I think Mr Gupta’s actions may have literally broken the back of investor confidence globally and only time can tell what the real impact of his conviction is.
(Ramesh S Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward—is the first authentic compendium on the history of microfinance in India and its possible future.)