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Perils of investing in companies growing through political links

Crash of Sun TV, SpiceJet stocks underlines the dangers of looking at fast-growing companies while ignoring their political links. Many Indian mutual funds and foreign investors would be affected

Shares in Sun TV and the budget carrier SpiceJet crashed by over 27% and 16% respectively on Thursday, following an expose in Tehelka magazine about the role of Dayanidhi Maran when he was the telecom minister between 23 May 2004 and 15 May 2007.

This underlines the perils of investing in companies that seem to grow easily and fast-but with generous political patronage. The shares crashed on allegations that Mr Maran's family-owned business, Sun TV, received substantial investment from the Maxis Group (which owns Aircel) which picked up 20% equity in Sun Direct. The government approved this investment on 2 March and 19 March 2007. Maxis Group invested a total of Rs599.01 crore in Sun Direct between December 2007 and December 2009.

With the DMK-linked companies in a soup and DMK out of power in Tamil Nadu, a cloud hangs over the immediate prospects of these companies. The stock prices are unlikely to recover soon. Among the mutual fund investors in Sun TV and SpiceJet that would have suffered losses are IDFC Premier Equity, Fidelity Equity, Morgan Stanley Growth, Sundaram Select Midcap, DSP BlackRock T.I.G.E.R and SBI Tax Advantage Series I.

The promoters of Sun TV hold 77%, while foreign institutional investors (FIIs) hold 9.49%, domestic institutional investors (DII) hold 3.06% of the equity, and the remaining 10.45% is with retail investors. In SpiceJet, the promoters hold 38.61%, FIIs hold 11.84% and DIIs hold 15.10% equity respectively. The remaining 35.45% is the retail shareholding.

Clearly, institutional investors have a significant holding in both companies and they will have a difficult task recovering their investments. The main problem is that both SunTV and SpiceJet have strong political patronage which will be undermined by new polticial equations. Analysts believe that with the DMK's arch rival J Jayalalithaa of AIADMK, coming to power as chief minister in Tamil Nadu, and the scam-ridden UPA at the Centre, both Maran-family owned companies will find it difficult to grow.
 
The AIADMK is already up in arms against the Marans. It has announced that it plans to nationalise the cable TV distribution business in the state, a step that would break the monopoly of Sun TV which has the largest cable TV distribution in Tamil Nadu.

In the past, companies having strong political affiliations have been rejected by investors, in the wake of scams and controversies. These stocks have subsequently underperformed. For instance, the HCC stock crashed by 29% after the company's Lavasa project came under the scanner of the environment ministry for various violations. Investors have been on tenterhooks since. Promoter Ajit Gulabchand is reported to be close to union agriculture minister Sharad Pawar.

Key leaders of the DMK, such as former telecom minister A Raja and member of parliament MK Kanimozhi are already in prison after the CBI arrested them for being a beneficiaries in the 2G spectrum allocation scam.

Although Sun TV gained about 4% and SpiceJet put on a little over 2% in trading today, the allegations against Dayanidhi Maran will make it very difficult for these stocks to recover very much.

(You may also want to read an earlier report on this subject on Moneylife:
'Stocks of companies with political links beaten down'.)

 

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COMMENTS

GOVIND SHANBHAG

6 years ago

Sirs - there are number of companies whose promoters are politicians and management is professionally managed one such is ARISTO PHARMACEUTICALS, a Patna based company. It is deemed public ltd co. and management has full freedom to run. Shares are closely held, grossly under valued and this company is still in SSI category.

Vinay Joshi

6 years ago

MLD!,

Buy Sun TV as much as you can, year later tell me. SpiceJet, an airliner will face industry norm.

Further MLD i advise you to buy scrips of co's to be delisted to give returns.

MLD, TV broadcast channels don't survive on distribution/ subscriptions! So threat of nationalisation can't work, a writ can be filed.

Of course a birthday gift to Kaurunanidhi, 88, was delivered by the Hon'ble Guv, in his assembly speech, + the threat + demand of resignation of the Textile Mininister.

Further MLD, buy HCC, await IPO, profit. HCC is a fundamental co.

Disclaimer : In no way the above msg be construed by the average reader as an investment advise, MLD, notwithstanding, they exercising caution.

Regards,

malq

6 years ago

Political clout inspiring the evolution of companies is not really new within the Indian horizons, but it has seldom been done as blatantly on such a large scale as by the present DMK politicians.

Mayve KD Malaviya's legacy, strong rumours about Praful Patel and Pramod Mahajan's involvement in business, Badals and Patiala Amrinders in Punjab - but the real wheelers and dealers were and are good enough to build cutouts.

Aaage aaage dekhiye?

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