In your interest.
Online Personal Finance Magazine
No beating about the bush.
The largest government company had promised redressal of complaints from investors, during the sale of 10% equity seven years ago. It also said it would pay interest if investors did not receive refund orders within 15 days of the issue closing. But the company has not done so, and it is now on the verge of a follow-on issue
The largest public sector company by market capitalisation in our country is Oil & Natural Gas Corporation (ONGC). It is also the highest profit-making corporate in our country with international operations. It is one of the four publish sector units that have been awarded the "Maharatna" status by the government of India.
In March 2004, the company came out with an offer for sale of 10% of its equity to the Indian public, amounting to over Rs10,500 crore, which was a huge success. It received unprecedented response from retail investors and the issue was oversubscribed several times-a record at the time. This resulted in the company and its registrars not being able to make the allotment of shares and issue of refund orders within the time stipulated in the offer document. This gave rise to a large number of complaints from investors.
The offer document contained this undertaking by the selling shareholder and the company: "…that the complaints received in respect of this offer shall be attended to by the selling shareholder expeditiously and satisfactorily. The selling shareholder has authorised the Company Secretary and Compliance Officer and the Registrar to the offer, to redress all complaints, if any, of the investors participating in this offer."
The offer document further stated that the selling shareholder shall pay interest at the rate of 15% per annum on the excess bid amount received, if refund orders were not despatched within 15 working days from the bid/offer closing date. But when investors demanded interest for the period of delay, the company was in a strange predicament, because, the funds realised from the offer for sale had been credited to the Consolidated Fund of India, as it was due to the Central government. The company did not receive any amount from this issue. Due to this unexpected situation, the company appears to have not been able to sort out this matter for the last seven years.
According to Stock Exchange requirements, all listed companies are required (under clause 41 of the listing agreement) to disclose every quarter-when publishing the quarterly results-the number of investor complaints pending at the beginning of the quarter, the complaints received and disposed off during the period, and the complaints that remain unresolved at the end of the quarter. In compliance with this requirement, the company has been meticulously mentioning these details only in respect of normal investor complaints with regard to transfer of shares, dividend payments, etc. However, during the last 28 quarters, the company has been honest enough to make the following statement after these mandatory details about the complaints outstanding at the end of quarter.
The notes read: " These exclude investors' complaints regarding the offer for sale up to 10% of equity shares of the Company made by the Government of India in March 2004, which are being attended to by the Registrars to the issue appointed by the Government of India." The moot question is, if the company has not been able to resolve the complaints for the last seven years, how can an investor expect to get his/her complaint resolved at any time in the future?
ONGC has now announced that it will be coming out with a follow-on public offer (FPO) of shares shortly. Will the Securities and Exchange Board of India (SEBI) allow the company to come out with the FPO without fully resolving the outstanding investor complaints pending for such a long time? SEBI should ensure that all the pending complaints are resolved, before allowing the company to divest stake.
SEBI should also ensure that the company and the registrars suo moto identify all those cases where refund orders have been sent after a delay and all those investors should be properly compensated with interest not only for the delayed period, but be paid compound interest. (Interest on interest should be paid to serve as a deterrent against repetition of such instances in future.) Those responsible for this state of affairs should be pulled up, and the aggrieved investors should be compensated on the lines of the disgorgement by SEBI in the IPO scam, recently.
Can we expect SEBI to act swiftly to protect not only the interest of the investors, but also the dignity and honour of the highest office in the country, in whose name the public issue of shares was made?
(The author is former managing director and CEO of a mutual fund. He writes for Moneylife under the pen name 'Gurpur'.)
What is a business model without a widening customer base? Amazingly, PE funds missed that core point. Even as brokers threw PE money at branch expansion, retail investors stand alienated from the big bull market
India's consumption is booming. The Indian stock market is booming. There will be millions joining the market for stocks, mutual funds and other risk products, right? Well, the D Swarup Committee report on Investor Awareness and Protection put the number of retail investor population at just 8 million in 2009. And that figure has not risen over the years. The figure counted by the National Council for Applied Economic Research in 1999 for the Securities and Exchange Board of India was 12 million. There has been a decline in investor population, according to official studies, in a decade, which by all accounts was the best decade in living memory.
Retail investors are not coming to the market-or even to mutual funds. This is a fundamental problem with the way the investment market is functioning, something that the private equity players missed. Increasing the number of branches with PE money was easy. Getting customers was much harder. Baffled brokers are now cutting down branches.
This is a huge irony. After all, the stockbroking business should be thriving. The Sensex was at 1,000 in 1990 and is close to 20,000 today-a 20-time rally in 20 years. There are not too many markets in the world that have done so well over 20 years. And who would gain more from the great stock boom other than stockbrokers and mutual fund companies?
However, over 20 years, financial reforms, a scorching economic growth and massive market rally later, here are some shocking facts. A reply by Union minister of state for finance, Namo Narain Meena, in response to a question in Parliament, showed that the Indian capital market is narrow, shallow, illiquid and concentrated in the hands of a few individuals located at a few centres. (Read, Different Strokes: Where are the investors? ).
Here is another piece of shocking data, this time from the Reserve Bank of India (RBI). The proportion of shares, debentures and investment in Unit Trust of India in household savings was 14% in 1990. In 2007-08 it was down to 13%, despite the fact that the market valuation has gone up 20 times during this period. Where are investors putting their money? Bank fixed deposits occupied 32% share of the household savings. It is now 50%. Savers are happy to put their money into banks.
Why is this happening? Surely, we are not short of products. There are over 3,000 actively traded stocks, 230 diversified equity mutual funds, over 100 life insurance products, the New Pension System, portfolio management schemes and other financial products. We are not short of ways to reach investors either. There are over 600 brokers, 1,000 financial planners, over 20,000 active financial advisors, over 3 million insurance agents, 25-30 banks and their "relationship managers", many websites for comparison and purchase online. Then there is the media-dozens of print publications, 4-6 TV channels regularly talking about financial products.
So, when the smart investors in 2007 believed that they have spotted a big virgin market -retail distribution of financial products-they were very confident. After all, rising prosperity naturally swelled the household surplus, which savers had to put somewhere. And it was an easy assumption that a branch and a few relationship managers are all one needed to vacuum the savings into the coffers of financial firms and of course, the pockets of intermediaries.
It could have worked out that way, except that financial products are not like consumer products. Unlike consumer products, they are not standardised. And therefore, the way they are sold is as important as what is being sold. This is also why financial products are regulated tightly all over the world. The expansion of 2007 would have indeed worked out well if only the producers and intermediaries behaved themselves and the regulator did its job.
Well, the reason retail investors have run away from the market is because of poor performance of financial products and horrendous mis-selling by financial intermediaries, even as the regulators tweaked some rules here and there without ever coming down heavily in favour of investors. We will examine that aspect in our next and final part of this series.
You may also want to read...
With the high cost of operations and a change in the business model, retail-focused stock broking companies and their smart backers are staring at a difficult future
A business newspaper front-paged a report this week that Angel Stockbroking is in talks with Citigroup to buy Sharekhan, the retail brokerage which was acquired by Citigroup in 2007. Sharekhan was planning a public issue, which would have been impossible to pull off. Angel's move may save Sharekhan, but what happens to the dozens of other broking firms that have built large overheads and nationwide chains in the hope of tapping the desire of retail investors to trade in stocks, and buy insurance, fixed deposits and other financial products?
Those that have been funded by private equity investors will have to take a decision soon -- like Citigroup is doing. There have been efforts by some brokers to survive by reducing costs and widening geographical reach; but there will have to be many more big deals like the Angel-Sharekhan to be able to make a difference to the large and fragmented broking industry. There is something fundamentally wrong with the sector and unless this is set right, private equity funds which invested in broking companies for their retail spread, face a severe challenge. They will have to get ready to slash, burn and exit.
Remember, a few months back, New Silk Route of Victor Menezes and Rajat Gupta got rid of Destimony, the broking business it foolishly acquired from Dawnay Day and gave a bunch of highly-paid bankers to run, even though they had no truck with Indian retail equity investors. As Destimoney and others have discovered, the Indian model of large nationwide broking is beset with several problems.
High overheads: The cost of running a large nationwide brokerage business is exorbitant -- and fixed. Broking companies have to bear the cost of a large back office staff, compliance, technology and high capital cost of property (or rent). These expenses have skyrocketed in India over the last few years, especially the cost of staffing. And nearly all these costs are fixed in nature -- brokers have to incur them simply to stay where they are. Any attempt to reach retail investors involves promotional costs as well. This too is killing in India. Try to run an outdoor campaign or ads in one of the business newspapers or business news channels. It would set the firm back by a few crores and may not help the bottomline.
Research - The Expensive junk: In 1999, DSP Merrill Lynch published a research report that promoted Pentafour Software as a 'buy' when the price was at around Rs800. The stock is junk today. It was junk at that time too; the researcher who was being paid a princely sum to write the report was either ignorant, or was compromised. This is not an exception. The Moneylife Foundation library has a collection of research reports from the last three bull markets (1994, 2000 and 2007) that make for hilarious reading. That is not so hilarious to the customers who trusted them and have suffered a large hole in their wallets. The core of what passes for stock research is usually a clerical effort with the numbers. The tone of the report is guided by companies and investment banks. But for some strange reason, stock brokers pay through their nose to hire people to do this. The high cost of maintaining a research team that would churn out 'buy' recommendations irrespective of the market climate, based on financial projections that rarely come true, severely skews the cost structure of any decent sized broker.
Revenues: Brokerage revenues are worth nearly Rs15,000 crore in commissions each year, but the business is growing erratically. Geojit BNP Paribas reported an 8% decline in revenues for the March quarter. The others may do better, with slightly different business models, but essentially there is no growth in this business. This is due to the changed structure of the market. Volumes in the cash market-which is more lucrative for brokerages-are declining, while trading in option contracts is increasing. In the case of option contracts, the broking commission is charged only on the option premium, which is miniscule. On the National Stock Exchange, some 3.04 crore contracts of index and stocks options were traded in 2006-07. This exploded to 68.31 crore in 2010-11. But the cash market volumes have hardly budged in this period. The cash market was Rs7,812 crore in 2006-07 and jumped to Rs14,148 crore in the next year and that's where it has remained for the last three years.
So, the model of the nationwide chain of retail broking that private equity investors jumped into, was always flawed. Frankly, investors are not falling over each other to invest in equities, despite the long bull market. And a nationwide chain increases costs without increasing revenues commensurately. Firms like India Infoline may have understood that early, as it transitioned from an online broking firm to a full-service broking firm, and to a distributor of all financial products. Some time in 2007, it also added the institutional brokerage business at a very high cost. But this too has not worked well. Horrendous mis-selling of life insurance products has driven away customers and stirred regulatory action. Other brokers have moved from the institutional brokerage business into retail business (Edelweiss) or into selling non-equity products (Bonanza). But these moves have not been rewarding. The reason: customers have been treated shoddily by the stock market system comprising of broking firms and the market regulator. Retail investors have voted with their feet after 2006-07, after being bled by poor advice, frequent churning, massive losses in portfolio management and initial public offerings. They are not desperate to come back. Private equity firms who funded the broking business are staring at a retail business without retail participation. We will examine that paradox in the third part of this series.
You may also want to read...