Governance trumps valuation on D Street

Several stocks that figured in recent scams have fallen out of favour with investors, as good corporate governance starts commanding a premium on Dalal Street.

Shares of LIC Housing Finance and Money Matters Financial, whose officials were arrested in the bribe-for-loans scam on November 24, have fallen 27.30 per cent and 81.37 per cent, respectively, since then.

Stock prices of companies like Ackruti City, Murli Industries and Welspun Corp have also dropped about 25-35 per cent since the Securities & Exchange Board of India (Sebi) charged their promoters, along with market operator Sanjay Dangi, of market manipulation on December 2. The market regulator has barred promoters and promoter entities of these companies from trading in their own and group companies’ shares.

“Whenever a stock is tainted, investors lose confidence in it,” explained Ambareesh Baliga, vice-president at Karvy Stock Broking. “Except LIC Housing Finance, these stocks may never regain their earlier highs and may languish for a long time,” he added.
 

OUT OF FAVOUR
Company name	Last close  on BSE (in Rs )	Fall in   stock price  (in %)*
LIC Housing Finance	951.05	27.30
Money Matters Financial	123.70	81.37
Ackruti City	248.00	35.56
Murli Industries	65.00	26.55
Welspun Corp	164.70	24.83
*since scams became public

Despite a steep fall in prices, almost all leading broking firms have advised clients to steer clear of these stocks. “Some of these companies have not been able to clearly explain their position to the marketplace,” said Deven Choksey, managing director at Mumbai-based KR Choksey Shares & Securities.

“Proactive communication is essential to regain investors’ confidence,” he added. Apart from disclosures required by law, companies should also follow good corporate governance practices, Choksey said. Shares of several other mid-cap and small-cap stocks, where the market suspected the involvement of operators were also hammered. To clear the air, promoters of some of the companies have explained their company’s position in conference calls with analysts.

In the last few weeks, some analysts have started attaching a premium to stocks of companies that are known to have good corporate governance. In a strategy report on December 9, foreign broking firm UBS advised clients to consider high-quality stocks and avoid those of companies with corporate governance issues, irrespective of how attractive their valuations look. 

However, not everyone is convinced with D Street’s newfound love for corporate governance. “It is just a seasonal thing,” said V K Sharma, head of private broking & wealth management at HDFC Securities.  “Whenever a scam takes place, people start talking about corporate governance,” he said.