Vanishing cash

Corporate governance not getting better in India

With optimism about Indian equity at a high, a significant pipeline of public offers is likely to be built up. It is also the case that, perhaps because of pessimism about remunerative avenues for investment in the recent past, some Indian companies are sitting on piles of cash. Normally, both these circumstances should not be worthy of comment except as symptoms of the larger macro-economic situation. However, in a country with lax corporate governance standards, it also means that investors and regulators must be alert to what could be possible attempts to game the system to the benefit of majority shareholders, or promoters.

Some possible occasions of this have come to light in the recent past. The markets have reacted negatively, for example, to recent news that Cairn India, of which the Anil Agarwal group company Vedanta owns 60 per cent, will give a $1.25-billion loan (about Rs 7,500 crore) on notably easy terms to Sesa Sterlite, another Anil Agarwal group company. In fact, it turns out that almost two-thirds of this loan has already been disbursed this financial year. The company says that funds are being lent at three percentage points above the London Interbank Offered Rate, or LIBOR; but, naturally, minority shareholders are unhappy. For good reasons - this is a related-party transaction that has been treated with considerable casualness by Cairn India. Further, Sesa Sterlite is burdened with debt. Meanwhile, Cairn India has $4 billion or about Rs 24,000 crore on its books; if it found no productive avenues for that investment, it should have returned it to shareholders. But the group's incentives to transfer that cash to Sesa Sterlite are obvious.

Such instances abound. For example, the real-estate company Lavasa revealed that in March this year it signed an agreement with the Swiss construction company Steiner. Steiner will carry out all construction; Lavasa will pay costs, as well as 10 per cent of the contract value as fees. Lavasa and Steiner are both controlled by the same entity - Hindustan Construction Company (HCC). As with Vedanta, HCC has said that the terms are generous - fees could be 12 per cent, it argues. Nevertheless, this is a related-party contract that will worry investors. Lavasa is about to go for an initial public offering (IPO), and it seems, in effect, half the IPO funds will be go straight to loss-making Steiner India. Lavasa has even promised to insulate Steiner from any further losses.

A third such instance was reported in this newspaper on Tuesday. JSW Steel, controlled by Sajjan Jindal, has announced that it will seek shareholders' approval for paying an annual Rs 125-crore fee to a firm entirely owned by Mr Jindal's wife, Sangita. The fee is in return for rights to the "JSW" brand name, which JSW Steel says Ms Jindal's company, JSW Investments, owns. Ms Jindal is being paid for owning and promoting the brand JSW. At least on this occasion shareholders are being given an opportunity to express their dismay over this related-party transaction at an annual general meeting. These examples demonstrate that corporate governance in India does not seem to be getting markedly better. More scrutiny is just making promoters more brazen. The question that deserves to be asked is, why would any retail investor put her money in a publicly listed company when there is little guarantee that standards of corporate governance will be honoured?