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Franklin Templeton wound down schemes, invested in paper that turned illiquid: IIAS (IANS Interview)
New Delhi, May 25 - Franklin Templetons decision to wind down its schemes was because it had lent to holding companies (- using promoter equity as security) and investing in paper that quickly became illiquid, according to Amit Tandon, Managing Director, Institutional Investor Advisory Services (IIAS), a corporate governance advisory firm.
In an interview with IANS, Tandon said that debt investors too need to worry about governance and not just equity investors. He cited the case of IL&FS which impacted debt investors.
"The recent decision of Vedanta to delist is driven by debt. The delisting if it goes through will enable the global parent to access the cash from the operating companies with minimum checks", he added.
Tandon pointed out that SBI has called for a public gathering of shareholders as the SBI Act does not allow for a virtual meeting.
The relationship between investors and promoters is more equal than anytime before. Fifteen years ago, for each share an investor held, the promoter held three. Today for each share an investor holds, the promoter holds only 1.5, Tandon added.
Q: What are the risks to corporate governance and investors?
A: One observation since the past 18 months has been that it is not just equity investors that need to worry about governance, debt investors need to pay close attention to it as well. The IL&FS episode has impacted debt investors. The firm's governance structure and practices led to its failure. The recent decision of Vedanta to delist is driven by debt. In this case it is the need to service debt in the 'holdco'.
The delisting - if it goes through, will enable the global parent to access the cash from the operating companies with minimum checks. Franklin Templeton's decision to wind down its schemes was because it had lent to holding companies (- using promoter equity as security) and investing in paper that quickly became illiquid.
Issues in the debt market immediately impact the equity markets, just like governance failures in the equity market impact all lenders.
Q: SEBI has recently issued an advisory that companies are not giving details on financial and business impact of Covid 19. How do you seethe advisory on these disclosures?
A: This is a welcome development. The need to present investors with meaningful business commentary is greater during periods of extreme disruption, particularly during unprecedented times like these. The roughly seven-week period would have given companies some clarity regarding trends or uncertainties that they face in their business, and this needs to be communicated.
Q: A survey has found that the Big-4 audit firms appear to have lost credibility? What is IIAS' view on this?
A: The question asked was "Are you open to move beyond the Big-4 audit firms? The investor response is a bit more nuanced. It shows a willingness to move beyond the Big-4 ? an acceptance that a few non-Big 4 firms can provide an acceptable level of audit quality. I must emphasize that the survey does not reflect how investors will vote. Over the last two years, excluding the abstains, over 99% of the institutional investor votes have been FOR the appointment or re-appointment of the Big-4.
Q: How is Covid 19 affecting shareholder meetings?
A: MCA has permitted companies to hold virtual AGM's. The challenge with a virtual AGM is that questions asked may not be satisfactorily answered ? because the shareholder may be unable to press for a straight answer. The second is some of the richness is lost. Investors queuing up, asking questions, exchanging views creates it's own buzz, that will be lost. We favour a hybrid meeting i.e. both virtual and physical simultaneously, but recognise that under the current circumstances, only a virtual will have to do.
Q: SBI is holding a physical EGM in June? Was there a way to make an exception under the Act?
A: The SBI Act , 1955 does not allow for a virtual vote, let alone a virtual meeting. Despite the Ministry of Corporate Affairs allowing all other listed companies to hold virtual meetings, State Bank of India is weighed down by the SBI Act which does not provide for such a meeting. While India has been under a lockdown for over a month, grappling with the rapid growth of the COVID-19, State Bank of India has called for a public gathering of its shareholders at its auditorium on 17 June 2020. The bank expects its shareholders to be physically present to appoint shareholder directors. Unless there is a high-level intervention from Delhi, I am unable to see a solution.
Q: What is IIAS advising investors on the Vedanta delisting?
A: IIAS runs a committee process to recommend what it should advise investors ? whether to vote FOR or AGAINST. The committee will take a view after it receives the shareholder notice. We will have to wait for this.
Q: Is the governance landscape changing in India?
A: There is far more focus on governance today than in the past. This has not happened overnight and I believe three factors explain this.
First regulations ? the Companies Act, 2013, Listing Regulations, Kotak Committee have all ensured Corporate Governance remains a hot button issue. Second institutional investors now own 35% of the market, up from 20% after the financial crisis. During this period the promoter shareholding has fallen to 50% from 60%. This has brought about a change in the relationship between promoters and investors.
Fifteen years ago, for each share an investor held, the promoter held three. Today for each share an investor holds, the promoter holds only 1.5. So, the relationship between investors and promoters is more equal than anytime before. Finally, firms like ours keep the governance agenda at the forefront and are helping shape the governance debate.
(Sanjeev Sharma can be contacted at email@example.com)
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