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Enron, WorldCom, Quest Communication international, Vevendi…
The list is getting longer by the day as more and more companies are coming under the scanner for unethical accounting practices. Questions on corporate governance are being raised as never before and the biggest question on everybody's mind is "Is India waiting for an Enron to Happen? Is our regulatory system sound enough to prevent accounting malpractices?
The question of transparency and disclosure in accounting presentation becomes more acute in case of public companies that are accountable to the shareholders. What if the companies are not listed on the Exchange and there is no accountability to the investors?
This question leads us to another pertinent question in the current scenario. Is this the reason why the last one-year has seen more than 30 multi nationals de-listing from the Indian bourses? Companies ranging from Cadburys to Philips have de-listed themselves and some of the major Indian MNC's like Pepsi and Coke have chosen to stay away form the bourses. Even Indian companies like TCS and Tata Sons stayed unlisted.
The rush for delisting has been fueled by the recent performance of the stock markets. With the shares of most of these company's trading low, the parent company is finding it cheap to buy back the shares.
Should Companies be allowed to delist?
Delisting of the Companies may be in the interest of the individual companies but for the market as a whole it may have far reaching implications. Some of the arguments against the de-listing of the companies have been that it further limits the investment options for the individual investors as the Indian capital market already suffers from a paucity of sound scrips. Out of the 10,000 companies that are listed on the BSE, 99% of the trading volume are accounted by 100 top shares and further 75-80% of the volumes are commanded by the top 10 scrips.
From a larger national perspective also, delisting of well-managed companies depletes the wealth creation capacity in the Indian stock markets. In these times, stock markets have become an important creator of wealth instead of being pure barometers of corporate performance. Being listed increases the transparency and disclosure levels of companies. Markets provide an automatic regulatory mechanism, though not very efficient at times but better than an empty platter. For instance not much is known about the financial health of the Two Cola giants Coca Cola and Pepsi. One can only make estimates. In fact the fear of disclosure may be one of the reason why Coke is reluctant in coming out with an IPO since the last five years, despite tremendous pressure by the Government.
There is strong school of experts, which believe that the government should bring this trend to a halt as soon as possible by stipulating a minimum public holding for all foreign companies. Or as some investors have suggested, it should discourage private foreign companies by way of higher tax rate, or other similar measures.
Is it about proving a level playing field?
However, here another point of view cannot be ignored. MNC are sought after as they provide the highest return, which is mostly attributed to their efficient operations. Would such a mandatory stipulation not tantamount to taxing the efficiency of the MNC's and curtailing their freedom?
Many MNCs operate worldwide with fully owned subsidiaries and India often stands out as a sore thumb in this respect. A fully owned subsidiary is likely to attract higher investments (from its parent) than a listed one. Indian economy is constantly looking for greater investment from overseas and has been lagging severely in attracting FDI. Such a move may in fact have a negative impact on the investments flowing in to the country. One can always argue that a listed company would also attract portfolio investment, but we all know that portfolio investment is highly fickle and unreliable vis a vis direct investment. FDI also creates a ripple effect due to its demand for employees, support services, etc.
The biggest function of any efficient market is price discovery and steps like buybacks and open offers go a long way in fulfilling that function. If the parent company sees the domestic subsidiary stock being priced lower than their intrinsic value it has every right to buy the remaining stake. It actually goes on to boost stock prices as has been seen in most countries, even over the longer term. In the US markets too, such activity fuelled by Leveraged Buyouts (LBOs) triggered a big bull run in the 80s.
It is also about providing a level playing field. If the Indian promoters have an option of keeping the company private, so should a multinational. If TCS can be unlisted despite being India's largest IT company, Cadbury has every right to get unlisted.
Is there smoke without fire?
The spree of delisting as has been followed by many multinationals in Indian markets is seen with suspicious eyes. With the recent spate of scams involving some the major coming of world these arguments are strengthening. Some of these major arguments are:
- Listing of the company brings transparency in its operations and accounting policies. Unlisting of companies provides enough flexibility to companies to hide their decisions and policies and thus follow wrongful policies.
- Listing is essential as it curtails the unethical practices followed by companies to curtail and kill competition, e.g. if Pepsi and Coca-Cola will be listed companies then it will give true picture of manufacturing cost of concentrate vis a vis pricing policies followed by these majors to create strong entry barriers for new entrants.
- Listing of companies makes management more accountable to interested groups as management is expected to justify its actions and results achieved in every general meetings.
Though the arguments for and against the delisting of the shares can be carried on it goes without saying that issue needs more serious thoughts from the regulators and a re-look at the entire mechanism. The transparency of these companies and their operations should be properly scrutinized before being granted the permission to delist. Once delisted the company would escape the scrutiny of the investors, analysts and the media and the smoke may die down with the ceasing the fire.
*Contributed by -
'Spectrum' - Research & Consultancy Group
(Team: Ashish, Deepak, Lalit, Mohit, Pankaj)
MBA (IB) - II Year Students
Indian Institute Of Foreign Trade, New Delhi.
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