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Monday, July 16, 2018

Company outlook: Beyond the boardroom battle

In events such as management tussle in a company, investors should look out for the broad intent of the promoter and whether returns were generated in the past

Written by Sandeep Singh | New Delhi | Updated: February 24, 2017 8:15:30 am
Tata, tata group, Infosys, Companies, company's battle, cyrus mistry, Ratan Tata, Mistry, Tata Mistry, Tata companies, Vishal Sikka, Tata news, business news, indian express news Market experts say that investors should not bother much when there is a rift between a majority shareholder promoter and the management as large investors always tend to side with the promoter. (Illustration: C R Sasikumar)

The recent developments at Tata Group and Infosys, where the promoters publicly expressed their unhappiness with the management and some board members on account of cultural differences, which resulted into temporary blip in the share price movement in their listed entities should only come as a reassurance to investors that in the medium and long term, it is only the fundamental of the business and the company that matters and all the noise around boardroom battle fade away as the dust settles down.

Experts, however, say that investors should take a serious note of boardroom fight when there are issues of impropriety and malpractice in the company and the issues are left unresolved, as there are chances of them resurfacing in future.

Infosys founders’ dissent with the current management over issues of high severance pay and change in culture, came within months of the high decibel battle at the Tata Group where Ratan Tata moved in to dismiss Cyrus Mistry as the chairman of Tata Sons and then from other group companies one after another.

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What began on October 24, 2016 with removal of Cyrus Mistry as the chairman of Tata Sons, continued for over three months and kept the investors of various listed entities of Tata Group hanging in the air with both groups unwilling to step back and making counter claims. After the announcement by Tata Sons on October 24, the shares of major Tata Group companies fell between eight per cent (Tata Steel) and 24 per cent (Tata Global Beverages) in the following three weeks reflecting the investor’s concerns. However, as the dust settled around Tata Sons and the group announced its new chairman, the companies have recovered most of those losses at the stock market and majority of the group companies are trading above their October 28 closing prices. In fact, share prices of Tata Communications and Tata Steel are up by 12 per cent and 10 per cent, respectively. Even Titan Company Ltd saw its share price fall by 13 per cent in the first three weeks after the October 24 announcement. However, now the shares are trading at a premium of 15 per cent over the closing price on October 24.

Market experts say that investors should not bother much when there is a rift between a majority shareholder promoter and the management as large investors always tend to side with the promoter.

“In case of Tata group, there is a well-known identifiable promoter and investors have invested in Tata group companies, knowing how Tatas run their companies and thinking it to be the way the companies would be run going forward. Hence, the investors would always be on Tatas’ side whenever such a situation arises. In fact, there would have been concerns in the investor fraternity if Cyrus Mistry had emerged victorious,” said C J George, managing director, Geojit Financial Services.

Interestingly, in the case of Infosys, there was no meaningful slide in the share price of the company as the founders hold only 12.75 per cent stake in the company and the institutional investors (both domestic and foreign), who hold an aggregate of 57.9 per cent, fully backed the current management led by Vishal Sikka, CEO, and the Board led by R Seshasayee, chairman. The stock market movement totally reflected this. While the Infosys share price fell less than one per cent on the day the rift came out in the public knowledge, it has gained seven per cent since then. This clearly reflected the fact that the Infosys Board was together and the management and the Board enjoyed the investors’ confidence.

George, however, pointed out that the Infosys case should be looked differently by small investors. “Some of the governance issues raised by the founders hold merit and they still remain unaddressed and may come up again in future which may be a cause for concern,” said George. He added that in the current times, investors perception has changed. “They want an aggressive management that delivers good performance and generate high returns instead of following the culture of the group.”

Some feel that while boardroom fight in the public glare leaves a bad taste, what can make it more worrisome is the fact that the issue remains unresolved or more such stories come out in the public.

“Investors mostly take a call on the business decisions of the company related to products, expansion plans, dropping a product or a territory, etc, that are announced by the company. However, if there are issues of impropriety or malpractice in the company being discussed in the public and there is an apprehension of more such stories, then it is a matter of concern,” said Prithvi Haldea, chairman, Prime Database.

There are some who feel that investors should not worry if they know that the promoter’s intent is good and he/she has generated out-performance for a long period of time. “Any trouble at the top is taken negatively because there are concerns that the functioning and decision making within the company may get impacted. However, one should see if intent of the promoter is good. In the case of both Tata group and Infosys, it is clear that they both have a history of out-performance and it is also known that their intent is good. If the promoter’s intent is in doubt then investors should take a call on whether he wants to be with the company or not,” said Pankaj Pandey, head of research at ICICIdirect.com.

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