This is a just an excellent idea by Dinesh Mehta one of our course participants and a value investor. He was also one of the person who suggested tatkal system to railways check this article -
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Many deals like Indo Asian Fuse Gear, Piramal healthcare , Gwalior Chemicals, Laffans Petroleum,Nelcast and recently Smartlink Network Systems which sold their assets in the company and are now available at 30-50% discount to cash on books.
The only good deal was Andhra Paper as the company came out with an open offer making the stock a doubler.
Right now i havent done much research on to the topics but for example Smartlink current marketcap 200-220 crores has got 500 crores in their business sold. So thats a 40-50 % discount on cash ( considering tax implications). It becomes a steal if the company would come out with an open offer or dividend to the extent of 100-200 crores.
So in the end many minority shareholders are left without any gains with promoters participating in buy back or selling the stakes as well as a non compete fee.
The below article is written by Dinesh Mehta – Views invited.
A public limited listed company in theory equally belongs to all the shareholders but in practice it seems to belong only to the promoters controlling the company where the small shareholders are a necessary evil which have to be thrown some crumbs while the promoters either cream the company or run it as their proprietary business.
The small shareholders get rewarded only at the mercy of the Promoters as and when it suits them otherwise all kind of manipulations are resorted to derive gains.The truly fair companies are only a few and they get valued at such premiums that small shareholders rarely dare to touch them.This situation inhibits the growth of investments in equities as one after the other generation of shareholders burn their fingers every 5-6 years chasing dreams and finally getting robbed of their clothes.
How it will harm the country if we were to devise a way which would make it very difficult for unscrupulous promoters to cheat minority shareholders and if they do so will have very high chance of facing the music as the process would expose their malafide intentions.
So many laws are still there which can ensure a fairdeal but actually do not do that.If we put market forces to act in a manner that ensures a fair deal to minority shareholders so many problems will solve themselves.
We have a TAKEOVER CODE which rarely allows takeover hence let us try an OVERTAKE CODE.
A listed company may be taken over by any body from the promoters if they are willing to pay twice the average price during the last one year or last one month whichever is higher provided they offer to buy 100% of the equity.On receipt of such offer the promoters will have the first right to offer the same and buy the equity at the offered price.If they fail to do so then they will have to relinquish control and sell the whole promoter equity to the offerer.The choice of being under this code will also remain with the promoter but once exercised can not revert to not being under the code without offering twice the price to all the shareholders.
Now let us see who benefits and who loses from such a code.
They will certainly benefit as if the company management is not doing well but sitting wastefully on valuable assets then certainly somebody more dynamic will come forward and buy it offering them the real value. The takeoverability itself will force many people to revalue the companies and their share prices will go up.This will become an added tool to value the company as the existing managements will cease to be a permanent liability on the company and analysts will soon flood the market with the potential values of the companies.Even shareholders will do their own studies and latch on to the companies with hidden or unlocked value.
We are basically talking about weeding our unscrupulous promoters so we will not talk about how they will be harmed but look at how the promoters who want to deliver value to minority shareholders will benefit and why they would like to be under this code out of choice.
The biggest apprehension of any stakeholder not only the equity holders but even debt providers is the changed attitude of the promoters once they get their money and hence institutions ask many managements to pledge their equity before disbursement. Once the promoter decides to be under this his intentions become clear that he wants to play fairly and reward shareholders. This will help him raise money easily and at a lower cost. Merchant bankers will also advise the clients to be under it so that the issue becomes more palatable to the general public and may be even priced more in line with company’s real value.More institutional interest will be there.So for the ease of money raising and as a sign of their good intentions the promoters would go for it as a stigma would get attached to those not willing to go under it.Even the already listed companies would face pressure to be under it from their shareholders specially the institutions.
The government would benefit in many ways. Spread of equity culture benefits the country by way of higher growth and we all know the impact of even a 1% higher growth on the share prices of all companies. The companies would stay clean and the government would face less pressure on account of scams. The companies would achieve and have to show better results to keep share prices at such a high level that nobody comes forward with twice the price offer. Their disclosures will be more as it would become in the interest of promoters to keep prices high. Better results will mean all kind of higher taxes for the government.SEBI will be burdened with less work due to self correcting mechanism as when the company changes hands the new managements will find out if any scam has been done by the old management. The auditors will be under pressure to audit properly otherwise they may be in focus in future if any wrongdoings are found out.
Who may be a loser?
Only the promoters who want money from completely unknown people but want to evade all their responsibility but still want to retain hold over the company will hate this idea. There are no other losers in this system in fact everybody including genuine promoters will benefit handsomely as they will not be clubbed with scamsters and robbers.
It’s too big to happen.
New and revolutionary ideas always face this first wall of disbelief and skepticism as the whole world is used to existing ways.So at this point it is not important to see how it will happen.More important is to see whether it benefits large sections and promotes corporate behaviour in line with fairness,growth targets and laws of the country .Time will do the rest.
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