The term related-party transaction refers to a deal or arrangement made between two parties who are joined by a preexisting business relationship or common interest. It is normal for companies to deal with companies and people they already know but only if the rules related to such transactions are strictly adhered to.
One such transaction raised eyebrows recently. N.B.I. Industrial Finance Co., is a non-banking financial company. Like any other NBFC, NBI had made investments in several unlisted privately held companies. Few of these companies x, y, and z invested their funds in the shares of Shree Cements Ltd., which happens to be a major stakeholder in NBI.
Lets take an example. NBI holds a 15.38% stake in the company Shree Capitals (one of the x, y, z companies). Shree capital services, held shares worth Rs. 12,560cr in Shree Cements. A simple math tells us that this makes NBI hold 15.38% of 12,560 cr, i.e. Rs. 1932cr in Shree Cements.
The cumulative value of such investments in Shree cements, made by NBI held companies, comes up to Rs. 28,125 cr. This entitles NBI to a whopping Rs. 3077 cr worth of shares in Shree Cements. When NBI sold its stake in these companies (Shree Capital Services, x , y, z) it by default sold that much stake in Shree Cements to its own promoters. So stake worth Rs.3077 cr was sold to another group holding company of Shree Cements at just Rs.89 cr. A discount of 97%.
This related party transaction came under scrutiny by a corporate governance watchdog. As said earlier though such transactions are legal, but they have to follow rules. One such rule is that such a transaction must be put up for a vote in front of the shareholders. With their consent it is a completely legitimate transaction. If not done it equates to acting for personal gain and hence conflict of interest. Questions have been asked whether such a vote was put up or not, and whether the other shareholders of NBI, apart from the promoters of Shree Cements were on the same page with NBI.
The questions asked are yet to receive answers, but what lesson do we take home from such instances?
The implication of not adhering to corporate governance:
Share price of NBI Industrial Finance dropped by 7.25% and that of Shree Cements by 3.33% immediately after the news hit the markets. A small question raised on the corporate governance of the company can make it lose face and reduces the worth of the company. Poor corporate governance destroys value.
Investment Research
Apart from quantitative analysis, it has become increasingly important to imbibe qualitative analysis in the process of taking investment decisions. This brings us to the 4C’s of Credit analysis
Watch this space for more such content.
Apart from quantitative analysis, it has become increasingly important to imbibe qualitative analysis in the process of taking investment decisions. This brings us to the 4C’s of Credit analysis
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- Character
- Capacity
- Collateral
- Covenants
Watch this space for more such content.
