Business standard updates *Sebi- approved film investment fund to be launched soon* URVI MALVANIA Mumbai, 24 March Soon, those not connected with the Hindi film segment in any way will also be able to reap the benefits of the sector’s doubledigit growth, with Third Eye Cinema Fund ( TCEF), a Securities and Exchange Board of India ( Sebi)- registered alternative investment fund, set to hit the market. TCEF, which will target wellheeled investors, aims to generate about 25 per cent returns. Kewal Handa, chief executive of the fund and ex- managing director of Pfizer, says, “ Given the growth of the Indian film industry, many individuals want to invest in it, but have no clue how to go about it. Also, there are many myths such as the segment isn’t professional and organised. With the digitisation of screens and the advent of a corporate structure in major studios/ production houses, these myths are being busted.. What better time to enter the industry and make it more professional and transparent?” Handa and his team have already started pitching the concept to prospective investors. He is confident the first project under the new fund will be underway by the third quarter of this year. To ensure transparency and professionalism, the fund has roped in various agencies as auditors and advisors. While IL& FS Trust Company will act as the fund’s trustees, Fidelis, the production audit agency, will oversee and keep a check on production, in terms of costs. KPMG will look after taxation and audit, while ALMT will be the fund’s legal advisor. Karvy will play the role of a registrar. TCEF will follow the mini studio model and seek to invest in films across functions--from pre- production to distribution and marketing. Apart from co- producing and distributing Hindi films, the fund will also explore opportunities in distributing Hollywood films not backed by major Hollywood studios in India. It will also look at syndication of content across the satellite and digital platforms by acquiring the intellectual property rights ( IPR) for either the entire film or just its music. The fund’s advisory board includes directors such as Ashutosh Gowarikar, Kunal Kohli, John Mathew Mathan, Chandraprakash Dwivedi, Sagar Bellary and Nagesh Kukunoor. Apart from Handa, the fund’s management also comprises Chief Investment Advisor Sandeep Bhargava and Chief Operating Officer Shariq Patel. Patel says, “ We will be looking at investing in films such that the money can keep circulating at a brisk pace. We understand the risk in the film business and, therefore, will invest in different films in different ways. Our interest will be in content- driven films with budgets of ₹ 5- 20 crore.” While it might not be India’s first film fund, Handa is confident an approval from Sebi will stand it in better stead. “ The fund will have a more professional approach to business and will undertake due diligence. It will operate in a transparent manner, with the NAV ( net asset value) published every six months to show the heath of the fund, among other things,” he says. FUND DETAILS |Type: Sebi- approved alternate investment fund ( category- II) |Tenure: 5 years + 1 + 1 ( closeended) |Minimum investment: ₹ 1 crore |Target fund size: ₹ 200 crore, with a greenshoe option of ₹ 50 crore |Commitment/ drawdown period: 12– 18 months |Target return: 25% I- T dept struggles to meet year’s target; still hopeful >ECONOMY Owing to slowdown, advance tax collections this year grew 8.7 per cent to ₹2.9 lakh crore, from ₹ 2.66 lakh crore last year. The income- tax department is still hopeful of meeting its revised direct tax collection target of ₹ 6.36 lakh crore on the back of lastminute payments. “We are hopeful of achieving the revised estimate for 201314. Our officers are working 24x7 to see the tax collection target is met,” Central Board of Direct Taxes ( CBDT) Chairman R K Tewari told reporters. As on March 22, the government has collected ₹ 5.82 lakh crore in direct taxes, 13.6 per cent higher than the last year’s, but still short of the target by ₹ 45,800 crore. It is expecting some more revenue by way of advance tax in the remaining one week of the year. Refunds during the period grew 13.6 per cent to ₹ 84,999 crore, against ₹ 80,729 crore in the last financial year. The tax department is planning to further simplify e- filing of returns. The e- filing of returns in FY14 saw an increase of 40 per cent with 25.6 million online returns being filed till March 22, compared with 18 million a year ago. Asked about transfer- pricing disputes, Tewari said CBDT would sign some more advance pricing agreements ( APAs) with multinational companies before the end of the current financial year. Some APAs are likely to be signed on March 31. The government has so far received more than 146 applications from companies to decide in advance on an appropriate transfer- pricing methodology for a set of international transactions in future. The CBDT chairman said the department had not received avery good response on safe harbour rules, and was examining the reasons. Asked about the Nokia tax case, he said the company had not yet come to CBDT with a concrete proposal to settle its row with the department. BS REPORTER [1] New Delhi *Troubles for listed MNCs to increase in India* MALINI BHUPTA & VISHAL CHHABRIA Mumbai, 24 March The recent fracas between Maruti Suzuki and its minority shareholders has blown the lid off the tension that has been steadily building between minority shareholders and listed multinational corporations in India. This is despite the fact that many of the listed multinationals have delivered better financial performance as well as stock returns to shareholders. Compared to their Indian peers, multinationals have higher return ratios ( return on capital and return on equity) because of their superior allocation of capital, management skills and higher dividend payouts. This is visible in the shareholder returns too. Listed multinationals in India have generated CAGR ( compounded annual growth rate) of nearly 19 per cent over the last decade while the BSE 500 has returned about 13 per cent. In contrast, many Indian companies tend to hoard cash, which is either parked in low- yielding bank deposits ( or fixed return instruments) or used for unrelated diversification, leading to lower return ratios and stock returns. But, over the last few years, Indian subsidiaries of multinationals have also begun to contribute significantly to their parents’ earnings. It is the rising size and scale of Indian operations (in their global portfolio), and partly the fact that parents’ global operations are slowing down, that have led to a conflict of interest and simmering tensions between the promoters ( the parent of the multinational) and the minority shareholders in India. In a bid to get a larger share of the profits, experts say, parents of Indian multinationals are resorting to questionable tactics. Maruti Suzuki is a case in point. As it expanded its business, Maruti’s contribution to its Japanese parent, Suzuki, grew significantly. By setting up a parallel manufacturing plant in Gujarat, partly utilising Maruti’s post- tax profits, Suzuki would have not only reduced the Indian arm to a marketing company but would have also eroded its profitability. There are several other examples of the multinational parent’s growing dependence on its Indian subsidiary. Emerging markets contribute 55 per cent of Unilever’s profit and by 2020 this will increase to 75 per cent. Last year, Unilever guided for lower profits due to the slowdown in key emerging markets like India. Hindustan Unilever on 22 January 2013 announced its decision to increase royalty from 1.4 per cent of sales to 3.15 per cent in a phased manner between 2013 and 2018. Over two days the stock was down over 7 per cent, and remained under pressure till end- April when Unilever announced an open offer. On April 30, Unilever announced the offer at ₹ 600 per share, which though 21 per cent higher than the then prevailing price, was only 14 per cent higher than the two- month average price before the royalty increase was announced. The market viewed this as controversial. Brokerages too are taking note of the investor sentiment. Espirito Santo recently redflagged the top five royalty payers— Maruti ( which paid the highest royalty as apercentage of sales at 5.8 per cent in FY13) along with Hindustan Unilever, Nestle, Bosch and ABB. While the increase in royalty is one of the many ways to benefit the parent, larger institutional shareholders claim that multinationals also resort to merging unlisted subsidiaries, into listed ones, usually enabling the parent to raise its stake. Conversely, there are instances of transferring (profitable) divisions to the parent firm, and that too at low valuations. Siemens is one such example, say experts. The German parent bought a company owned by its listed Indian subsidiary at valuations that were way lower than valuations afew years back. Holcim’s complex proposal involving two of its listed subsidiaries was also questioned by shareholders. The proposal was to sell Holcim’s stake in ACC to Ambuja Cements for cash consideration of ₹ 3,500 crore plus higher stake in Ambuja. By doing so, it would have got the cash as well as retained indirect control in ACC. Mismatched interest Most of these restructuring exercise by companies are driven by the intention to enrich the parent company, say experts. London- based Nick Paulson, cohead (emerging market equities), Espirito Santo Investment Bank, says: “ The problem is inherent — the interest of multinational and minority shareholders aren’t fully aligned. Some companies operate with global standards of transparency and accountability, but others suffer serious incentive misalignments.” Investors today are watchful of red flags like royalty increases, merger of wholly- owned subsidiaries into parent- owned entities to increase shareholding, poor disclosures and weak boards. Ambit Capital says, With the increasingly hostile behaviour of several prominent multinationals vis- à- vis minority shareholders, and given the business strengths and superior capital allocation of multinationals in general, investors face adilemma today. The brokerage has red- flagged some of these multinationals which have been accused of short- changing minority investors. Fund managers and equity strategists believe that multinationals command higher valuations because they pay dividends, but it does not mean that their corporate governance standards are world- class. Amit Tandon, founder & managing director, Institutional Investor Advisory Services ( IiAS), says, As the Indian business has grown, it has attracted more attention. So the parent looks at how to benefit more tangibly from it by either taking cash or increasing stake at artificially low valuations. These last few years have also been difficult globally — hence, the tendency to move cash from the Indian balance sheet to global balance sheet to shore up the global P& L.” It is for this reason that Ambit Capital says that while many multinationals are great companies, they might not be great stocks given the misalignment in their interests and that of minority shareholders. This behaviour is unique to India in many ways as these entities are listed in India not out of commercial compulsions but because Indian laws mandate them to do so. Tandon says India might be one of the few markets where large multinationals have alisted entity outside of their home markets. It is for this reason that they behave differently and the minority shareholder is an unnecessary irritant. There are about 100 listed multinationals in India, either due to historical reasons or because of acquisitions they have made. So far, most decisions taken by the boards of these listed multinationals have sailed through, despite opposition from the minority shareholders. But the new Companies Act 2013, introduced recently, has been a big step forward for the minority shareholders. Under this Act, all related party transactions will need to be passed through a special resolution, which requires 75 per cent consent from the minority shareholders. Any decision on mergers, royalty and other similar transactions will also need to be passed through a special resolution where the multinational parent will not be allowed to vote. This opens up the possibility of more litigation. As IiAS points out in a report, Have multinationals found a way around the delisting norms?, “ Given the complexity of regulations and increased cost of compliance across various jurisdictions, multinationals generally prefer to remain listed only in their home markets. This is especially true in the Indian context where the Companies Act 2013 and SEBI corporate governance code ( to be implemented soon) not only requires a larger set of disclosures and approvals, but also raise the risk of litigation through class action suits. But, even as the tensions are rising between the two sets of shareholders, there is perhaps more waiting to unfold. Because of regulatory tightening, many companies may look at delisting their Indian arms. But even that will have its own set of challenges with questions being raised on the manner of arriving at the delisting price. Minority investors to have final say in all related party transactions, says the new Companies Act; MNCs may find it hard to resort to controversial ways to enrich parent WHILE THE Companies Act makes it difficult for related party transactions to go through without the approval of minority shareholders, experts await clarity on whether royalty pay- outs fall in the normal course of business or are a related party transaction. Listed multinationals may have gotten away with some controversial decisions in the past, but the Companies Act ( 2013) gives more muscle to the minority shareholder. Section 188 of the Companies Act has made it mandatory for all related party transactions, other than those in the ordinary course of business, to be passed through a special resolution, requiring 75 per cent votes of the minority shareholder. All transactions between the company and a related party ( be it royalty payment to the parent or M& A with other related parties) would have to be passed through a special resolution. In this special resolution the related party (which would be the promoter) will not be allowed to vote. Historically, promoters or majority shareholders have often pushed through regulations to benefit themselves, at times even at the expense of the minority shareholder. The new Companies Act has now changed the regulatory landscape. While more clarity on royalty pay- outs is awaited, even if the payments are assumed to be in the normal course of business, they would have to be justified to the audit committee. Yogesh Sharma, partner (assurance), Grant Thornton ( an assurance, tax and advisory firm), says: “ Section 188 gives additional protection to minority shareholders. Any transaction which is outside the course of regular business, like brand fees or management fees payments to majority shareholders ( or to related parties), would require going through a special resolution. Further, all related party approvals will now be scrutinised by the audit committee, which comprises of a majority of independent directors.” Nick Paulson of Espirito Santo says the bill provides the enabling architecture for better corporate governance. There are tighter restrictions on related party transactions, but the restrictions will not apply to those entered into in the ‘ ordinary course of business’. The definition of this needs clarifying, as it creates uncertainty on issues such as royalties.”ROYALTY PAY- OUTS: WHAT THE COMPANIES ACT SAYS TRANSFER OF PROFITABLE DIVISION AT THROWAWAY VALUATIONS Siemens India in January 2009 approved divestment of its subsidiary Siemens Information Systems Ltd ( SISL) to Siemens Corporate Finance, wholly- owned by Siemens AG, in a deal valued at ₹ 490 crore. The subsidiary SISL had revenues of over ₹ 990 crore and a net worth ( book value) of ₹ 360 crore, implying a valuation of 1.25 times of book value. In contrast, in May 2003, the parent company had picked up 25.2 per cent stake in the Indian subsidiary for about ₹ 80 crore ( SISL’s networth stood at ₹ 120 crore as on September 2003) or valuation of 2.75 times of book value even as the profitability of the subsidiary had deteriorated in the year preceding the divestment in 2003 ROYALTIES RISE DESPITE SLOWING SALES The top 25 listed MNCs in India paid ₹ 4,950 crore in FY13, a23.8 per cent jump over the previous year, well in excess of both sales and profit growth. Maruti Suzuki continues to pay the highest royalty at 5.8 per cent of net sales. Others in the list are HUL, Nestle, Bosch and ABB BUYBACK ANNOUNCEMENTS SOON AFTER ROYALTY INCREASE Hindustan Unilever on January 22, 2013 announced its decision to increase royalty from 1.4 per cent of sales to 3.15 per cent in a phased manner between 2013 and 2018. On 30 April, Unilever announced the open offer at ₹600 per share, which was 21 per cent higher than the then prevailing price, but only 14 per cent higher than the two month average price before the royalty increase was announced. The market viewed this as controversial CASH REPATRIATION FROM SUBSIDIARY TO PARENT Last year, Holcim announced a deal involving sales of its controlling stake in ACC to its other listed subsidiary, Ambuja Cements. While Holcim would have got ₹ 3,500 crore in cash ( and a higher stake of 61 per cent in Ambuja versus 50.6 per cent prior to the deal) besides retaining its control ( indirectly through Ambuja) over ACC, Ambuja would have seen significant cash outflow and equity dilution. Although Ambuja was getting majority stake in ACC ( hence, ACC’s financials would reflect in its consolidated numbers), the combined stake of its minority shareholders would have fallen 20 per cent. Analysts say, a better way would have been to merge ACC and Ambuja, which would have helped retain cash within the listed companies as well as made the structure simpler SEEKING TO DE- LIST This month, AstraZeneca Pharmaceuticals AB of Sweden announced plans to delist its Indian arm, AstraZeneca Pharma India ( AstraZeneca), a move minority shareholders are opposing. IiAS, a proxy advisory firm, while examining the issue, said one of the patterns emerging is oddly enough, the ‘ Offer for Sale ( OFS)’ route. To comply with the minimum 25 per cent public holding rule, last year many promoters did so through the OFS or IIP ( institutional placement) route. AstraZeneca’s parent held 90 per cent stake which it brought down through the OFS route. In less than a year, the parent has come out with delisting offer. Given the current rules, the delisting is easier if AstraZeneca’s parent manages to get the shares held by institutional investors. IiAS says that retail investors have alleged that entities which participated in the OFS were acting in concert with the promoters and would sell the shares purchased through the OFS to the promoters. This would impact true price discovery while de- listing. Source: Espirito Santo, Ambit Capital and IiAS QUESTIONABLE DECISIONS BY MNCS “The restrictions will not apply to transactions entered into in the ordinary course of business“ NICK PAULSON Co- head ( emerging market equities), Espirito Santo “The last few years have been difficult globally — hence, the tendency to move cash from the Indian to the global balance sheet“ AMIT TANDON Founder & MD, IiAS NEW STORY The Maruti Suzuki plant in Gurgaon *Aadhaar cannot be mandatory: SC* BS REPORTER New Delhi, 24 March The Supreme Court on Monday directed the central government not to share Aadhaar card details with any agency without the consent of the card holder. It also asked the government to immediately withdraw all orders which had made the card compulsory for registration of marriage or property or availing of the subsidy on cooking gas cylinders or for any other service. The court reiterated its order of September last year that no one should suffer for not having the card. A bench of judges B S Chauhan and J Chelameswar passed the order in a case from Goa involving gang rape. A court there had asked the Unique Identification Authority of India ( UIDAI) to share the biometric data of residents in the state to crack the case. The authority petitioned the high court at Mumbai against this but the latter did not prevent the sharing of Aadhaar details with the probe agency.. Solicitor General Mohan Parasaran, who argued for UIDAI, was told by the judges that they were receiving a number of letters complaining the government was insisting on an Aadhaar card for providing services despite the September order. “You issue instructions withdrawing the notifications making the Aadhaar card mandatory for availing of services,” the court said. Parasaran, who also represented the government said, “ We will do it immediately.” The court observed it had already passed an order in this regard and it should be strictly implemented. While staying the high court order, the Supreme Court issued notice to the Central Bureau of Investigation, which is probing the gang rape, seeking its response to the UIDAI petition. The apex court has been hearing for some time a challenge to the validity of the Aadhaar scheme, moved in several public interest petitions. The hearings are yet to be completed. The privacy issue, one of the main attacks on the scheme, was highlighted in this case of the gang rape of a seven- yearold girl in a school 14 months earlier. The investigators have some fingerprints and they want the Aadhaar cards of all residents to ascertain the identity of the suspects. The card is supposed to be the authoritative record for fingerprints, iris and facial images. UIDAI told the Supreme Court if the high court upheld the Goa court order, it would open a floodgate of such demands by courts and other authorities. It said the UIDAI system was developed “ for civilian use and for non- forensic purposes”. If the data is used for non- civilian purposes, it would affect scores of innocent people, the appeal said. Sharing information with other agencies would violate a person’s right to privacy, since the current data sharing policy and guidelines clearly provided that biometric data cannot be shared without the consent of a resident, it was argued. Says its order of Sept last year is clear that no one can be deprived of any service for not having an Aadhaar number SC said it received complaints that the government was insisting on Aadhaar card for providing services despite order BS PHOTO -- CS A Rengarajan 9381011200 CS Benevolent Fund is a collective effort towards extending the much needed financial support to the community of Company Secretaries in times of distress Let us lend support and join for noble cause. SHARING KNOWLEDGE SKY IS THE LIMIT This mail and its attachments (if any) are confidential information intended for persons to whom the email is planned for delivery by the sender. If you have received this mail in error please notify the sender of the error by forwarding the email and its attachments (if any) and then deleting the mail received in error and the relevant email trail in this connection without making any copies or taking any prints.
Posted on: Tue, 25 Mar 2014 00:16:22 +0000
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