Promoters and Lifestyles

While Indian stock markets are said to be on the largest (in terms of listed securities) exchanges of the world, when it comes to Mergers & Acquisitions, especially of publicly listed firms, we really pale to a non significant ranking. And if you were to search for hostile acquisitions, there is very little of that happening on Indian markets. The last famous hostile battle was to try and takeover GT Offshore.

“Taking over a company (in India) has become even more difficult … every time if one has to waste years in court, it’s not worth it (a take-over bid),” said Lord Paul who attempted some high profile takeovers in 1982. While he exited in profit, the fact that he had to take the companies to court to get his shares registered says a lot about the pain quotient in taking over publicly listed firms.

The fact that its tough to acquire companies has made promoters to worry less about the risk of being thrown out even if they run the company to ground trying to boost their ego even if they don’t own 51% of the company. And if you own 51% or 74%, you can treat the company as your own piggy bank with none to bother.

Motor Cars are a depreciating asset and hence when you buy them personally, you suffer the depreciation. But what if the same could be routed out via your company. You get the same car while the company pays off the cost of acquiring and sets if off against its balance sheet.

Now, companies are free to spend the money the way they want but when promoters start to use them for their personal needs, one really wonders where the line ends between the company’s real needs and the promoters own needs.

If I own 100% of my company, I can do as I please since end of the day, its my own money at stake. But what if I run a publicly listed firm where at least 25% (SEBI minimum) of shareholding is held by the public. Treat them with the contempt they deserve to have trusted me in the first place?

A long time ago, a flashy promoter bought a private jet for his personal use using funds from a US listed (where he owned a majority stake I believe) firm. All hell got raised and he was forced to act. The promoter therefore simply sold off the plane to his Indian firm (where again, being listed was not 100% his own) and that matter died a natural death.

Media tags promoters with tags like Visionary or frauds / charlatans. Most of the time, its based on outcomes rather than the process itself. If a promoter takes enormous risks and succeeds, he is a Visionary, if he fails, it was because he was either stupid or there is more to it than visible to the eye.

The idea for this particular post came from friend Anand Mohan who runs equitybulls.com. (A disclaimer though, he also holds a stake in the company and hence can be treated as being interested). He posted a pic of the depreciation table of a small listed company. The company as on date has a market cap of 6.65 Crores and a Enterprise Value of 8.16 Crores. Promoters hold 74.43% of the company shares.

In the Financial Year 2014 – 15, they had a Profit after Interest but before Depreciation of 1.13 Crores. But then there is the depreciation which came to 94 Lakhs which literally ate away all that the company made that year. So, the question is, what kind of assets does the company hold that ensures that all it earns is literally wasted away in depreciation.

Here is the Fixed Assets statement. Apologies for the low quality of the pic, but it seems that the company has in order to save money, stitched up pictures taken from what seems like a low end camera.

The biggest number out here is for Plants and Machinery which is acceptable given that Plants and Machinery constitute the very basis for the company’s existence. Second biggest item though is Motor Car. The total amount invested into Motor Cars before this year was 2.16 Crores and this year they seems to have added 38.46 Lakhs worth more.

In other words, 23.50% of the company’s depreciation is due to Motor Cars which most likely are for personal usage rather than being for running the business of the firm. While 38 Lakhs in itself may not appear big, do consider that the Net Profit of the firm comes to just 8.89 Lakhs for the whole financial year. In other words, they spend around 4x what the company made.

Of course, this is one such company and I am sure that there are dime a dozen companies where the promoters milk the company in every way possible.

A famous quote of Warren Buffet is

“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

Most investors unfortunately get sidelined by the management even in outstanding business as promoters lifestyle requirements takes a more prominent place. Since hostile take overs cannot even be effected, there is no exit route other than to give up on the company’s shares since its rare as they say “A leopard can’t change its spots”.