RINGSIDEVIEW. When untoward stock price movements clog bold business decisions

Recent events in the corporate world suggest that India Inc. gives more weight to share price movements for business decisions. In October last year, the Ministry of Railways withdrew its proposal to seek 50 per cent of the convenience fee that IRCTC generates after the stock price of the company fell over 25 per cent on fears of de-rating by analysts. In January, shares of Tata Teleservices (Maharashtra) hit the lower circuit after the company decided to convert interest related to adjusted gross revenue (AGR) dues of ₹850 crore into equity. However, as the company share prices kept on declining and eroded to almost half of its value, Tata Teleservices said it has decided not to convert its accrued interest on deferred AGR dues into government equity, saying the amount to be converted —₹195.22 crore as per the government’s calculations— is much lesser than what it had estimated, or ₹850 crore. However, the stock failed to recover to its previous level and is still down almost 45 per cent.

Godrej-DB realty deal

Similarly, last week, real estate firm Godrej Properties cancelled its planned investment of ₹700 crore in DB Realty to acquire 10 per cent stake and also set up a joint platform, after the stock crashed over 10 per cent. “We’ve decided against going ahead post the feedback we received from various stakeholders including our minority investors,” Godrej Properties said Earlier this week, mining major Vedanta too backed off from its earlier decision of changing its corporate structure. The company had in November said that it would consider the hiving off and separate listing of its aluminium, iron and steel, and oil and gas businesses as standalone entities. The board now found the present structure to be “optimal”. However, in the case of Vedanta, the decision was not due to share price movement.

Shareholders’ value

Should corporate decisions, that are supposed to enhance shareholders’ value in the longer run, hinge on stock price movements? According to Investopedia.com, a company’s shareholder value depends on strategic decisions made by its board of directors and senior management, including the ability to make wise investments and generate a healthy return on invested capital. If this value is created, particularly over the long term, the share price increases and the company can pay larger cash dividends to shareholders. Mergers, in particular, tend to cause a heavy increase in shareholder value. So, if a management feels the corporate action will create a value in the longer run, it need not worry about the short-term price fluctuations. Even if the stock price falls in the immediate term, it is duty of the management to convince its shareholders about the pros of the deals. But, if the problem is real and serious, then it is prudent to act immediately rather than later. However, the person or persons should be held accountable for that bad decision. However, withdrawing from a decision will also send wrong signal about the management’s decision making skills. Some of the above decisions seem kneejerk, but it is heartening to see how the IRCTC management quickly responded to the event, when PSUs are generally accused of being slow decision makers.

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