Don’t short-change stakeholder interest

M Muneer | Updated on November 23, 2020

One too many: The failings in governance are visible in ever-innovative formats in India   -  istock

Has the the current asset sale bidding process in scam-hit DHFL been transparent enough?

Maximising shareholder value has always been the fulcrum of most capitalistic enterprises. They continue the exploitative capitalistic ways, and even the current pandemic turmoil hasn’t enlightened them. The exploitation of labour and environment, coupled with complicit policymakers, has taken its toll on the increasing poverty and economic situation in India. As Ayn Rand said years ago, the soul of capitalism was long dead. Yet, not many businesses seem to be keen in proving her wrong.

That corporates will continue to drive shareholder wealth is to some extent understandable given the wrong truism they believe in. Very few will focus on stakeholder wealth for now but eventually others will follow when they find the old truism cannot sustain for long.

But it is often shocking when governments and lenders help corporates without any consideration for the public whose funds are being given away.

Maximising shared value

Without the welfare of stakeholders (employees, customers, suppliers, communities, society at large), businesses will soon find things going harder for them. The concept of maximising shared value is finding currency in many developed economies ever since the 2008 financial meltdown, and several billionaires are showing commitment to it. Not so much in India, though.

If we look at the list of scamsters, masquerading as capitalists, who siphoned off billions of dollars in public funds and got away scot-free over the last six years, we can see that our governance mechanism has failed at both public and private levels. Those monies could have helped improve the poverty situation in India, which is at an all-time high of 80 crore even according to the Prime Minister when he had announced free foodgrains till November-end.

The failings in governance are visible in ever-innovative formats in India, begging us to differ with the popular notion that India is not innovating. Take, for instance, the current asset sale bidding process in the scam-hit Dewan Housing Finance Ltd (DHFL) case.

Is the consortium of lenders following stakeholder governance to the core? If they are looking at maximising stakeholder value, they should make the process of bidding more transparent and clear. Else, if the bidders walk away and go into litigation, public funds will be destroyed. This is the time for the government and regulators to step in and bat for the stakeholders.

In mid-2019, the DHFL promoters were found to have misused around ₹14,000 crore for personal use and the company got into a bankruptcy mess. We don’t seem to learn from such frauds of the past. Where are the board members of DHFL? All all of them should be accountable for the loss of public funds — all the more reason for the Committee of Creditors (CoC) to restore the credibility of the bidding process.

What governance issues are problematic for the CoC here? In February, when the EoI was floated for DHFL assets sale, 24 entities had expressed interest but eventually only four (Oaktree, Piramal, Adani and SC Lowy) submitted the financial bids in October.

The first question is whether the CoC was right in asking for revised bids from all? What were the provisions prescribed beforehand to all parties for revision of their bids? Second, when revised bids are called for, can the bidders change their terms to incorporate parts or can they bid for the entire assets? This question is what is prompting the other three bidders to back out from the bidding as Adani, initially bidding for the wholesale assets, has now revised its bid for the entire assets. (At the time of going to press, the CoC has clarified that a bidder cannot change what they had bid for.)

Third, the governance issue that arises is whether the competitor bid details were leaked to one party because of its alleged relationship with the CoC or its associates. Going by the allegation of Piramal that its terms have been copied by Adani, there is a serious governance issue here. Litigation in India will take years to conclude and public funds will be lost for effective use. Who will be held responsible? The CoC members, or no one?

In a matter such as this, all links between the CoC members, administrators and the accused bidder must be examined and investigated for breach of trust and confidentiality. Did Adani allegedly violate the IBC (Insolvency and Bankruptcy Code) rules by submitting a disruptive bid? This needs to be investigated, too. It is alleged that Adani submitted the bid six days after the deadline, the revised bid was just 0.8 per cent more than Oaktree’s, and it chose a different category of assets than what it had already chosen for primary bidding.

All this when, as per the IBC process, each bidder could only revise the value of initial offers for the section of DHFL’s portfolio that they had initially bid for and not revise their bids to change the category.

Examine the issue

The government as a stakeholder must examine if this whole process mitigated its own interest in attracting foreign investment into India and whether the process has dented the Prime Minister’s recent assurances of fairness and transparency for foreign investors.

Here are a few remedial measures the CoC can take:

Look at what is most critical for creating long-term stakeholder value. They should learn from the most recent YES Bank imbroglio.

Put in place a level-playing field and rules, and insist that all must play by the rules of the game.

Re-examine the parameters of selection. Should they be based on: Highest bid alone — even if marginal? Payment terms? Or, best returns for lenders? Stick to objectivity and no subjectivity must creep in for transparency’s sake.

Get all the committee members to re-evaluate the bids and the process threadbare, paying no heed to how influential the chair or the bidders are.

Re-examine the potential conflict of interest between the committee members, advisors and the bidders.

Bring in an external expert to examine the bids neutrally, preferably an international mediator of repute, to show things are all above-board and no bias or conflicts.

The writer is is Co-founder of the non-profit Medici Institute Foundation for Diversity and Innovation

Published on November 23, 2020

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