Battle for Fortis: The farce of valuation will be exposed, says expert

Discussion board: Selling Fortis Healthcare

As the battle for the buyout of Fortis Healthcare plays out, the Extraordinary General Meeting (EGM), slated for May 22, is likely to have a bearing on the fate of some of the existing directors and the selection of the bidders. Experts share their views on the significance of the Fortis episode, highlighting what it means for the rights of minority shareholders, and the corporate governance lessons for India Inc

JN Gupta
‘The farce of valuation will be exposed’

It seems that happenings at Fortis Healthcare are in competition with saas-bahu serials on TV for TRP. Not a day passes by when it isn't pulling in an eyeball, such attraction may be good for serials but not for corporate as it dents image. However, despite its negative impact, there is a big positive effect also. It is forcing transparency, accountability and may be good governance while exposing weaknesses of the present system.

It has exposed threadbare what goes on behind the scene in restructuring and M&A transactions, in so far as valuation is concerned. The board, after a detailed exercise and deliberations based on independent valuation, fairness opinion and audit committee recommendation, decides to enter in a transaction and in no time the prospective buyer increases valuation by 21 per cent, without any effort by the board. What went wrong? Did the buyer decide to act as a Good Samaritan and dole out extra or did the board fail in its duty, either due to inefficiency or other reason? It clearly establishes that entire valuation exercise and the process is a farce. It's like a music band which produces the tune to the liking of the buyer and the seller.

The board once again surprised investors and analyst by recommending the offer by the Munjal and Burman families, although at least on the face of it other offers appeared to be better. It appears that the board was divided and didn’t follow the advice of various advisors appointed at the cost of shareholders. Not allowing seven days for due diligence on the pretext of urgency, while spending good 45 days from one offer to another lacks credence. Why doesn’t the board want to say why it didn’t follow the advisors? Or is it a case that advisors were really independent for a change?

Once again despite numerous laws to protect, investors are short-changed. They can either pick up fights or have to surrender meekly to wishes of those in control -- in this case without any economic risks as the promoters hold almost no shares. One will have to wait till the law becomes effective in practice rather than on paper. Hope one day the farce of valuation will be exposed. Till then we all can sing “Woh subah kabhi to aayegi..."

The writer is managing director, Stakeholders Empowerment Services

Shailesh Haribhakti
‘Conflict of interests must be avoided at all costs’

The Uday Kotak committee on corporate governance for listed companies in India deliberated on parameters relating to ensuring independence in spirit of independent directors and their active participation in functioning of the company, improving safeguards and disclosures pertaining to related party transactions, accounting and auditing practices by listed companies, improving effectiveness of the board evaluation practices, addressing issues faced by investors on voting and participation in general meetings, and disclosure and transparency related issues. After detailed deliberations, the committee made recommendations in its very comprehensive report. It is encouraging to see that the SEBI has notified for implementation many recommendations of the committee and some of the recommendations were accepted with modifications.

Given this background and the existing legal and regulatory framework in place the corporate governance lessons for boards are:

1. Have strong and wholesome boards to achieve strategic goals in a transparent, efficient and engaged mode. Any major divestment must be fully valued following on objective, well-laid out, timely and result-oriented process to serve the interests of every stakeholder. Benefits to none of the stakeholders should be affected due to lack of effective process.

2. The process should have the following characteristics:

a. It should be fully backed by consensus at the board
b. It should set goals which are transparent and easy to implement
c. Ensure the right constitution of the decision-making committee with full empowerment
d. Timeliness of outcome must be honoured

3. A board should be aligned with the interests of all stakeholders. This happens by continuous Board refreshment, segregation of positions of chairman and managing director and a very strong secretarial support which ensures regulatory compliance.

4. Conflict of interests should be avoided at all costs. Ethical board members must consciously avoid situations where the benefit is evenly spread without any personal interest.

5. A continuous communication of the progress of the procedure as milestones are crossed should be incessantly made. 
With these lessons in place, the vibrant mergers & acquisition market will flourish.

The writer is chairman, Haribhakti & Co

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