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You are here : IndiaNotes >> Research & Analysis >> Companies >> About Companies

Skip at your own risk

Arun Jethmalani | Published: 23 Jan, 2005  | Source : ValueNotes.com | Follow Author | Add to my Favourites


As an investor, I've spent many hours trudging around Mumbai streets to attend company AGMs, often borrowing proxies from friends so the gatekeepers would let me in.

While I no longer get too much time or opportunity, it is an activity I strongly recommend for every investor.

And no, it is not for the snacks or gifts, but to interact with management. Listen to what they have to say. Look at them in the eyes, and gauge whether they can be trusted to say the truth. Figure out how responsive they are to shareholder queries or needs. Share experiences with other shareholders.

And ask questions! They may not all be answered, but as long as you're polite, well behaved and a bona-fide shareholder, nobody can prevent you from questioning the accounts or corporate governance practices.

These trips have often saved me from costly mistakes, after management explanations on certain issues made me suddenly uncomfortable.

One time, an MD spoke eloquently and convincingly about future growth prospects, but then couldn't explain (to one persistent shareholder) why inventory numbers looked skewed or intra-group transactions were so high. This company is now practically bust.

In my experience, lack of clarity on balance sheet questions is a definite danger sign. This either indicates unwillingness to be transparent, or lack of knowledge implying the incompetence of directors or the team that briefed them.

Another time almost a decade ago, at a young IT company, I learned first-hand about the intricacies of the huge Y2K opportunity largely because I had a chance to spend two hours chatting with a bunch of motivated IT professionals.

It helped that at that particular meeting, I was one of only two non-promoter/management shareholders!

There's no other forum available for investors to meet with the management and get a first-hand look.

This is more critical for small companies, since the promoters are (relatively) unknown and typically attract low media and analyst coverage. Think back to Warren Buffet and Philip Fisher, and the theme of management quality runs through all their investment decisions.

While an AGM may not allow promoters to adequately display their finance or marketing skills, at least you can see how they talk, carry themselves, answer questions, conduct the proceedings, take a guess on integrity and ethics, and evaluate a bunch of `soft' factors.

The issue of trust cannot be definitively settled by a public meeting, but even one face-to-face interaction can be worth more than a thousand printed words. Trust your instincts and they will occasionally surprise you with their perspicacity.

Apart from personal gain, the mere fact of greater investor attendance and awareness can induce better corporate governance.

Shareholders can actually pressure the management, even if only by asking difficult questions. Saying that this is Sebi's role, is shying away from your own responsibility. As you have a right to attend AGMs, so also it is your responsibility to attend, especially when you're uncomfortable with the company's performance or strategies.

Given that AGMs can be so illuminating, it's surprising that investors don't attend in larger numbers. While managements say that investors are apathetic, it's difficult for many to take time off during a working day.

But the biggest inhibitor is often the location. AGMs are held in the strangest places. For instance, Jindal Vijayanagar expects shareholders to go to Bellary - several hours away from any large city.

This is all thanks to an archaic law, which specifies that the AGM should be held in the same town where the company is registered.

A large number of companies have registered offices in locations outside major cities. This is often a matter of convenience and history, but occasionally to deter anxious shareholders from attending important AGMs.

Whatever the reason, location is a huge deterrent. Why not de-link the place of registration with the shareholders meeting?

In any case, the registered office has become little more than a post-box address, whose primary function is to receive official communications from offices of the stock exchange, registrar of companies, income tax department, and various other government authorities.

Some of the savvier, more transparent and well-run companies have realised that AGMs are ideal places to build long-term shareholder loyalty.

In bad times, loyal investors are unlikely to sell on rumour or because of minor or transient bad news. For instance, Bajaj Auto actually runs buses to Pune station and other parts of the city to pick up shareholders, many of whom travel by train from Mumbai.

A full day's activity is planned, and this includes a plant tour, the AGM itself, snacks, and the chance to hear Rahul Bajaj speak on a variety of subjects, including the automobile industry.

At the end of the day, first-timers are impressed and old shareholders are reassured. In fact, the Bajaj Auto AGM has become something of a pilgrimage amongst Mumbai stockbrokers and analysts.

On a related issue, postal ballots are the new trend. A story in the Economic Times last week said that the number of companies asking exchanges for permission to conduct postal ballots is rising dramatically.

Apparently, HLL transferred its Sewree assets after getting shareholder votes by ballot. Blue Dart got permission to divest its airline subsidiary the same way. Several other examples are mentioned.

Managements argue that if they (promoter groups) hold more than 51%, the result of the vote would not be any different. They also claim that it keeps costs low, which benefits shareholders - most of whom do not attend anyway.

However, I'm not convinced. The real benefits are less hassle; that 'outsiders' don't ask embarrassing questions; and the management does not have to waste time `humouring' these people.

Mailers are one thing, but those willing to bear the cost and time of getting to the meeting are deprived of a chance to take a second call. Our right to ask `why' can result either in a positive vote for the management's agenda or a decision to sell the stock! But we must have this right.

Small investors are the most affected. At a big firm like Morgan Stanley or Enam, the analyst will simply call up the management and demand explanations before voting on the ballot.

However, you and me have only one forum - and these are AGMs and EGMs. By not attending, or occasionally reducing this to a farce by demanding gifts, we are encouraging the system to make these redundant. At this rate, the day will come when the entire AGM is conducted by postal ballot!




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