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Siemens arm valuations unfair for investors: JR Varma

Published on Thu, Jan 15, 2009 at 11:20 | Source : CNBC-TV18

Updated at Thu, Jan 15, 2009 at 14:45

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Siemens India has been trading on unusually large volumes for the last few days. It is down 6.25% and has lost more than 30% of its value despite yesterday's recovery because of the move to divest its 100% subsidiary Siemens Information Systems (SISL) to its parent Siemens AG.

JR Varma, Former Sebi Member, said the valuations and the manner in which the Siemens transaction has been done is unfair. He feels that Siemens' divestment is not fair for minority investors. "An IT firm being sold at half of its previous years' revenues is quite cheap."

He feels Siemens could have problems with transfer pricing. Varma stated that prevention of such transactions may not be possible under current laws and one needs to look at a model like that in UK to prevent such transactions. "Market regulator, Securities and Exchange Board of India can effect changes to prevent such unfair related-party transactions."

Here is a verbatim transcript of the exclusive interview with JR Varma on CNBC-TV18. Also watch the accompanying video.

Q: Your observations on whether this is patently unfair for the minority shareholders of Siemens--such a move to divest a valuable subsidiary at what looks like a very attractive price for the parent?

A: It doesn't look fair at all--both the valuation and the entire manner in which it has been done. First of all, looking at the valuations, an IT firm being sold at six months of revenues looks quite absurd. We have the mainstream IT stocks trading at something like 2-3 times revenues, and this is half a year revenues, even by price earnings multiple, which looks very low about half of what mainstream companies sell at.

The other part of the problem is the process by which it is being conducted. The day Siemens announced that they were selling; they said nothing about the valuations, they said nothing about the financial performance of the subsidiary. Couple of days later, after all hell has broken loose, they come out with details about this and the information, which they disclose is even more troubling. It even gives an impression that the financial performance has actually been turned down--the revenues have fallen, the profit margin has collapsed and there is a situation in which somebody could give a low valuation to the stock.

The entire process looks really bad and when one looks at Satyam-Maytas, at least, on day one, they told us what the valuation was. Here on day one we were told nothing about the valuation, it is really troubling.

Q: Do you buy the argument of the management that they were shifting a low margin business out of the core business itself to focus on other high margin acquisitions?

A: When you are talking about something which is really captive, the margin is entirely a function of transfer price. To believe that the kind of IT that Siemens does, they are really into relatively high value IT, and to believe that the profit margins are so low it strains credibility. Moreover, these are not third party prices; these are not arm's length prices; these are internal transfer prices. In fact, I would imagine that Siemens could even have a problem with the transfer price regulations, about how such a valuable business can produce only 6% margins. When Satyam said that their margins are only 3% we were shocked and here we have a company, which is into much higher end of the value chain, embedded software, niche areas, etc. to believe that profit margin is only 6%, I think it strains credibility.

Q: Is there anything that the Indian regulator can do about this? Or will we have a discussion about this expressing our anguish and nothing can be done because they own more than 50% of the stock--the parent? There is conceivably nothing which a minority shareholder can do under the current laws to prevent them from doing this transaction, or is there?

A: Under current laws, probably not. However, if one looks at what other countries have done, UK for example has a listing requirement, which says that a company can be listed only if it is capable of carrying on an independent business. This implies that if one has a controlling shareholder, then either he can't list at all or if you list you have to put in a set of contractual provisions, which prevents this kind of a thing from happening.

For example, when Vedanta was listed in London they agreed to a set of regulations, which said that one the promoters will not vote their shares in a general body meeting on related party transactions. If there were regulations like that, and if Siemens were to put this to vote--and Siemens AG can't vote--then one has 45% which can vote the institutional shareholding is 25%, the institutions can come together and vote it down.

So, we need to seriously look at things like this--where you have companies which are not capable of carrying on independent business either they should not just list, they should just be asked to delist, they should be asked to buy the minority shareholders out and then do what they want or they should be put in governance system, which ensures that the business could be carried on relatively independent of the controlling shareholder. We need to seriously look at the UK model of how business can be done.

Q: It's a pretty well-owned stock and it's on the key indices as well. Is there any action that can be taken at this point, aside from the recommendations that you just laid out?

A: You can't do anything about it under current laws because I don't think this requires you to go to the general body. Even if one had to they would be able to carry the transaction through, so I think it is completely in conformity with the current laws. I don't see how anyone can do anything about it, it is probably not large enough for you to go and talk about oppression of minority share holders and so on. However, if the stock has fallen 30% then even that route maybe open but under current regulations it looks like an uphill struggle for the minority share holders.

Q: Under whose jurisdiction does it fall to change the kind of listing laws that you are talking about--is it under Sebi's jurisdiction or the Finance Minister has to do the legislation?

A: Sebi can do that. All the listing regulations and Clause 49 and all that comes out of Sebi, so one could have this come out of Sebi; however, the company law also might need to come in respect of existing companies. If you are talking about a new company to say that you have to agree to all this is easier. But for somebody who is already listed, to go back retrospectively and say that you have to change your governance structure, is probably easier if the company law is also involved. However, Sebi can certainly make a beginning in this.

Q: I just want to get your thoughts on whether you are disappointed with the role of the regulator these past few months. The concern that happened with Satyam or the question that was raised was that why weren't there more checks and balances immediately after the Maytas episode. Why weren't there more checks run on what was happening with Satyam-Siemens as we just discussed is almost a come and gone issue, would you blame the regulator?

A: I would not rush into judgment. On the Satyam issue, we still don't know the facts. We know that something went wrong; we don't know exactly what went wrong and how it went wrong. We do not know what could have been detected, what could not have been detected. I would refrain from jumping into judgment.

Q: What's your assessment of (A): Where this Satyam's episode is headed from here and (B): The disclosures that you heard from Pricewaterhouse yesterday and whether they are opening themselves up serious litigation from here?

A: I really don't know, litigation will certainly be there, Satyam is US listed as well, so litigations, class action suits--all of that is going to be there. How they defend themselves and what are the defences they would have--all of that remains to be seen.