Fairness Opinion 101: Abhijeet Shekdar

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CNBC-TV18's Menaka Doshi caught up with Abhijeet Shekdar , MD, Duff & Phelps to discuss the issue of 'Fairness Opinion'.

Below is a verbatim transcript of the interview. Also watch the video. 

Q: It's not yet a trend in India but you are stressing very highly of value of various opinions and what they bring to the table in terms of objective opinion making. What purpose do fairness opinions serve?

A: If you look at India, the whole cross border M&A and the whole deal has picked up in the last 10-12 years and as more and more Indian companies move towards best practices in terms of governance, independence, transparency-you will see more and more fairness opinions being used simply because especially in India a large part of corporate India is still promoter driven and there are several cases of related party transactions. There are several cases where there could be a conflict of interest. We are seeing more and more spin offs and demergers being the flavour of the day as they get to a sustainable level, companies are spinning of individual units.

So all of these trends are going to put the onus and responsibility on the board to ensure the minority shareholder is not getting squeezed out anywhere in any form or shape, which is why I think as part of their best practices, the boards will start getting independent fairness opinions from third parties to objectively look at the transaction, as opposed to an over arching influence from the promoters or the controlling share holders.

So that trend I see picking up in India in the next 6-12 months and Sebi has already made it mandatory for more companies merging in India to have to have a third party give a fairness opinion. So Sebi is catching wind of it and pushing that.

Q But it's not mandated elsewhere in the world. It's not necessary that you are a company who is about to enter a substantially large transaction of an acquisitive nature that your board must demand a fairness opinion or anything like that? 

A: I don't think it's required by law anywhere but it is a must-have from a corporate governance point of view, from an independence point of view. Globally you will see all material transactions have an element of fairness opinion. Any transaction, which requires a shareholder, would absolutely have a fairness analysis in it which would be included in the proxy, which is mailed out to the shareholders. It's all a process of transparency that you are creating and the board's subjectivity which gets reflected in the form of the level of independence the board has and it gets shared with shareholders in a proxy. 

They can see it and in the long run in India also you will see what happens is companies, which are adapting these practices, would typically see high level of investor confidence in those companies. That always pays off to be proactive and to be doing things, which are inline with best practices.