The post-earnings investor call of Hinduja Global Solutions, a business process management firm involved very little discussion on the impact of coronavirus on business or the result itself. The discussion centred around the Rs 340 crore short-term loan given to group companies for the year ended March 31, 2020.
Srinivas Palakodeti, the company's CFO told Moneycontrol the loan was given to three unlisted group companies – Hinduja Group, Hinduja Realty and Hinduja Energy – between November 2019 and March 2020.
These loans, Palakodeti said, have since been repaid.
However, investors in the company seemed unconvinced about the idea of lending within the group. Ajay Sharma, a portfolio manager pointed out that it is a corporate governance issue since the surplus money could have been used to pay more dividend. “You are at the end of the day still assisting a group company. What is the guarantee that it (loan) does not go badly?”
Sharma’s concern was backed by many others. Another investor wanted to know if such transactions would be an integral part of the company strategy and why there was a delay in the disclosure. The transactions done between November and March were disclosed only in July.
The reason for the tough questioning was a similar issue that had earlier been raised at the automotive firm and group company Ashok Leyland. Investors had raised concern over the company lending Rs 500 crore to promoter entities, according to a Mint report.
Corporate governance experts pointed out that such practices do raise concerns. Shriram Subramanian, founder, Ingovern, a proxy advisory firm, said, “Related party transactions, not in the ordinary course of business, raises red flags and in this case, they are not being very transparent about it.”
Disclosure has come late as well, he added.
According to the company, the disclosures were made within the time limit offered as per Companies Act and Securities and Exchanges Board of India (SEBI). With respect to loaning the surplus, Palakodeti said, the company considered alternatives including bank deposits and liquid mutual funds before loaning it to group companies.
There are two or three options, Palakodeti said.
“One is you can keep the money in terms of bank deposits, the rates would not be more than 3-4 percent,” he explained. Liquid mutual funds have risks and the company, he said, did not examine government securities and hence was not clear about the risk.
According to him, the reason they went with group companies is that they offered a good return, at the rate of 8.3 percent, and there was no credit risk. “We were pretty sure, based on the names of the lenders, that the money would come back,” Palakodeti said.
On an investor voicing his concern that transferring shareholder’s asset to a family group might not be safe, Partha De Sarkar, CEO of Hinduja Global replied, “Fair enough. That's your opinion.”
Palakodeti continued to remain non-committal on whether this would be a strategy the company would follow. That is if the company would continue to give surplus as a short-term loan to related parties. “We are open to any options. If they have short term surplus they should be deployed and earn reasonable returns,” he added.
While the management continued to brush off corporate governance issues stating board approvals were in place, some have pointed out that the board should have insisted on shareholder approval.
“So this is a corporate governance issue and if the board was strong they would have insisted on a shareholder vote, which they didn’t,” Subramanian pointed out.
The management did not comment on the credibility of the board, which had approved the transactions. While Palakodeti said that new members were appointed last September, he said that he cannot comment on the same.
This is important as the board has seen a huge churn last year. According to reports, three family board members resigned - Ramkrishan P Hinduja, Shanu SP Hinduja, and Vinoo S Hinduja.
The tenure of two independent directors Rajendra P Chitale and Rangan Mohan ended on July 3, 2019. Pradeep Mukerjee, who was appointed as an independent director effective May 2019, according to the FY19 report, resigned in September 2019.
The board now has six members, YM Kale, Anil Harish, Bhumika Batra, Ganesh Natarajan, Partha DeSarkar, and Sudhanshu Tripathi. Natarajan and Tripathi were appointed as an independent director and non-independent director, respectively, on September 30, 2019. Batra was an independent director appointed on September 4, 2019.