Nykaa’s 5:1 bonus issue has raised concerns about alleged weak governance practices at the recently listed startups. In an interview with Moneycontrol, corporate fraud-investigation expert Vidya Rajarao claims the bonus issue cheated retail investors, points to those who allegedly failed in their duty to protect these investors and states that this is a reflection of a larger problem.
Rajarao, founder and CEO of Fraudopedia, was the first Indian to be elected to the Board of Regents of the Association of Certified Fraud Examiners (ACFE) and she recently served as the Vice-Chair of the Board. She is also the only Indian expert witness to appear continuously in the International Who’s Who of Arbitration Expert Witnesses since 2014.
Rajarao has more than two decades of experience in forensic accounting, has been part of fraud investigations and has helped regulators in India, the UK, the US and Germany in their investigations. She was formerly Partner at Grant Thornton India, where she had set up and led the Forensics Practice.
What problems do you see with Nykaa’s bonus issue?
The bonus issue announced by Nykaa is questionable in both intent and timing. Without any discernible improvement in business since the IPO, the motive behind the announcement of bonus shares appears to be arresting a fall in share price. Recently, there was a similar instance with Zomato. After the lock-in period ended, PE Funds, high networth individuals and other original investors started selling shares, which led to a sharp fall in the share price of Zomato. Nykaa promoters (being investment bankers) seem to have come up with this sleight of hand (bonus share issue) to arrest such a drop in price.
The lock-in period ended on November 10 and the record date for the bonus shares was set on November 11, which meant that investors had to wait for almost two weeks for the bonus shares to be credited in their accounts for them to sell. This is another age-old practice of promoters in the 80s, when investors had to send their paper shares to the registrar to get the shares transferred in their name, and they couldn’t sell their shares in this duration. It is ridiculous that, in the 21st Century, a company has regressed to the 80s.
Even after the shares are credited to the investors’ accounts, within 15 days, there won’t be selling pressure because investors would be stuck (with shares at a lower value and short-term capital gains tax higher). Only promoters and other high networth individuals, who were pre-IPO investors, will sell because their holdings are much larger and they got at their shares at a much lower price than retail investors. So, even by selling their (pre-IPO investors’) shares after the bonus issue, these bigger investors would make a profit.
(Some of the pre-IPO investors bought 2.5 million to 11.4 million shares for as low as Rs 6.3 and Rs 6.9. One of the bigger shareholders, Harindarpal Singh Banga with 30.5 million shares, bought it for Rs 7.3, according to a JM Financial Report.)
What is the market regulator’s attitude to such instances?
Market regulator SEBI invariably ignores and falls short in policing listed companies’ corporate governance practices. Directors at SEBI who periodically make tall claims about protecting the interests of retail investors did nothing in the Zomato case. Had SEBI or the exchange authorities blocked the purchase of Blinkit (a firm founded and managed by the spouse of a co-founder of Zomato) by Zomato, such ‘unfair and unethical’ corporate governance practices could have been prevented at Nykaa.
SEBI’s public messaging is that they are on the side of the retail investor. But if they don’t act in such instances, they have to admit that they are a toothless tiger.
Who should have raised an alarm about the bonus issue?
The Board of Directors, especially, the independent directors should have raised concerns about this issue. Their lapse is particularly galling because the independent directors have several years of experience in the corporate sector and serve on the Boards of several listed companies in India. The independent directors can and should have seen beyond the ‘ruse’ of the bonus shares to prop up the share price of Nykaa.
One of the independent directors we spoke to said they didn’t flag it as a concern because they are non-executive directors, and this is part of managing the company… Isn’t that wrong, since this directly affects minority shareholders?
Absolutely. I am also an independent director on the board of two private limited companies. Operational issues are things such as fixing the price of the product or engaging with a particular supplier, and so on. But this is capital raising and this would have come to the Board for approval, then the Board cannot say this was an operational issue.
They would have been notified of the entire scheme, including the date of the bonus issue.
Also, we don’t know what transpired at the board meeting. Did some Board member dissent? If someone did, they could have communicated that to SEBI or they could have come out publicly and said that they had dissented.
There is an argument that the management was just intelligently avoiding a fire sale, which would also have been harmful to the shareholders. Do you think there is any justification here?
The whole idea that this was done to avoid a fire sale is ridiculous because how would one know that. (If their intent was to protect the share price) the bonus issue has made it worse because, with the issue, they are telling long-term institutional investors that the price of the stock is much lower than what the market was giving it.
It is clear that this move was made to benefit large shareholders such as promoters and their family, PE Funds, high networth individuals since they would have been the sole beneficiary of such a sale leaving retail investors in the cold.
Are such instances common to other recently listed companies?
The instances of such lapses are increasing. The new-age startups seem to think that just because they are tech-enabled, they are different and the rules don’t apply to them. Many of them are completely immature and unschooled in governance. Therefore, the responsibility of the board becomes even more critical. Some of the founders are completely clueless about what belongs to the founder, and what belongs to the company and the shareholders. The founder may own 95 percent of the company’s shares at the time of listing and only 5 percent may belong to public shareholders but the moment the company lists the assets of the company aren’t the founder’s assets. Somehow they (the new-age founders) don’t understand that concept at all.
Recent issues at new-age companies have all revealed significant corporate governance lapses. Nykaa is no different. For example, conflict of interest and related-party transactions at Zomato and BharatPe, and now Nykaa’s feeble attempt to enrich the promoter family shareholding at a higher price and at the cost of its retail investors. Some of the startups’ use of adjusted EBITDA (a non-GAAP measure) is also a severe indictment of corporate malfeasance. None of these lapses was questioned either by the Audit Committee or the Board.
What are the commonly found governance lapses at these newly listed companies?
They include related-party transactions, lack of transparency in dealings, conflict of interest, weak controls and governing mechanism. The silence of the Board of Directors, especially independent directors, is stunning.
Are these newly listed start-ups doing anything better than their earlier counterparts, in terms of corporate governance?
Nothing. Technology companies such as TCS, Infosys, Wipro, Mindtree and Happiest Minds are some of the companies that are a beacon of corporate governance practices in our country. The managements and boards of new-age companies would do well to follow the tall standards set by their predecessors.