Two days after the Satyam fraud was announced, Siemens Limited, a 55% subsidiary of Siemens AG of Germany informed the stock exchanges that “the Board of Directors of the Company at its meeting held on January 09, 2009, has approved the divestment of its 100% stake comprising of 6,815,000 Equity Shares of Rs 10 each in its subsidiary Siemens Information Systems Ltd, Mumbai, to Siemens Corporate Finance Pvt. Ltd., a 100% subsidiary of Siemens AG, subject to receipt of all requisite consents, approvals.” In its press release, the company stated “This is pursuant to the change in structure of the global software business, where SISL businesses have also been aligned with the parent group. In the new model, SISL will serve as an internal software factory supporting the R&D and product development initiatives for business sectors globally. It will also focus on increasing its presence in the domestic market and continue to act as an offshore development centre for Siemens worldwide.”
The response of the stock market has been brutal: the stock fell almost 30% from Rs 298.00 to Rs 211.80 while the Nifty index fell by only 6% from 2920.40 to 2744.95. The press release does not mention anything about valuation or consideration, but clearly the market sees this as a valuable business being transferred to the dominant shareholder at a discount to its fair value. Investors are powerless here because unlike in the Satyam-Maytas case, here the parent company has a majority shareholding.
India should probably look at the UK model for dealing with such situations. Rule 6.1.4(3) of the UK listing rules, requires that a company that seeks listing of its equity shares in the UK should demonstrate that “it will be carrying on an independent business as its main activity.” In practice, rather than refusing to list an issuer that fails to satisfy this requirement, the UK regulator looks to see how a lack of independence will be managed. This means satisfying itself that an issuer that has a controlling shareholder is capable of carrying on its business independently of that shareholder.
For example, when the promoters of the Sterlite group in India listed their business in the UK as Vedanta Resources plc, the restrictions that they agreed to as a condition for listing included the following (Vedanta Resources plc, listing particulars, page 68-70):
- The Board and the Nominations Committee and most other committees to which significant powers are delegated shall at all times comprise a majority of directors who are independent of the promoters
- Neither the promoter-director nor any non-independent directors shall be permitted to vote on any resolutions of the Board to approve any arrangement or transaction with the promoters
- The promoters may not exercise voting rights in the company in respect of any transactions or arrangements between the company and the promoters.
- The promoters shall not invest in certain specified businesses directly or indirectly except through the company.
- Transactions and relationships between the company and the promoters shall be conducted at arm’s length and on a normal commercial basis
Restrictions of this kind might have helped prevent the Siemens transaction provided they were coupled with a requirement that a related party transaction should be put to shareholder vote if say 10% of the shareholders so demand. The institutional investors with 25% shareholding would then have been able to demand a shareholder vote and then vote it down with Siemens AG unable to vote its shares.