Clariant Chemicals' sale of business - no clarity here!

Lets play a small word association game. I will write a word and you say the first thing that comes to your mind upon reading the word..


1. Stock market  (Most of you will probably say high returns, volatility, manipulation, satta, etc)

2. Government  (Most of you will probably say lethargic, corrupt, unreliable, etc)

3. Wife  (Dangerous territory..so no comments from my side)

4. MNC Management  (I am sure most of you will say high quality, clean, professional, fair, etc)


Well, such has been the record of managements of MNC subsidiaries that we generally associate them with everything goody goody. A lot of these companies have been prolific wealth creators for investors over the years. And hats off to these guys.

But, it is not necessary that all MNC managements would be great, fair, transparent and professional. This is not something we can take for granted. Such representativeness bias can be highly dangerous to investors.

Lets take the recent happenings in an MNC subsidiary, Clariant Chemicals India Ltd.

Whenever the name Clariant Chemicals is mentioned, I have always seen experienced investors going gaga about the company. And rightly so. The company has grown profitably and has distributed liberal dividends. So, when the global CEO said in December 2011 that they aim to reach Rs.4600 cr in India sales by 2016/17 (CY11 sales were just Rs.1000 cr), investors sat up and took notice. Of course a management of this quality would have a broad plan under which they were making such claims right? Sadly, that doesn't seem to be the case. Not only have the sales been flat in 2011 and 2012, but recently, the company has announced sale of a large chunk of the Indian business (as a result of sale of the global business unit). Now how will the sales grow to the levels promised is beyond my understanding!!

First, let us look at this deal. The global Textile Chem, Paper Specialties and Emulsions business of Clariant (including Clariant India's business unit) are being sold to SK Capital for about Rs.3000 cr. Since Clariant India's business unit will also be sold, Clariant India will get part of this money. Well, sounds ok.

What is not ok is the way Clariant India has treated minority shareholders regarding this deal.

On 26/03/2013, Clariant India put out an announcement saying that Clariant India will get Rs.209.15 cr out of the total pot for sale of the mentioned businesses. From where did this sacrosanct number come was not given. To be fair, what is being given to Clariant India seems to be a good deal. The global business was sold at about 0.45x sales, while the India business is being given 0.6x sales. We have no idea about the India business profitability though! I was waiting for the postal ballot for this to be published, which would give more details and justification for the deal and what Clariant India is receiving.

I thought that decent clarifications and info will be given when they give out the notice for the postal ballot on this issue. (Since this sale cannot be done without the approval of shareholders).

However, I was absolutely shocked when the postal ballot was put up on BSE. It seems like the management is totally taking the minority Indian shareholders for granted.

Consider this.. the postal ballot is basically to ask the shareholders whether they are ok with the sale of the mentioned businesses for Rs.209.15 cr.
Now, if you want to take a proper informed decision whether to say yes/no on this, you will need info about the business being sold, right?

Shockingly, the explanatory statement to the postal ballot simply states that "TPE business contributes about 35% to the net sales of the company and includes a manufacturing plant for textile products situated at Roha". Thats it!!!!!!!!! It gives absolutely no more details about anything!! So how would you say yes/no to this resolution for selling the business? They are just not giving you any info!!

• So basically, does the Board want us to blindly trust whatever they say as true and fair? 
• Nothing has been mentioned as to who did the valuation, how was the number arrived at?
• We do not know how much profitability will reduce, how much fixed assets will go out? In short, there is virtually no info given on how much would the remaining business be like?
• So what purpose will this postal ballot serve? How does the Board expect shareholders to take a decision, when they are just not providing any info to take the decision?!

The Board does not seem to take into consideration the minority shareholders' opinion for this. It seems as though they are saying 'look this is what we have decided, just agree to this'. Not the best in terms of corporate governance, eh? I would request all shareholders to oppose this resolution and spread the word to everyone you know to oppose it.
This is just not done.

If things like this continue, then the 'management premium' that the valuations of MNCs were getting will soon turn into 'management discount'!!

Cheers and happy desi investing!!

Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) As a professional investor, I may have positions in stocks discussed.

4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

SEBI's new baby - rules for illiquid stocks

I am sure most of you must have heard of SEBI's new rules for trading in what it calls 'illiquid stocks' which came into effect from 8th April 2013. Some of you may not have heard of it because surprisingly, the media has just not highlighted the issue! Perhaps there is not much incentive for the media to get involved here! ;-) These rules hit more than 2100 hundred companies among the listed space, as can be seen in the annexure to this notice. SEBI has not explained exactly why this has been done, but supposedly it has been to control manipulation in smaller companies. In my very humble opinion, the new rules can be best described as insane! (To put it mildly).

Lets see what all this is about..

I think it all started when, in 2010, an academician decided to write a paper on how call auction system can be implemented to solve certain difficulties in the capital market. The paper can be downloaded here. The author is an extremely accomplished academician and a highly educated individual and is a member of SEBI's SMAC from January 2009. Her CV can be viewed here.
Well, it seems like SEBI really liked the paper and decided to take a cue from it and thus were born rules for call auctions in illiquid stocks. In it, firstly, SEBI defines what it means by 'illiquid stocks' by prescribing few quantitative criteria..


Criteria for illiquidity – For the purpose of this circular, a scrip, whether trading 
in normal market or trade for trade settlement, shall be classified as illiquid on 
a stock exchange if all the following conditions are met:
2.2.1. The average daily trading volume of a scrip in a quarter is less than 
10000;
2.2.2. The average daily number of trades is less than 50 in a quarter; 
2.2.3. The scrip is classified as illiquid at all exchanges where it is traded.


All those stocks which come under this will not be traded in the normal fashion. Instead, they will be traded through an auction mechanism which goes like this..


2.6. Number of auction sessions – Periodic call auction sessions of one hour each 
shall be conducted throughout the trading hours with the first session starting 
at 9:30am.
2.7. Session duration - The call auction session duration shall be one hour, of 
which 45 minutes shall be allowed for order entry, order modification and order 
cancellation, 8 minutes shall be for order matching and trade confirmation and 
remaining 7 minutes shall be a buffer period for closing the current session 
and facilitating the transition to next session. The session shall close randomly 
during last one minute of order entry between the 44th & 45th minute. Such 
random closure shall be system driven.
2.8. Un-matched orders- All un-matched orders remaining at the end of a call 
auction session shall be purged.


Fancy!!! But practically speaking, it has merely made investors like me miserable.

1. Investors now have to track and keep a watch on the market (stocks) the whole day. They are being encouraged to always keep tracking the market, which is a big negative as far as long term investing is concerned.
2. Every hour, a fresh order has to be placed. I think my broker would now hate me more than he hates his mother-in-law.
3. Since a lot of market participants are clueless as to what is all this, there has been extremely low participation and volume in the affected stocks. People must surely be feeling 'trapped' in certain stock, since virtually no exit is available.
4. Practically, this whole section of the listed space will now be closed to institutions, since I am sure they will have better things to do!!! Such lower participation does not help proper price discovery.
5. Also, will promoters take advantage of lower liquidity and panic selling to shore up their holding at lower prices?

I suppose that all this was done to curb manipulation. But setting up quantitative criteria for this purpose does not help. Manipulators can just ensure that these criteria are met and their stocks remain out of the net! But in the process, a lot of genuine companies with genuine shareholders will suffer.

I am no-one to preach on this. What is right/what is wrong is immaterial. Laws are laws and rules are rules. So what can be done about it?

1. I am hoping that as time passes, the market participants will get slowly used to the new method and some bit of sense will return to this section of the market. Otherwise, effectively, this section of the market is practically dead. The stocks covered by these rules for illiquid stocks have become more illiquid than they were earlier!!!
2. I tried viewing this as an opportunity. Probably some panic selling due to absence of liquidity may help us get some good stocks at lower prices. Somehow, that just hasnt happened till now. Lets see what the future holds.
3. I feel it is best to try and adapt to the new system, instead of cribbing or complaining about it. Have a good talk with your broker and ensure his cooperation without frustration in this matter. If instructed properly, the broker can handle the order placing and monitoring part, without much botheration to us.

In a nutshell, this is surely a huge negative for people who invest in small, unknown companies with a lot of value. If price discovery is hampered, returns just cannot be earned. I am keeping my fingers crossed and hoping that over a period of time, all the problems associated with this will be ironed out. After all, we must accept finite disappointment, but never lose infinite hope!! - Martin Luther King, Jr.

Cheers and happy illiquid investing!!

P.S. One may also like to read about this whole issue in Moneylife.

Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) As a professional investor, I may have positions in stocks discussed.

4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!