Reliance Mutual Fund raises Corporate Governance Issues in Novartis

Hey ! Guess What ! now Reliance Mutual Fund,who hold 5% of the Equity  in Novartis have questioned the Inter-group Lending in Novartis…As at March 31,2008,Novartis Group Companies owned Rs 340 crs to Novartis…that’s 76% of the Networth of Novartis……also during 2007/8  the quantum of Intergroup Loan Transactions was as high as Rs 2457 crs

Check it out in the Economic Times Today at

http://economictimes.indiatimes.com/Personal_Finance/Reliance_MF_doubts_Novartis_inter-group_deals/articleshow/3362524.cms

Now this is the way to Go…Shareholder Activism is now rising in India and we need Big Shareholders like Institutions and Mutual Funds to keep the Managment and Promoters of the Company on their Toes  with regard to efficient operations and proper and full disclosures in the Annual Report…They should act as Guardians for Minority Shareholders

Questions that have been raised for Novartis lending to it’s Group Companies are

• Why are Group Companies being supported by Cheap Capital from Novartis ?
• What is the Interest rate Charged and is there any security ?
• Such a High Quantum of Lending may require Novartis to register with RBI as a Non Banking Finance Company?
• If you do not need these huge Funds,why not return them to shareholders as Dividend?

Novartis has clarified that the Loans are on call and have been given at arms length at Market Interest rates and have been audited and relevant sections of the Companies Act has been complied with 

The Reason I raise this Blog is that there are so many Companies which are cash rich and do not deploy all the Cash in their Operating Business…Sesa Goa for example…..However their Other Income is lower and not in proportion to such surplus Investible Funds in the Books….By lending at lower rates or showing them as Interest free Business Advances to Group Companies during the year and having them payback before year end so as to not reflect them in the Balance Sheet,shareholders are deprived of the Company earning appropriately on such funds……The Risk in Sesa Goa is that it is doing so well and can divert Huge Surplus Funds to Vedanta Group Companies….check earlier blogs

Sesa Goa is debt free and has been generating significant surplus Cash. Other Income in Q1 FY 09 shows a leap to Rs 61 Crs from under Rs 11 crs in Q 1 FY 08…In fact whole of FY 08 the Other Income was Rs 71 crs.There should be over Rs 5500 crs Cash in the books at March 31,2009 and one can expect Other Income Figures to leap past Rs 300 crs as Interest rates perk up…If they don’t you can question the Vedanta Group of Mr Anil Agarwal (Sterlite,Hindustan Zinc and Balco)…these would be most probably be reflected in Group Loans and Advances and probably at preferential interest rates 

Check the Capital Employed Figures for Q 1 FY 09.The Group had deployed Rs 3678 crs of which a very high 68% or Rs 2495 crs was unallocated !….It’s Capex this year will not cross Rs 400 crs .It’s Inventory Levels may have gone up and may be sitting on higher cost indicating increase in working capital…but this is temporary

Expect a Billion Dollars or over Rs 4200 crs to be shown at year end March 31,2009 under Unallocated Capital in the Expected Capital Deployed of over Rs 5500 crs

Another way of looking at it is that by March 31,2009,Sesa Goa would have Rs 80+ cash/share on it’s books…that’s over 45% of current xb/xs price of Rs 175

One Final Point…I hope that Reliance Mutual Fund does not hesitate to question and raise Corporate Governance Issues,if clearly visible and evident, in it’s Own ADAG Reliance Group of Companies where it may have Invested . 

Cheers !