Regulators must protect the interest of minority shareholders

Apr 12 - 18, 2004

The Supreme Court judgement has paved way for holding the Annual General Meeting (AGM) of Adamjee Insurance Company and election of directors. The judgement must have brought some peace of mind to the small shareholders who have not received any return on their investment for the period the legal battle was fought. While it may not be right, as it may tantamount to 'contempt of court' to pass any comments on the Judgement, it may be of some interest for the investors to look at the possible future moves of petitioners as well as the respondents.

An interesting situation has been created as the company has notified Karachi Stock Exchange that the Board of Directors meeting, for approval of annual accounts, scheduled for March 30, 2004 has been deferred. The reason for the postponement was said to be the Supreme Court Judgement. There are two point of views regarding this act of the sitting Board of Directors. Some analysts say, " As such approval of accounts should have not been a cause of concern". However, other believe, "The annual accounts may contain certain 'year end appropriations' which were feared to be questioned at the annual general meeting. Therefore, additional time was required to prepare the revised accounts".

It may be pertinent to point out once again that one should abstain from calling this a 'hostile take-over'. Calling it a hostile take-over gives an impression that the highest court of the country could not protect the interest of current sponsors of the company. Whereas, the realty is that the court judgement has created conducive environment for holding the election of directors. And only time will tell that who controls the majority share or has the power to solicit proxies. The next election of directors could be termed, 'proxies war'.

Proxies will play a very important role as was witnessed at the last election of directors. It is understood that Adamjee family enjoys/controls 40% votes and the new incumbents also control an equal number of votes. Those who have the potential to change the equation are the financial institutions. In the last election financial institutions has brought their own nominees on the Board. It is yet to be seen whether they follow the same strategy or prefer to join one of the groups.

It may be very unfortunate but a harsh reality that alongwith the sponsors, the new incumbents will be participating at the highest level of decision making, at the Board of Directors. Sharing powers with those who were resisted to the maximum means that the heart-burn will continue for some time. It will not be easy sail for either of the group. While the new incumbents may be over-zealous in turning around the operations of the company, the old-guards may not like replacement of some of their 'most trusted' ones. Will there be large-scale horse trading, as described in the politics?

According to an analyst' "Adamjee's stand was very weak. However, they wanted to retain the company under their control as long as possible. In this attempt millions of rupees must have been paid by both the parties to attorneys. The wining party may say that fees paid to attorneys is the cost of acquiring control of the company, which was not possible otherwise". However, the shareholders certainly feel that the fees paid to attorneys has deprived them from the return on their investment, had this money not paid to attorneys it would have been either distributed as dividend or kept as retained earnings.

Soon after the Court decision, price of shares of Adamjee Insurance Company went up considerably. The general perception was, "Accumulate as many shares as possible because both the parties will be the buyers". This euphoria was created by the rumours that both the parties are accumulating as many shares as possible before the AGM to ensure the maximum number of their representatives on the Board of Directors.

The rumour mill was very active and it is still active. It also churned a rumour "Mansha Group is interested in selling its stake to Adamjee family". The possible price at which deal could be struck was floated as high as Rs 200/share. However, this rumour died quickly because the quoted price was unrealistic/too high. On the second thought, many speculators were convinced that none of the party would be willing to offer such a fabulous price.

However, only a novice could believe this rumour. Many rejected it on the grounds that the new incumbents have come to stay and also have the expertise of managing the insurance business. Since Adamjee Insurance Company enjoys enormous upside potential, departing with the stake in the company can only be termed a bad proposal and no wise business group would like to commit such a mistake.

There is no tradition of electing representatives of minority shareholders in the country. Often to provide a cover up one of the directors is labeled as representative of minority shareholders and fully supported by the sponsors. Ideally such a representative should only be elected by the minority shareholders. It is the time SECP should assert itself and change the rules of game by giving a ruling that minority shareholders should elect their own representative.