Related Party Transactions are considered the biggest concern of investors (74% of Institutional Investors as per a survey of a known proxy advisory firm in India) because quite a few of these transactions are geared to benefit promoter shareholders at cost to other shareholders.
While they may not be ‘illegal’ they are certainly unethical. It points to an wise saying by a friend - Indian promoters have one target returns for themselves and another for the minority shareholders.
One such example is Ador Fontech, an extremely well managed business providing reclamation services to improve useful lives of critical industrial components.
I am reasonably convinced however that the promoters (who control about 35% shares) undertake transactions that benefit “their clan”. Here’s why:
1). Ador Fontech’s profits that get realized as cash and kept in the firm, but lent to a sister concern that would otherwise find it difficult to raise money from the market at the same rates.
Management in its AGM says that the transaction is legal and with requisite approvals. But management needs to ask if the promoters would have approved the transaction if momentarily they became minority shareholders
2). Related Personnel of Ador Fontech’s Promoters have been paid cash as professional fees and remuneration that were initially undisclosed, but when disclosed, the amounts are as high as 5% of pre-tax Profits! I did some basic research and found that one of these “related personnel” is based in UK. Ador Fontech has no business in UK and one wonders why such a person could not be found in India at a cheaper rate? Another “related personnel” is possibly on the rolls of the company drawing a very high compensation - likely much higher than senior management (except the MD), but is not a part of senior management!
It is thus not unreasonable to conclude these payouts are not done on an arm’s length basis and such benefits come at cost to minority shareholders.
I wrote to the Chairperson in January 2014 bringing this to her notice. I got no response. I wrote again to an Independent Director (who is related to a common friend) who is a Member of the Audit Committee - which is supposed to ratify such transactions. It’s been over 2 weeks now after I wrote to him, and to my disappointment no response from him as well.
I am attaching a copy of the letter I wrote to the Independent Director which provides the basis for point 2 above (while hiding personal details). Makes you wonder whether Independent Directors are really Independent.
I am writing this so that members of this forum may take this into account in their evaluation of this company.
Cheers,
Kimi
Note-on-RPT-to-ID.pdf (18.7 KB)