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Thursday, June 23, 2011

How a Good Investor Relations Programme could have avoided the crash in Stock Prices of Over Leveraged Companies:

The week beginning 20th June 2011, saw the price of one of the stocks, GTL, crash by 70%. It was an interesting study: this had happened once around two years back when the shares of another company, Orchid Chemicals, had similarly crashed overnight by more than 50% without any fundamental change.

In GTL's case, it seems the crash was forced by rumours which were in the market for a couple of days that the promoters had defaulted on their loan repayments. The fundamental problem, in GTL now and Orchid then, was that the promoters had overleveraged themselves by borrowing against pledge of their shareholding in the company. Once the rumours started of default, there was a dip of around 10% in the stock prices, on the previous working day on the bourses. When the bourses opened on 20th everyone wanted to jump on the sell bandwagon before the lenders against shares came to the markets to sell in order to meet the margin requirements of the promoters.

This selling saw a catalytic move and, despite the promoters coming on record saying that none of the lenders had sold or were selling the shares in the market and clarifying that there was no loan obligation default, the cat was out of the bag. It was too late to stop the selling and all hell broke loose. Next day saw similar runs on the stock prices of two other companies, where the pledged promoter shareholding was large. The market is full of rumours of selling and default in other stock counters as well and there is literally a fear psychosis in the stock markets as of now.

From the Communication angle, this provides us great insight into what went wrong and how a proper communication strategy - a structured investor relations and crisis management programme, could probably have prevented such a carnage.

Let us first analyse what went wrong communicationally for GTL. Fact of the matter is that GTL is a very investor savvy company and institutions have always loved this stock. The reason for pointing this out is that if this can happen to a company like GTL, it can happen to anybody.

What were the steps that GTL should have taken proactively which it did not, in all probability, take? In India there are no regulations governing the end use of funds borrowed by promoters against their shareholding. While promoters are mandated to declare the amount of shares pledged, that is all.

GTL promoters, first, should have communicated to all their stakeholders and the investor community on the utilisation of the funds borrowed against shares. This would have ensured transparency and put to rest any doubts that one had about the promoter intentions.

Second, the promoters knew that the Indian stock markets were underperforming and were giving negative returns. They were plagued by one bad news after the other relating to Government and policy. Also they knew the dates of redemption of loans well in advance, so they should have been prepared that any slightest delay or renegotiation on loans could have negative impacts. Under such circumstances they should have kept their Institutional and other large investors fully apprised on a proactive basis, so that these investors stood by the company if there were bad times. In fact if the lenders were threatening to sell the shares to meet promoter margins or redemptions, a fully transparent management could have placed the shares of the lenders at a discount to these large investors. But the management it appears did not do so. There was, it seems,complete lack of proactive approach from the company.

Third, when the rumours started, I am sure the promoters and the company must have got calls trying to verify the facts, the company did not do anything concrete to stop the rumours. Why didn't the company come out with statements and go public when the first bout of selling happened on Friday, when the share price decreased by 10%? Because the managements were complacent.

Also, it seems that there was no Crisis Communication programme or even if there was, it failed. Another reason could be that the Crisis Communication programme did not take into account the Investor relations programme. A Good Investor Relations Programme should have anticipated the likelihood of this happening and would have proactively engaged in a much more frequent dialogue with the investing community to help keep and maintain their faith in the company.

While it is also possible that despite the best investor relation and crisis communication plan, this would still have happened but at least nobody could then have pointed fingers. Here any semblance of a Crisis Communication strategy, was completely missing from the public domain.

What I am advocating is not rocket science but only the need for Communication and Management teams to remain focused on engagement strategies, more so particularly, when the external environment is bad. Promoters need to think of expenditure on Investor Relations (IR) and Crisis Communication as a Capital Expenditure. Imagine if I had gone to the company and asked for a paltry Rs.3 million for taking care of the IR programme per year, the company would have laughed.

But see the scenario now: the company has lost roughly Rs. 20,000 million in market capitalisation; the investors are scared and sceptical about the company; and there is a run on it. Lenders confidence has been shaken, employee morale has been hit, etc. Even if GTL had engaged in an IR programme for 10 years, they would have spent only Rs.30 million and the returns would have far outweighed the expenditure.

There is still time for scrupulous Promoters and Managements, who are here for the long term and serious about their businesses, to hire professionals to undertake complete IR and Crisis Preparedness programmes. This will, in all probability, help them build sustainable brands and businesses and the Return on Investment (ROI) will start from day one.

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