Demerger devil enters India’s fairytale entrepreneurial stories

Update: 2012-11-23 22:26 GMT
Wipro’s and CESC’s are two post-independent India’s fairytale entrepreneurial stories, probably unparalleled in the annals of modern business management across the globe. While Wipro’s is a story of a small-time Mumbai vegetable oil producer becoming the country’s wealthiest person and one of the world’s top technology product providers, Kolkata-based CESC’s is all about turning British India’s earliest and best electricity company partly into a vegetable oil seller of sort through an acquired retail firm. Incredible, but true! This month, both companies decided to demerge their oil business – Wipro’s non-IT businesses and CESC’s multi-brand retail subsidiary, Spencer’s.

Ordinary shareholders are unhappy. Some are angry as well over corporate governance issues. Are the proposed demergers meant to divert a good part of corporate wealth to bulge the pockets of the promoters? Wipro’s proposal is public. CESC’s is still shrouded in mystery. The latter’s diversification in grocery and multi-brand retail business has already eaten up much of the original power company’s cash and other assets. Those assets belong to all its shareholders and not CESC’s promoters – RPG-Sanjiv Goenka group – alone, leaving aside its millions of consumers whose increasing electricity bills on account of regular revisions of power tariff helped the 115-year-old company build the surplus for the management to splurge.

First, Wipro. The present $5.4-billion-worth Wipro chairman Azim Premji’s father, Mohamed Hashim Premji, a well-to-do Bombay rice and oil merchant, dreamt it big in manufacturing. On 29 December, 1945, he set up Western India Vegetable Products Limited with an old oil mill at Amalner in Maharashtra. Azim was only a five-month-and five-day old child then.

Under Azim Premji, the company’s name was changed twice – Wipro Products Limited (1977) and Wipro Limited (1982) – in keeping with the fast changing profile of its operations. In 1980, Wipro had already diversified into information technology business. Wipro, the third largest Indian IT firm with a turnover of $1.5 billions (2011-12) from this business segment comprising IT services, consulting and outsourcing boasts 1,30,000 employees and business centres across 54 countries. Of late, its IT business appears to have reached a plateau although other Indian giants such as Infosys, TCS, Cognizant, Tech Mahindra and HCL are continuing to grow. Few can blame Premji’s decision to totally dissect Wipro’s IT products and services business into a separate company giving it a strong and independent attention and operational push. Three other segments of Wipro’s current businesses – consumer care and lighting; healthcare; and infrastructure engineering – stay together as a separate corporate entity.

Wipro’s non-IT businesses, which account for nearly 80 per cent of its current annual revenue of over Rs. 37,500 crore, will be demerged into a new company called Wipro Enterprises Limited (WEL). Premji will remain as Wipro Limited’s chairman. He will serve WEL as non-executive chairman.

The demerger plan wouldn’t have raised a governance issue if WEL, too, was to be made a listed company. In other words, the proposed demerger is being seen as an attempt by the Premji family to walk out with 80 per cent of Wipro’s business. The valuation of the assets, including the brand, is also being questioned by critics.

Proxy advisory firms have turned the heat on Wipro. The Stakeholders Empowerment Services (SES), formed by former SEBI executive director J N Gupta, has been particularly critical. It has asked Wipro shareholders to seek listing of WEL to realise its fair price in the market. The demerger is said to have been structured to help Premji circumvent the SEBI norm of cutting the promoters’ stake to 75 per  cent.

CESC’s case is, however, unique. Former take-over tycoon R P Goenka (RPG) grabbed this former British corporate jewel cheaply through a well calculated stock market operation aided by a mischievous rumour that the company’s distribution licence might not be renewed by the then Left Front government under Marxist chief minister Jyoti Basu. CESC was widely held and professionally managed. Trade unionist Basu’s dislike for CESC’s management culture and its earlier INTUC union was well known. Goenka, a shrewd businessman, struck an excellent rapport with Basu and through him the CPM party. By then, CPM-affiliated CITU had also replaced Congress-led INTUC.

CESC had a smooth run under the 30-year CPM rule in West Bengal, which never questioned the diversion of the company’s funds to set up non-core projects such as spinning mill in north India and buying Chennai-based cash-strapped Spencer’s. CESC has been slow in raising its power generation capacity (1,225 MW) and shareholders’ wealth despite regular increase in electricity tariff rates.

The RPG-Sanjiv Goenka power company’s annual cash generation of close to Rs 1,000 crore partly went into regular equity infusion into loss-making Spencer’s, whose total equity is Rs 325 crore as against CESC’s Rs 125 crore.

In the case of both Wipro and CESC, it appears the demerger plans are designed more to enrich their respective promoters than the ordinary shareholders who have always rendered proxy-support to corporate management for the latter’s quest of more and more wealth generation. So much for India Inc’s adherence to good corporate governance practices! [IPA]

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