1. Feature / Columns MAGAZINE | JUL 09, 2011
Pradip Shah, Founder, Indasia Advisors
COLUMN
“Get Your Strategy Right”
PRADIP SHAH
K eep the investor profile in mind: The first challenge in managing investor expectations is that the investor base of
young and fast-growing companies is quite different from that of a mature business with steady cash flows and a slower
growth rate. Often acquisitions and divestments lead to an imbalance in investor expectations and the company’s own
ambitions.
As a member of the board, if a company is pursuing a move that leads to a change in its profile—cash flow movement,
dividend profile, risk profile—you should be worried. That is not to say that you should ignore business opportunities.
Given the requirements of a fast changing world, inorganic growth and even diversification into new business lines may
be inevitable. But the management has to articulate its strategy at its AGMs and in the annual reports rather than wait for
its actions to take investors by surprise.
Fairness to minority shareholders: There is one aspect of fairness that is vital but often ignored. In India, in particular,
where you get 8-9% growth, you are bound to see capital raising going on continuously in fast-growing large companies.
But companies often do not raise cash from existing shareholders; they go outside, which means dilution for existing
shareholders.
Companies should give the first chance to existing shareholders and offer shares to outsiders only if there is still a
shortage of funds. Usually, the logic that a board of directors will give is that existing shareholders can go and buy in the
open market. That is fine, but a win-win will be to minimise the dilution yet increase growth for the company. Worse than
the follow-on public offer is preferential allotment to promoters, which again ends up diluting the stake of public
shareholders. It may be legally permitted, but is it fair to minority shareholders? Managing minority rights is key, whether
it is equity rights or non-entity dilution or rights to pre-emption. For that, we need corporate democracy, which exists in

2. theory but needs to be made effective in practice.
Don’t ignore dividends: Investors expect dividends. And when companies pay dividends, they send the vital message
that the company is in good health, quite apart from the cash-flow value to those dividends. But in a high-growth
economy, when companies are expanding furiously, cash-flow requirements and so on may constrain the management
from declaring dividends. The board has to take a pragmatic view keeping in view the larger interest of shareholders.
Don’t pay attention to analysts: In a high-growth economy, where you are making investments, you may not be able to
match upto the expectations of investors on a quarterly basis. Unfortunately, managerial behaviour is affected by this
quarterly reporting requirement. And there is inordinate attention given by the CEOs—not necessarily by the board—to
what analysts say. Analysts are number driven. They are not business driven. And yet, CEOs are driven by them. The
undue power of analysts over CEOs, the undue power of a corporate reporting deadline over CEOs and the continuing
challenge of managing minority shareholders are all heightened imperatives today.
Keep a tab on managerial remuneration: India has some astronomical salaries and commissions—even by world
standards. In a country where 410 million people are below the poverty line, can this be justified? Remuneration
committees would say pay is by performance. But if that is the case, how do you justify paying a higher amount to the
executive director from the promoter family than to a professional holding the same position in the company? There are
several such instances. The question boards must ask is, how much would this director get if he were to look for
employment outside this company—that is his true worth.
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