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Shareholders are losing money. Bankers are fuming.
Lawyers are smiling. And the auditors—ah well, they are
just waking up.
And all
this is happening because skeletons are tumbling out of
Indian corporate treasurers’ cupboards.
As this
column mentioned last week, Jamal Mecklai, chief
executive officer of Mumbai-based risk-management
consulting firm Mecklai Financial, estimates that Indian
companies may have as much as $5 billion in
mark-to-market losses on their currency-derivative
positions.
Some of
that is now beginning to surface.
On March
28, Amtek Auto Ltd., which makes crankshafts, flywheel
ring-gears and other automotive components in factories
in the United States, Britain, Germany and India,
informed the Indian stock exchanges that some of its
currency hedges and swaps “could expose” the company to
losses of as much as $18 million over the next two
years.
The
company, whose shares have declined 40 percent this
year, said it was the victim of the “recent turbulence”
in the currency market and vowed that insider
shareholders will bring in money, if required, to meet
Amtek’s obligations on these contracts through 10-year,
zero-interest debt.
Amtek’s
strategy to deal with the loss appears to be a
responsible one: it’s neither trying to renege on its
obligations nor is it sending the bill to minority
investors.
Wrong
bets
The
currency bets of Indian treasurers’ are unraveling—and
not just at Amtek.
Hexaware
Technologies Ltd., a Mumbai-based computer-software
company, has set aside $25 million to cover possible
losses from what it says were “potentially fraudulent”
options trades. Sundaram Multi Pap Ltd., a stationery
maker, says the “speculative option deals” offered to it
by ICICI Bank Ltd. under “the guise of” export-risk
hedging are legally void.
The
courts will see about that.
The
problem has arisen because rapid globalization of the
Indian economy is taking place without commensurate
improvements in either the regulatory framework or the
risk-management practices of corporate treasuries.
Even the
smaller Indian companies have grown at a breathtaking
pace in the past few years by acquiring businesses
overseas, boosting exports and selling foreign-currency
convertible debt to finance their growth.
With
increased openness comes the responsibility for managing
the new financial risks associated with greater global
integration.
Accountants wake up
And
that’s where managements have been reckless.
In the
process of hedging the risk of the Indian rupee rising
or falling against the currencies in which their
exports, imports and loans are denominated, treasurers
have gone ahead and taken bets against, for instance,
the Japanese yen gaining against the dollar.
Since
Indian companies were only required to shift to mark-
to-market accounting in 2011, they had every reason to
seek risks that could remain hidden from shareholders
for a long time.
The
Institute of Chartered Accountants of India, which sets
the rules for the industry, had a meeting last week in
which it decided that given the possibility of “heavy
losses,” companies should immediately start making
provisions for mark-to-market losses on all outstanding
derivatives contracts.
So the
accountants are now trying to do, in a rather ad-hoc
manner, what they should have done years ago.
Unmeasured, unmanaged
Minority
shareholders in Indian companies will be grateful if the
government creates an independent, professional
regulator for the accounting industry, an idea that has
been discussed since the 2001 collapse of Enron Corp.
and the creation of the Public Company Accounting
Oversight Board in the US under the Sarbanes-Oxley Act.
Mecklai
Financial did a survey in December 2007 of Indian
corporate treasuries and their currency-risk management
practices. What it found was that two out of five
treasuries don’t even bother to measure their currency
risk, let alone manage it; more than half didn’t have a
risk-management policy.
Even
worse, out of the 18 percent of companies that said they
were using the gamut of derivatives, the majority had
sales of less than $60 million a year.
Not only
have smaller companies engaged in riskier behavior, they
are also more likely to have hidden it from their
shareholders. Most of the respondents in the Mecklai
survey who confessed to not regularly marking to market
derivative risk also came from this group.
Corporate governance
Now that
their bets have gone wrong, many of them are looking for
loopholes to renege on paying the banks. Lawyers are
having a field day. Banks are, naturally, furious.
Since
January 2006, Indian publicly traded companies have been
required to “lay down procedures to inform the board
about the risk assessment and minimization procedures,”
and to “ensure that executive management controls risk
through a properly defined framework.”
Companies have to be made to take this so-called Clause
49 of their listing agreement seriously. That can only
happen if the stock-market regulator imposes stiff
punishment in a few cases of violation.
Rather
than trying to prevent the treasurers from doing
anything more in the foreign-exchange market than purely
hedging risk—something that Indian central-bank rules
have failed to do—it may be more effective to stop them
speculating without adequate disclosure.
That
will create the right incentives for the CEO to cease
looking to the treasury for profits. |
