India has seen several high-profile cases of perceived corporate governance issues that led to stock crashes over the last 15 years. Such events generally lead to a loss of investor confidence and significant erosion of shareholder value. Is the damage during these events limited to the company in question or does it spread to the rest of the market?
To answer this question, we looked back at a few major corporate governance issues in India over the last 15 years –
Satyam Computers – 2009
One of the most high-profile cases of corporate governance issues in India was the Satyam Computers case in 2009. Satyam was a leading IT services company that was found to have engaged in financial irregularities. The fiasco eventually led to the arrest of the company’s founder Ramalinga Raju and resulted in the company being merged with Tech Mahindra.
- 07-Jan-09 – Ramalinga Raju confesses that he had falsified the company’s accounts and committed fraud of ₹7,000+ Crs. The stock price falls 78% from ₹179.10 to ₹39.95 in a single day. (Nifty 500 falls 6.6%)
- 15-Jan-09 – The stock price continues to fall and bottoms out at ₹20.30 as the government dissolves the Board and PwC admits failure to detect accounting irregularities.
- 09-Jun-09 – Tech Mahindra completes acquisition of Satyam Computers and rebrands to Mahindra Satyam. Stock price rallies 230% from the bottom to hit ₹66.85.
Even though Satyam Computers eroded ~60% of shareholder value in less than 6 months, the market (Nifty 500) was unfazed and ended up rallying ~40% during the same period.
DHFL – 2019
The stock price of Dewan Housing Finance Limited (DHFL), along with other NBFCs, had been under pressure since the IL&FS crisis in Sep-18, plunging from all-time highs of ₹600+ achieved earlier in 2018. This was further exacerbated by a media report that alleged financial mismanagement at the company in early 2019. DHFL crisis reached a resolution in 2021 as RBI approved its acquisition by Piramal Capital.
- 29-Jan-19 – Investigative journalism outlet Cobrapost alleges financial mismanagement of ₹31,000 Crs by promoters of DHFL. Stock price falls -55% from ₹209.20 to ₹111.45 in less than a week. (Nifty 500 falls 1.5% during same period)
- Jun to Aug-19 – Credit rating agencies downgrade DHFL to “default” rating as it fails to make multiple repayments in a span of few months. Stock prices falls further to ₹47.60 by end of Aug-19, dropping 80% since start of the year. (Nifty 500 fell just 2.4% during same period)
DHFL ended up eroding 97% of its shareholder value from Sep-18 to Dec-19. However, Nifty 500 was largely unchanged and delivered -1% returns during the same period.
Yes Bank – 2018-20
In 2020, Yes Bank faced a severe liquidity crisis due to high NPAs and perceived mismanagement. The RBI took control of the bank and implemented a restructuring with the help of other large commercial banks. The crisis caused panic among Yes Bank’s customers as well as shareholders, causing a ripple effect on the Indian financial sector.
- 19-Sep-18 – RBI refuses to give Rana Kapoor an extension to his term as the CEO of Yes Bank resulting in the stock price falling 29% from ₹318.50 to ₹227.05. (Nifty 500 falls just 1.3%)
- 13-Feb-19 – Yes Bank says that RBI observed no divergence in its NPAs and the stock jumps 30% to ₹221.00
- 26-Apr-19 – Rising NPAs trigger the first every quarterly loss reported by Yes Bank. The stock price plummets 29% from ₹237.40 to ₹168.00. (Nifty 500 remains unchanged)
- 05-Mar-20 – RBI places Yes Bank under moratorium and takes over from its board for 30 days. RBI also puts limits on withdrawals to prevent a run on the bank and protect its depositors. Stock price falls another 56% from ₹36.85 to ₹16.20. (Nifty 500 falls 2.4%)
Yes Bank eroded 93% of its shareholder value between Sep-18 and Mar-20. On the other hand, the Nifty 500 dropped 30% over the same period, largely due to the impact of Covid-19 pandemic.
Adani Group – 2023
Hindenburg Research, a US-based short-seller published an extensive report on 24-Jan-23 that alleged Adani Group being responsible for “the largest corporate fraud in history”. The report alleged that the Adani Group and its related parties had engaged in stock price manipulation, accounting irregularities, unsustainable leverage, and unreported related party transactions.
- 24-Jan-23 – Hindenburg Research publishes report alleging corporate governance issues at Adani Group
- 29-Jan-23 – Adani Group responds to the allegations, calling the report by Hindenburg baseless.
- 01-Feb-23 – Adani Enterprises, the flagship of the Adani Group, rescinded its ₹20,000 Crs FPO (follow on public offering) and returns the proceeds to investors.
- As of 13-Feb-23, the 9 Adani Group companies suffered losses ranging from -16% to -67% in around 2 weeks. In comparison, the overall market remained unaffected by the carnage in Adani stocks and the Nifty 500 fell by only 1.8%.
Historically most of the stocks discussed above have seen stellar stock price performance before they crashed. Many investors bought such stocks when they were trending in the market, some entered close to the peaks as well. As an individual investor it can be quite difficult to predict and preempt such sharp stock crashes. Hence, adopting a well-diversified portfolio approach to investing can help limit the impact of such shocks.
The Nifty 500 Index covers more than 90% of India’s listed universe and offers a portfolio of 500 companies which is diversified across size (Large, Mid and Small) and all key economic sectors.
Disclaimer: This article has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The indices/stocks mentioned herein is for explaining the concept and shall not be construed as an investment advice to any party. The graph used above is to explain the concept and is for illustration purpose. The information / data herein alone is not sufficient and should not be used for the development or implementation of any investment strategy. It should not be construed as an investment advice to any party. All opinions, figures, estimates and data included in this article are as on date. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.
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