Decoding Boardroom Dilemmas – Hiving Off to Fundraise Through Subsidiaries – Commercial Wisdom or Short-Changing Public Shareholders?

Placed squarely between the imperatives of maximising shareholder value and protecting stakeholder interest, Indian directors can no longer claim the benefit of a one-dimensional approach to governance. The transfer of revenue-generating businesses to subsidiaries, dissemination of unpublished price sensitive information to nominating shareholders, and undervalued fund raises are just a few of the key dilemmas faced by directors of listed companies which underscore this position. 

 

Elsewhere, enhanced scrutiny from shareholder activism has already reframed approaches to corporate stewardship. Directors have come under fire for failing to meet environmental targets (eg: the board of Shell being sued for failing to prepare for the net zero transition). Large shareholder/promoter-centric approaches have been criticized for enabling corporate functioning at the expense of public shareholders, compromising long-term value and holistic wellbeing. 

Key Takeaways:
  • Transferring a majority-revenue generating business into a private subsidiary (hiving off) and raising funds at the subsidiary level is increasingly seen as a preferred alternative to direct listed acquisitions or slump sales
  • Hiving off may result in a ‘holding company discount’ and public shareholders lose out on value
  • Public shareholders’ involvement in moving businesses downwards or raising further funds is extremely limited, permitting promoters to proceed unhindered with such transactions
  • Directors should exercise diligence and business judgement, reconcile commercial imperatives with shareholder interests, record robust reasoning and put in place necessary mitigants before approving such structures 

Register Now