How to do Management Analysis of Companies?

Modified: 02-Nov-21

The current article highlights the key steps/tools that investors should use to find out good management and avoid bad management. An investor should read these carefully and inculcate them in her stock analysis process so that she may avoid falling into the trap of unscrupulous managements that try to benefit at the cost of minority shareholders.

Additionally, this article also contains answers to some of the important queries asked by investors about different aspects of management analysis.

Let’s study the tools available to common shareholders by which she can do the management analysis of a company by using the information available in the public domain:

Simple Steps to do Management Analysis

1) Check Promoters’ Background:

Checking the background of the promoters’ is the first step in the management analysis of any company. A background check might mean different things for different investors. Some may stress on educational qualifications while others may focus on the family background, however, I advise investors to focus on the past management decisions of the promoters.

Educational qualifications do not give the investor an idea about the shareholder friendliness of the promoters. Shareholder friendliness is reflected in the character and integrity of the promoters/management. Therefore, the investor should focus on promoters’ past decisions and try to assess whether those decisions were taken while keeping the interest of minority shareholders in mind.

Let’s see an example of a good business and try to assess its promoter’s background and find out whether the background check helps the investor in decision making:

Management Analysis of Brooks Laboratories Limited:

Brooks Laboratories Limited, established in 2002, is a small-cap company with a market cap of about ₹110 cr. It is active in the contract manufacturing space and boasted of big names like Zydus Cadila, Alembic, Wockhardt, FDC, Alkem etc. in its clientele.

Brooks Laboratories Limited came into my investment radar in 2013 due to its very good financial position:

Brooks Laboratories Ltd Financials Upto FY2014

Brooks Laboratories Limited’s financials presented a picture-perfect scenario of any good business:

  • Sales were growing at 23%
  • Profits were growing at an even higher rate of 36%
  • Brooks Laboratories Limited was using its profits to repay debt and was essentially debt-free at the end of FY2013 and
  • As the company was acting as a cash machine, it was able to generate surplus cash after meeting debt repayments and was accumulating cash reserves year on year.

Finding a company with such performance is a dream for any investor and I was very happy to have chanced upon Brooks Laboratories Limited.

However, as mentioned above, I suggest that every investor should do the background check of promoters’ before making an investment decision. The steps to do a background check is very simple:

“Just Google It” 

Brooks Laboratories Ltd Google Search

It is essential to search for the name of the company with certain keywords like “Fraud, Issues, SEBI, Dispute, Court etc.” One such search attempt should give an investor about any critical information that might be present in the public domain.

Readers would notice that one of the results about Brooks Laboratories Limited is from Moneylife. In current times, Moneylife is very active in writing about corporate frauds and it is highly likely that if any listed company has been involved in any issue, then Moneylife would have covered it on its website. Therefore, investors may use the keyword “Moneylife” as well to search for the issues related to any company.

The check of promoters’ background for Brooks Laboratories Limited reflected that they were involved in defrauding public investors in their IPO and have siphoned off the investor’s money from the company. As per the below article in Businessline, SEBI found them guilty and imposed penalties on them.

“…it is clear that through fictitious transactions of round tripping of funds, the said noticees ie Konark, Blue Print, Sunshine and Shardaraj along with the promoters of Brooks, had siphoned off the funds to the tune of ₹ 8 crores from the IPO proceeds,” SEBI said.

Moreover, SEBI noticed that one of the entity, Suryamukhi Projects, had received ₹15.30 crores in advance “without the infrastructure being developed at the project site, which ultimately is siphoning off the funds from Brooks”. Suryamukhi has been fined with ₹30.60 crore by the market regulator for such act.

After learning about the frauds conducted by the promoters, I decided against investing in Brooks Laboratories Limited.

Thus, investors would notice that a simple Google search could be a very useful tool in assessing the management quality of any company. Therefore, one of the essential tools for any investor is to do a background check of the company’s promoters at Google, to assess whether they are shareholder-friendly.

Over time, investors would notice that such background search results bring out key information about promoters. Let’s see an example where the results point out positive things about the promoter:

Management Analysis of Manappuram Finance Limited:

(Disclosure: invested)

Manappuram Finance Limited faced heat from the regulator Reserve Bank of India (RBI) in 2012 when RBI asked it to stop using its branches to collect deposits from the public on behalf of Manappuram Agro Farms Limited (MAGRO). MAGRO is an entity owned by the promoter of Manappuram Finance Limited, Mr V.P. Nandakumar. Let’s see the way the event unfolded over the next few days:

  • February 7, 2012: RBI bans MFL and MAGRO from accepting deposits
  • February 10, 2012: Manappuram replies after the board meeting

In compliance with the directions of the RBI, the Company shall completely disassociate its name, officials, manpower, infrastructure, systems etc. from MAGRO and other entities owned or controlled by Mr. Nandakumar or his family.

The Board of Directors of the Company has directed thenCompany to take all steps and measures as is required to address and alleviate all concerns raised by the Reserve Bank of India in both letter and spirit. Mr. Nandakumar has informed the Board of Directors of the Company that he has issued public notices in Malayalam dailies undertaking to honour all obligations to MAGRO’s depositors and that no inconvenience would be caused to them.

In a meeting on 10 February 2012, the Board of the Company constituted an independent committee of its members, under the chairmanship of Mr. Jagdish Capoor (former Deputy Governor of the Reserve Bank of India and former Chairman of HDFC Bank) to review all relevant aspects of the operations, systems, controls and organization structure including Board composition and effectiveness to enhance governance in the Company. The committee will appoint leading independent legal counsel and other advisors as appropriate to assist with conducting its review. Further, the Company will retain a leading accounting firm to supplement the in-house internal audit team. Leading law firm, Amarchand Mangaldas and internationally reputed accounting firm, KPMG will be assisting in the independent review exercise by the committee.

The investor would notice that the company took the notice from RBI seriously and within a few days clarified its stance about RBI’s instructions.

  1. It clarified its intention of fully complying with the regulator’s instructions by dissociating itself from MAGRO
  2. Mr Nandakumar assured that he would honour all the liabilities towards the depositors of MAGRO
  3. And most importantly, Manappuram Finance Limited established a committee under the chairmanship of Mr Jagdish Kapoor, former deputy governor fo RBI and chairman of HDFC Bank to improve the governance standards of the company. Moreover, reputed companies like Amarchand Mangaldas and KPMG were appointed to help this committee.

These actions reflected the intention of the company to comply with the regulator’s intentions in letter and spirit in sharp contrast to some other corporates who try all the options under the sun to fight regulators be it in courts or media.

  • March 14, 2012: Mr Nandakumar writes to the board of Manappuram Finance Limited about his plan to sell stake in the company to pay outstanding depositors of MAGRO:

As disclosed in the previous press release of the company dated 13-02-2012, pursuant to my commitment to the Board of Directors of Manappuram Finance Limited in my letter dated 10th February 2012, and having issued public notices in this regard, I intend to repay all outstanding public deposits of Manappuram Agro Farms and honour all such obligations such that no inconvenience is caused to the depositors. Towards this effect, I intent to sell shortly approximately 4% of the share capital in Manappuram Finance Ltd on the stock exchange to certain reputable institutional investors. Kindly take it on record and inform the stock exchanges

  • March 15, 2012, Press Release: Marquee PE investors led by Baring India, Sequoia Capital, and Siguler Guff buy 4.75% of Manappuram Finance Limited from Promoter on the stock exchange.

Thus we see that the promoters of Manappuram Finance Limited accepted the directions of RBI, stopped collecting the deposits, took steps to enhance the corporate governance, raised funds by selling a personal stake in the company and then deposited the money in an escrow account with a public sector bank as the source from which outstanding deposits would be paid on maturity.

These steps took care of the interests of every stakeholder: MAGRO depositors and Manappuram Finance Limited & its shareholders. And all these events happened within a short period of about one month.

Such events establish that the promoter kept in mind the interest of outside stakeholders while taking his decisions, which is one of the essential qualities to look for while investing in any company.

As we notice that bad habits persist in people similarly, we notice that good habits also persist. We would notice that it was not the first time when Mr Nandakumar had kept the interest of public shareholders above his own:

In this interview published on Rediff in November 2011 (Source), Mr Nandakumar talks about the event post the IPO of Manappuram Finance Limited in 1995:

One of my most difficult times as an entrepreneur

We listed our shares at the BSE in 1995 and, in hindsight; we were probably not ready for the challenges of being listed at a stock exchange.

In the initial days, our share price slid from its face value of Rs 10 to as low as Rs 8, over the subsequent months.

People who had subscribed to the shares before the IPO based on my assurance that they would not lose money began queuing up for a buyback.

I actually ended up buying back shares with a market value of Rs 8 at a price of Rs 10. It was not a wise thing to do, but I had to do that to keep my word and somewhere in always knew that it all could turn around, provided we kept our faith.

Today, the sum of Rs10,000 that was invested in our IPO is worth Rs 23 lakh (Rs 2.3 million). The market capitalisation of the company is around $1 billion.

Mr Nandakumar had started Manappuram Finance Limited in 1992 with a capital of ₹10 lakh. He used to add his money to the capital every year so that the capital grew. Then NBFCs required a minimum of ₹3 crores paid-up capital to list at the BSE.

In 1995, Manappuram Finance Limited achieve a capital of about ₹1.25 crore. Mr Nandakumar asked for small investments from his family members and friends and could raise another ₹1.75 Cr. to meet the regulatory requirement for the IPO.

However, as mentioned in the interview, soon after the IPO, the share price reduced from ₹10 to ₹8 per share and the investors started asking him to compensate for the losses. Mr Nandakumar bought back the shares that were trading in the market for ₹8, at ₹10 from these investors to keep his word.

This is in stark contrast to the case of Brooks Laboratories Limited, which defrauded investors and siphoned off the money from public investors.

Therefore, looking at the contrasting cases of Brooks Laboratories Limited and Manappuram Finance Limited, an investor would appreciate the different kinds of management that are present in the listed companies’ marketplace. The investor would also appreciate the need for differentiating between these managements and the key role that a background check can play in avoiding bad management and finding out good management.

Therefore, a background check by way of Google search is the first step for assessing the management of any company, which every investor should mandatorily do.

Independent Directors:

As a part of management analysis, we should do similar checks about independent directors as well. Many times we see that independent directors constitute ex-bureaucrats, industry professionals etc. We should form our opinion about whether the business requires ex-bureaucrats on the board. Though ex-bureaucrats bring a lot of administrative & management experience to the table, however, such positions might have been offered as a reward for a favour done while on the job or as a liaising officer for government approvals & contracts. Such arrangements can be indicative of crony capitalism. However, an investor needs to make her own call about such matters.

Once the investor is convinced that there is nothing to question the character & integrity of promoters & directors, she should move ahead with further analysis.

2) Promoter’s Salary:

The salary taken by the promoter/management of the company is one of the key parameters of management analysis that can give critical insights into the management intentions.

Salary/remuneration details of promoter/management/directors are provided by the company in the annual Report. This data is not available in the public financial sources like screener/moneycontrol etc. Therefore, it is essential for investors to read the annual reports to assess the management on this parameter.

After analysing many companies as part of my stock selection process and for answering queries of readers, I notice that the usual salary range for promoter directors/management is about 2-4% of net profit after tax (PAT). The salary generally contains a 2% commission on PAT and a fixed monthly component along with other perquisites.

Let us see the examples of performance of two companies and the salaries being taken by their promoters:

Ess Dee Aluminimum Vs Ambika Cotton Mills Quick Comparison Salary Of Promoters

An investor can see the sharp contrast between the salaries being taken by promoters of ESS DEE Aluminium Limited and Ambika Cotton Mills Limited.

Remuneration of Mr Sudip Dutta, the promoter of ESS DEE Aluminium Limited has increased from ₹3 Cr. in FY2010 to ₹9.5 Cr. in FY2014 whereas the net profit of the company has decreased from ₹182 cr. to ₹76 cr. over the same period. The salary as a percentage of net profits has increased from 2% in FY2010 to 12% in FY2014.

An investor might question the basis of the increase in remuneration of the promoter even in the scenario of declining profits. Such remuneration practices that are not linked to the performance of the company effectively serve as a means for the promoters to benefit at the cost of company shareholders.

On the contrary, if an investor analyses the remuneration pattern of Mr P. V. Chandran, the promoter of Ambika Cotton Mills Limited, then she notices that the salary of Mr Chandran:

  • is in the range of 2%-4% of net profits, which is the average range for most of the listed entities,
  • has increased only in the years when the profits have witnessed an increase. In the years, when the profits did not increase, the salary remained constant.
  • the salary increased beyond ₹0.8 cr. in FY2014 when the profits of the company increased to ₹48 cr. which was more than the previous high watermark of ₹41 cr. achieved in FY2011.

ESS DEE Aluminium Limited came into my investment radar in 2013, however, after analysing it I decided against investing in its shares. The high salary of the promoter which was continuously increasing without a proportionate increase in the company’s performance was one of the primary reasons for avoiding investment in ESS DEE Aluminium Limited.

Recently, when I revisited the company, then I noticed that the company is reeling under debt of about ₹500 cr. and has been making losses for the last 2 quarters (September and December 2015) and its share price has declined from about ₹750 in February 2014 to about ₹90 in May 2016.

Ambika Cotton Mills Limited came into my investment horizon in September 2014. I liked many aspects of the company. You may read my analysis of Ambika Cotton Mills Limited in the following article: Equity Analysis: Ambika Cotton Mills Limited

Out of multiple factors that I liked about Ambika Cotton Mills Limited, the reasonable salary being drawn by Mr Chandra along with the moderate level of salaries being paid by the company to potential successors (daughters of Mr Chandran), was an important parameter that helped me take the final investment decision about the company.

(Disclosure: invested in Ambika Cotton Mills Limited)

As I have mentioned in the article above that bad habits persist, similarly, good habits also persist in people.

We saw another example of this in December 2015 when Ambika Cotton Mills Limited filed the following notification in stock exchanges:

This is to inform you that on the recommendation of Nomination and Remuneration committee the Board of Directors at their meeting held on 07/11/2015 have accepted the proposal of Sri.P.V.Chandran to annul the commission part of his remuneration calculated at 2% of the Net Profit of the company with effect from 01/04/2015 as according to Sri.P.V.Chandran such annulment would put him almost at par with other shareholders and a step towards part of further enhancement of Corporate Governance.

The notification mentioned that Mr P. V. Chandran has decided against accepting the commission part of his remuneration, which was calculated at 2% of the net profits of Ambika Cotton Mills Limited. This notice meant that Mr Chandran would be taking only the fixed component of his salary, which is about ₹2 lac per month.

On seeing this notice, one of the celebrated investors in Ambika Cotton Mills Limited, Prof. Sanjay Bakshi, wrote a thank you note to Mr Chandran appreciating his kind gesture towards minority shareholders. This is what Mr Chandran wrote back to Prof. Bakshi:

Ambika Cotton Mills Sanjay Bakshi PV Chandran Interaction

Mr Chandran highlighted that he is satisfied with the dividend that he receives from Ambika Cotton Mills Limited, just like minority shareholders and that he does not want to receive any special treatment different from other shareholders. Mr Chandran stresses upon living up to the faith reposed by minority shareholders in him.

I calculated that the promoters of Ambika Cotton Mills Limited would receive about ₹4.28 cr. in the dividend in FY2016 for their 48.63% stake in the company. ₹4.28 cr. per annum seems sufficient for living a good lifestyle in India unless one plans to live a very lavish life associated with private jets and parties at private islands.

I respect such managements, who respect the minority shareholders (Ambika Cotton Mills Limited) and don’t mind taking a financial hit to keep their words (Manappuram Finance Limited). I like to invest in the companies run by such managements and stay invested as their partner in the growth of the business over long periods.

Further advised reading: How to identify Promoters extracting Money via High Salaries

3) Related Party Transactions for Management Analysis:

The related party transactions section is one of the essential parts of the annual report that every investor should analyse in detail for every company that she plans to study.  This section discloses a summary of all the transactions/balances at year-end for the dealings that the company made with promoters and their personal entities, joint ventures etc. during the year.

The related party transaction section is a goldmine of the information for management analysis of any company. By studying each transaction in this section, an investor can conclude whether the promoters are benefiting from the company at the cost of minority shareholders.

Let’s analyse the related party transactions of a company:

Management Analysis of Rexnord Electronics & Controls Limited:

Rexnord Electronics & Controls Limited founded in 1988, is a Mumbai-based small-cap company with a market cap of about ₹45 cr. The company is a manufacturer of fans: AC Axial Fans, DC brushless fans, condenser cooling, evaporator, no frost, water cooler and gear motors.

I came to know about Rexnord Electronics & Controls Limited, when one of the readers of the website, Susheel Kapoor, asked me a query about his analysis of the company. You may read about Susheel’s analysis of Rexnord Electronics & Controls Limited and my inputs to his analysis in the following article: Analysis: Rexnord Electronics & Controls Limited

While reading the annual report of Rexnord Electronics & Controls Limited for FY2015, an investor notices that the company has sought shareholder’s approval for an agreement, which the company has already entered into with M/s Excelum Enterprises. The agreement is for sale & purchase, payment of commission on sales including overseas sales and reimbursement of expenses to Excelum Enterprises.

The Company has entered into a Contractual Agreement with M/s. Excelum Enterprises for Sale & Purchase, payment of Commission on Sales (including Overseas Sales) and reimbursement of expenses for an amount not exceeding of ₹ 2 Crores on annual basis, on such terms and conditions as may be agreed to by the Board.

M/s. Excelum Enterprises is a Proprietary firm of Mr. Kunal Tanna being a relative of Mr. Kishore Chand Talwar and Mrs. Nainy K. Tanna, Directors of the Company, this transaction will require approval of the shareholders of the Company. Pursuant to the Section 188 of the Companies Act, 2013 and rules

Excelum Enterprises is owned by Mr Kunal Tanna, who is the husband of Ms Nanny Tanna. Ms Nanny Tanna is the daughter of founder promoter & chairman of Rexnord Electronics & Controls Limited, Mr Kishore Chand Talwar. Therefore, we notice that Rexnord Electronics & Controls Limited is entering into a transaction with the son-in-law of the founder promoter of the company.

Rexnord Electronics And Controls Limited Related Party Transaction 2

When an investor analyses the annual report further, then she notices that until last year (FY2014), Mr Kunal Tanna was working at Rexnord Electronics & Controls Limited, as the Vice President – International Business. To an outside observer, the current arrangement of payment of commission on sales to Excelum Enterprises by Rexnord Electronics & Controls Limited seems like paying to Excelum for the skill that its proprietor (Mr Kunal Tanna) has learnt by working at Rexnord itself.

Moreover, a look at the salary structure of the promoter family for FY2014 highlights that Mr Kunal Tanna was being paid the highest remuneration in the company even higher than the salary of founder promoter & Chairman Mr Kishore Chand Talwar.

Rexnord Electronics And Controls Limited Related Party Transaction 3

I believe that it is good if relatives of the promoter join the company as employees/directors and contribute to the growth of the business and take a commensurate salary for their contribution. Family members at key positions ensure continuity of the business as well as relatively stable loyalties when compared to professionals who keep on shifting their loyalties by giving 90 day notice periods.

However, the investor should become circumspect when she sees the promoter family members entering into contractual agreements with the company. This is because, as in the case of Rexnord Electronics & Controls Limited, when two members of the family, a father-in-law, and a son-in-law sit across the table to decide what percentage as the commission would be paid to the company of the son-in-law, then the minority shareholder can only pray that they would have her best interest in their mind.

In related party transactions, many times, investors will find cases where the company has given the same amount of loan to a counterparty and takes it back within the year. Such transactions also need scrutiny. It might be that the company wants to help the third party with money but wants to avoid showing it as a loan in the balance sheet. On the contrary, it might be a transaction as well with a genuine reason. In such cases, looking at previous annual reports to find out a similar pattern will help the investor in getting more information that is relevant and in turn make an informed decision.

Read: How Promoters benefit themselves using Related Party Transactions

4) Warrants for Management Analysis:

Warrants are like options that are issued to select shareholders by the company that gives these shareholders a right to convert these warrants into shares of the company at a predetermined price. Like options, warrants come with an expiry date i.e. the period in which the warrants can be converted. Warrants form a key part of the framework of management analysis followed by us.

Over the years, promoters/majority shareholders have been treating warrants as a means to give special treatment to themselves. The special treatment might be related to pocketing risk-free gains and gaining/increasing stake through backdoor channels.

i) Risk-Free Gains: Converting a situation of a potential increase in costs to potential gains:

This usually happens in cases where the warrants are issued and become convertible right from the date of issuance. In cases where such immediately convertible warrants are issued at a discount to the market price of the stocks of the company, then it amounts to handing over free money to promoters/majority shareholders as promoters do not need to do anything else other than converting the warrants into shares the same day and sell these shares into the market to pocket the amount of discount as a risk-free gain.

Even though the allotment price of warrants is guided by statutory regulations by SEBI and the price of allotment would be in compliance with the regulations, however, the point to note here is that if the promoters would have tried to buy shares from the market, then they would not have got it at the prevailing price. Instead, the news of an attempt by promoters to buy shares from the market would have led to a significant increase in share price and in turn leading to an increase in the cost of acquisition of shares to the promoter.

However, by way of warrants, this effect of an increase in the share price of the company is reversed. The increase in share price which would ideally lead to a higher cost of acquisition of shares (if promoters would have bought shares from the market). However, through warrants, by freezing the cost price of shares at a pre-determined price, the promoters convert the impact of the increase in share price to their advantage by getting a call option payoff.

Many companies have resorted to such issuance of warrants. Let’s see the example of one such company:

Rexnord Electronics & Controls Limited:

Rexnord Electronics & Controls Limited made the following disclosure in its annual report for FY2015:

The Compnay, during the year, has alloted 3478800 Warrants at a price of ₹ 13.40 per warrant carrying an entitlement to subsribe to an equivalent number of equity shares of face value of ₹ 10/- each within 18 months from the date of allotment of warrants to promoter/promoter group and non promoter group in accordance of Regulations for Preferential Issue contained in Chapter VII of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 as amended, on 23rd September 2014 and received 25% of issue price as warrant allotment money aggregating to ₹ 1,16,53,980.

As per the disclosure, on September 23, 2014, Rexnord Electronics & Controls Limited had allotted 3,478,800 warrants to its promoters at a price of ₹13.40. Each of these warrants was convertible into one equity share of the company. The promoters could convert these warrants into equity shares at any time within 18 months from the date of allotment (September 23, 2014).

The eligibility to immediately convert the warrants is the key here because the closing market price of shares of Rexnord Electronics & Controls Limited on September 23, 2014, is ₹23.34. This effectively means that the promoters can convert the warrants allotted to them on September 23, 2014, the very same day at ₹13.40 and sell the resultant equity shares received into the market at ₹23.34 and pocket the difference of ₹9.94 per share as a risk-free gain, which ideally would have been their cost of acquisition of shares, if they would have tried to buy shares from the secondary market as the market would have immediately increased the share price. The Promoters got rights to 3,478,800 shares through warrants, whereas the average daily trading volume for Rexnord on the stock exchange is only a few thousand shares.

The total risk-free gain pertaining to the issued 3,478,800 warrants amount to ₹3.36 cr., which is the free money handed over to the promoters by the company.

This amounts to a loss of minority shareholders as the company has sold its ₹23.34 worth of assets at a price of ₹13.40. Therefore, investors should always compare the allotment price of warrants with the market price of the shares of the company.

ii) Gaining/increasing stake through backdoor channels:

Let’s see what further benefit the warrants bestow upon the promoters/majority shareholders.

In FY2015, the promoters of Rexnord Electronics & Controls Limited increased their shareholding from 46.47% on March 31, 2014, to 51.46% on March 31, 2015, by increasing their shareholding by 888,300 shares. This move is very significant from the perspective of promoters as it gives them a majority in the shareholding of the company.

However, when an investor analyses deeper, then she comes to know that the entire increase of 888,300 shares in the holding of promoters had happened by way of conversion of warrants on December 13, 2014, when the promoters had converted 1,098,300 warrants into equity shares of Rexnord Electronics & Controls Limited.

The issue to be focused on here is that promoters have acquired these additional shares on December 13, 2014, at the warrant conversion price of ₹13.40 instead of the market price of ₹22.85 for the shares of Rexnord Electronics & Controls Limited on that day.

Investors who have spent some time in equity markets would realize that when the promoters start to buy shares in their company, the market sees it as a very positive sign and it increases the market price immediately. However, in the case of Rexnord Electronics & Controls Limited, the promoters instead of paying a premium to the market price to increase their stake in the company got these shares at a deep discount to the market price.

Therefore, effectively the non-promoter shareholders, including retail shareholders, of Rexnord Electronics & Controls Limited had subsidized the purchase of shares by the promoters. And this was made possible by an ingenious instrument: Warrants!

Therefore, whenever an investor is analysing a company and she comes across issuance of warrants to promoters/majority shareholders, then she should analyse the issuance and exercise of these warrants to assess whether the management/promoters/majority shareholders are benefitting at the cost of minority/retail shareholders. Thus, the warrants become a key tool for management analysis.

Must Read: Stock Warrants to Promoters: How to Analyse

5) Management Focused on Share Price:

Running a business as well as investing in equities demands a long term vision. A promoter/manager is expected to create wealth for the shareholders and take decisions that are beneficial for the business over the long term and not be primarily concerned about short term implications. Similarly, a long term value investor should consider holding her investments over many years and not get worried about periods of share price declines in the interim period.

However, many times we see that the promoters/managers are constantly worried about the share price of the company, which is heavily influenced by daily level changes in the operating environment. Such kind of management is hardly willing to take the strong decisions that might be needed for the long term benefit of the business and in turn for shareholders.

Therefore, an investor should always analyse past decisions of the promoters/managers to assess whether their decisions have been motivated by long term vision or the short term share price fluctuations.

Let’s see a recent incident, which presented a pertinent example to this issue.

Management Analysis of DCB Bank:

DCB Bank has its origins in the merger of many cooperative banks in the 1930s. It was granted the scheduled bank license by the Reserve Bank of India in 1995. Renowned Tata group bought 4.6% in DCB Bank in 2007.

Potential 100bagger:

DCB Bank is covered by many big brokerages and has been a favourite among many of them to the extent that Motilal Oswal Securities in its 19th Annual Wealth Creation Study (2009-14), released in December 2014, selected DCB Bank as a stock with a potential of giving 100 times return to the shareholder on their investment.

Motilal Oswal Wealth Creation Study Potential 100 Baggers

DCB Bank had a market cap of ₹2,900 cr. then and effectively the analyst at Motilal Oswal assessed that the Bank has the potential of becoming a ₹290,000 cr. market cap company (A few of the comparative companies to this market cap today, May 28, 2016, are: HDFC Bank ₹300,000 cr., ITC ₹290,000 cr. and Infosys ₹286,000 cr.)

The analyst pointed out that in the evaluation of common stock, the management is 90%, the industry is 9% and other factors are 1%. I completely agree with this belief and therefore assume that the analyst who assessed DCB Bank for the report, would have dedicated at least 90% of the research time in assessing the management of DCB Bank.

On October 13, 2015, DCB Bank came up with its future business strategy and informed the public through stock exchange filings:

DCB Bank Expansion Plans

In the above filing, DCB Bank stated that:

  • It plans to increase the branch expansion speed from earlier 25-30 branches per year to about 150 branches within next one year along with various other technology initiatives
  • It had done detailed planning for this business strategy and expects that the cost ratios and in turn profits would be negatively impacted in the short term horizon of about 2-3 years but these decisions would create long term wealth for the shareholders from FY2019 onwards.

The Bank has done in-depth planning by assessing various parameters like probable break-even, payback, return on equity, return on assets etc. and the management seemed to be in the know of the steps that they are taking. The management seemed an ideal one, which prioritizes the long term interests of the business over the short term incentives. I find that such bold managements are in rarity nowadays and appreciate such managements.

However, the markets were spooked by this announcement. The share price of DCB Bank tumbled 30% in a span of two days from ₹133.45 on October 13, 2015, to ₹92.35 on October 15, 2015.

DCB Bank Price Chart Before And On Result

The reaction of the stock market started with the report of Kotak Securities, which downgraded DCB Bank to “Sell”:

Kotak Downgrades DCB Bank

Kotak labelled the management strategy as “very dangerous…..disappointing shift in their strategy”

In quick succession, Edelweiss downgraded DCB Bank to sell.

However, the real shocker was next to come when Motilal Oswal Securities, which has cherished DCB Bank as a potential 100bagger, downgraded it to a “Sell”.

Edelweiss Dcb Bank 100 Bagger To Sell

Any long term investor would be surprised to read the opinion of Motilal Oswal Securities in its “Sell” recommendation. It stated that despite acknowledging that the business strategy of DCB Bank is beneficial to business in the long term, we are recommending a “Sell”.

So much for the long term vision of the market analysts!

It takes 20.5 years for an investment to grow to 100-bagger if the share price grows at 25% each year.  20.5 years is a very long period, which is sufficient enough for every bit of the external and internal environment of any company to undergo a change. The changed business strategy of DCB Bank within one year of the study led the stock analysts to downgrade a potential 100bagger to “Sell”. I fail to understand whether the stock analysts expected the management and business environment to remain unchanged for 20.5 years

DCB Bank responds:

The story is not yet over.

Soon thereafter, DCB Bank filed another announcement to stock exchanges on October 15, 2015:

We recently announced our intention to install 150+ additional branches within 12 months so as to have more than 300 branches by December 2016. This was part of a new approach which has also other elements mentioned in General Q and A dated October 13, 2015.

Post the above announcement we have received feedback on our branch expansion plans from investors, analysts and other stakeholders. We sincerely thank them for taking time to express their feedback

In view of the feedback received, and in close consultation with our Chairman, the management team has decided to install 150+ branches in a cautious. prudent and calibrated manner over a period of 24 months (instead of 12 months).

This announcement meant that the business plan, which seemed to have been devised well after detailed background work, proper research with possible challenges in execution and their responses in place, was changed based on feedback from analysts. To stress, this was the feedback from investors and analysts who might not have worked in a bank branch and would have hardly done the research and hard work that DCB Bank staff might have done to devise the business strategy.

This was a complete “U” turn from the earlier strength and boldness expressed by the management. This demanded a deeper assessment.

One possible answer seemed to lie in the annual report for FY2015 on the page detailing the employee stock options outstanding for the Bank.

DCB Bank Employee Stock Options

It showed that at the end of FY2015, DCB Bank employees had about 1.1 cr. (11 million) options outstanding, which were exercisable at a weighted price of ₹47.29.

On October 13, 2015, when DCB Bank’s share price was ₹133, these options (ESOPs) had a value of about ₹95 cr. to their holders. And as per the prevalent corporate culture, a huge majority of these ESOPs are expected to be in the hand of top very few senior management employees.

On October 15, 2015, when the DCB Bank’s share price fell to ₹92, the value of these 1.1 cr. options had declined to ₹50 cr. That is a decline in value of a whopping ₹45 cr. and that too, primarily, in the hands of the top very few senior management employees.

A decline of ₹45 cr. in wealth (whether real or notional) is very significant for any salaried employee. This significant decline in value of ESOPs presents one probable explanation for the almost U-turn that the DCB Bank management did on its business strategy based on apparent “Analyst” feedback.

So much for the long term vision of the management! Neither the analysts nor the management is willing to bear the short term pain for long term gains.

Let’s see how the market responded to the volte-face done by DCB Bank management:

DCB Bank Price Chart After Roll Back Of Expansion Plans

(*the stock price chart represents the data until March 31, 2016, prepared for the presentation at Moneylife. On May 28, 2016, the stock price of DCB Bank at BSE is ₹93.60)

The stock price, which is continuously hovering around ₹70-80 potentially reflects the shaken faith of the markets in the management of DCB Bank.

Therefore, it is always advised that whenever an investor analyses any company, then it becomes imperative for her to assess whether the past decisions of the promoters/managers have been motivated by long term business vision or short term share price fluctuations. Reading annual reports, the presence of a significant amount of ESOPs and going through stock exchange filings can help her in management analysis. This may help her reach a decision about the behaviour of promoters/managers.

Further advised reading: Are professionally managed companies safer for shareholders?

6) Dividends:

One of the key features of stock investment that attract investors is the dividend payment by companies. Stock investors hold regularly dividend-paying companies in high regard and believe that the management that consistently pays dividends is shareholder-friendly.

However, before an investor firms up such a belief about any management, it is crucial to assess that the company is paying these dividends out of the free cash available.

Free cash flow (FCF) can be calculated by deducting capital expenditure (Capex) done by the company from its cash flow from operations (CFO): 

FCF = CFO – Capex 

It is highly likely that if a company does not have the free cash flow available after meeting capex requirements from its operating cash flows, then it is meeting the requirements of funds to pay dividends to shareholders by raising debt from lenders.

And investors would agree that if a company keeps on paying dividends consistently by raising debt, then sooner or later the debt will reach such levels that lenders would find it difficult to keep giving loans to it and the dividend payments would not remain sustainable.

Similarly, if the company does not have positive free cash flow and uses debt to pay dividends, then hypothetically there is no limit on the amount of dividend it can pay to shareholders. The dividend amount is only limited by the debt that the company can raise, be it a dividend of ₹1 per share or ₹100 per share the only thing that the management needs to do it to find a lender who can give it a loan and it would give the money to shareholders. The operating efficiency of the company does not remain the key parameter for such managements to pay dividends to shareholders.

Therefore, it is advised that investors should not take any comfort from the amount or consistency of dividend payments by a company that uses debt to pay dividends. Moreover, many times such debt-funded dividend payments are to benefit the promoter/majority shareholder at the cost of the company and in turn at the cost of minority shareholders.

Let us see an example of a company, which is paying dividends out of debt proceeds:

Tata Steel Free Cash Flow

The cash flow from operations (CFO) of Tata Steel for 10 years (FY2006-15) stood at ₹105,565 cr. whereas it did a capital expenditure (Capex) of about ₹126,073 cr. over the same period, which included massive ₹49,713 cr. in FY2008 primarily to acquire the European steel giant “Corus”.

The net result was that over the 10 years (FY2006-15), Tata Steel had a negative free cash flow (FCF) of ₹20,508 cr. (FCF = CFO – Capex), whereas it kept on paying dividends consistently every year and paid out about ₹9,547 cr. of dividends in 10 years (FY2006-15).

As the company did not have the free cash flow to pay dividends to its shareholders, it was not surprising that the dividend payments primarily came from debt, which increased from ₹3,377 cr. in FY2006 to whopping ₹80,701 cr. in FY2015.

Valiant Organics Ltd is another company, which paid out dividends by using debt when it did not have surplus cash flow after meeting the capital expenditure: Analysis: Valiant Organics Ltd

There is always a limit to which a company can take debt as with increasing debt levels, the lenders would become increasingly worried about the health of the company and in turn, would stop giving further debt to the company. Therefore, such debt-funded dividends are not sustainable in the long term and in turn, for a key aspect of management analysis. Investors should not derive any comfort from such debt-funded dividends.

Advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

7) Accounting Juggleries under Management Analysis:

Many times, instead of working hard to grow the business managements resort to shortcuts and manipulate the publically reported financial results to create a false image that the company has been doing very well. However, sooner than later, invariably such accounting manipulations are caught and the market heavily punishes the stocks of such companies.

In such cases, it is the minority shareholder who loses her entire investment in the company without any of her faults. Therefore, identifying accounting juggleries/shenanigans becomes a very important aspect of stock analysis.

I have written a separate article highlighting key tools available to investors for identifying key features of the financials, which have a high probability of containing manipulations. You may read this article here: 7 Signs to tell whether a Company is cooking its Books

These key tools are:

  1. Cumulative Cash From Operations (cCFO) falling short of cumulative Profit After Tax (cPAT) in the past
  2. Increasing Receivables Days/Days of sales outstanding (DSO)
  3. A fast buildup of inventory/decreasing inventory turnover
  4. Free Cash Flow
  5. Frequent Acquisitions
  6. Abnormal/supernormal performance
  7. Frequent changes in accounting policies/disclosures

After going through the above-mentioned article and reading the book mentioned therein “Financial Shenanigans: How to Detect Accounting Gimmicks & Frauds in Financial Reports”, an investor would realize that there are certainly red flags, which most of the manufactured balance sheets contain. If an investor is able to detect these red flags and avoids investing in such companies, then she would be able to do proper management analysis and steer clear of most of the accounting frauds.

These red flags are:

i) Rising Sales, Rising Receivables, and Rising Debt:

This situation primarily appears in companies, which book sales aggressively, sometimes even fictitiously. Such sales do not result in receipt of cash and therefore, lead to increasing account receivables/debtors/trade receivables. However, as the company has to incur operational costs like employee costs, utility costs etc., it typically relies on debt to meet its expenses.

Therefore, unless an investor personally knows that the promoters/majority shareholder in such companies is a person with integrity and that the buyers are facing a genuine financial crunch, which is leading to delayed payments, she should be better off avoiding such companies.

ii) High cash with high debt:

Such a situation is usually avoided by companies as raising funds by debt and keeping them as cash without deployment is a losing scenario as it has a financial cost attached to it. Debt invariably has a higher cost than the bank FDs or liquid investments in which cash is usually held by the companies. Therefore, an investor should do extra due diligence whenever she is faced with such a situation in her target company.

The company might have many explanations to keep high cash alongside high debt on its books. The most common answer is that the company is looking for strategic acquisition and therefore keeping the cash chest ready in case any opportunity arises. However, most of the times companies do not find good acquisition targets soon and therefore the continued presence of high cash with high debt raises concerns for shareholders.

In cases of accounting frauds, it has been seen that the debt shown is a true figure whereas the cash shown in the balance sheet turns out to be fictitious. Most of the time, such cash has already been siphoned off from the company by the promoters/majority shareholders/management.

Therefore, companies with high cash balances along with high debt should always be subjected to deeper scrutiny by the investors.

iii) Serial Acquisitions under Management Analysis:

Acquisitions are usually done by companies to get bargain deals in times of stress in the industry. Acquisitions are done by overseas companies in new markets/geographies to get access to the approvals, patents that the target company would have in order to shorten the time to enter a new market. However, acquisitions always pose a challenge to investors as the merging of accounts of two companies using multiple assumptions, mark to markets, revaluation of assets etc. completely mixes up the accounts.

Therefore, it becomes utmost difficult to assess the real financial position by analysing the accounts of the merged entity. No wonder, many accounting frauds remain hidden in the books of serial acquirers and companies find acquisitions as the most convenient method of fooling the analyst community about their real financial position.

Still, it is ok if a company acquires a target company once in a while for business reasons and assimilates & nurtures the target company as a part of its own entity. However, things start to become suspicious if the acquirer acts like a hedge fund and frequently buys & disposes of companies.

Ideally, under management analysis, an investor should avoid companies that are in a habit of growing only through acquisitions. She would do great good to her hard-earned money as invariably serial acquirers are known to give negative surprises to shareholders.

8) Competence:

Assessing the competence of promoters/management is a key aspect of management analysis. However, the competence must not be confused with the educational qualifications of the promoter/management. Time and again, evidence has proved that educational qualifications tell little about managerial competence and integrity with which a person would treat its business & shareholders. Instead, in management analysis, an investor should focus on assessing the project execution skills of the promoter/management. She should analyse the business expansion done by organic growth and ignore the capacity additions through acquisitions while she assesses the competence of the management.

i) Project Execution Skills for Management Analysis:

Successful execution of an increase in production capacity especially by green-field/brown-field plants is a good indicator of competent management. It is very good if the capacity addition has been done without facing any delays.

While analysing Supreme Industries Ltd, we saw that the company has continuously made investments in new manufacturing plants over the years. The number of plants has increased from 17 as per FY2006 annual report, page 1, to 25 as per FY2020 annual report, page 1.

The evidence of the regular addition of new manufacturing plants indicates that the project execution of the company is good.

The investor can take the help of multiple public sources of information to assess the project execution skills of promoters like annual reports, credit rating reports, milestones on the company website etc. She should focus on organic additions to business capacities and take note of the various warning signs.

Warning signs in promoter/management competence would present in the form of:

Investors should prefer buying shares of companies that are run by management, which have displayed timely completion of the projects within promised timelines.

9) Promoters’ Faith in the Business for Management Analysis:

Promoters’/majority shareholders’ faith in the business is an important part of management analysis. It gets reflected by two parameters:

a) Shareholding level and the trend of its change:

Ideally, the promoters should have a majority shareholding in the company i.e. more than 50%. However, more than the absolute level of shareholding I believe that the trend of change in promoters’ shareholding carries more significance.

A trend of increasing shareholding by promoters/majority shareholders over recent quarters/years should be seen as positive and vice versa.

Many times, it is noticed that promoters dilute their stake a lot in the initial years to fund the business expansion of the company. Promoters then try to make up for the lost stake earlier by buying shares from the dividends, which they get once the company starts generating cash flow for its shareholders.

Therefore, unless the promoters’ stake is very low i.e. less than 25%, an increasing trend of shareholding over the years shows promoters’ faith in the business. On the contrary, the companies where promoters have been reducing their stake should be subject to deeper analysis despite such promoters holding more than 50% stake in the company.

In addition, an investor may also note that many times, when the shareholding of the promotes in the company is low, then it might be a case that the shares of the company are owned by some persons who are friends and family of the promoters; however, do not fit in the definition of the promoters as per legal definition.

An investor may study the example of Ishan Dyes & Chemicals Ltd, where on June 30, 2017, the promoters’ shareholding was 24.59%. However, she notices that about 28% of non-promoter shareholding was with people sharing the surname “Patel” with the promoters.

On July 11, 2017, the largest public shareholder of Ishan Dyes & Chemicals Ltd, Ms. Shardaben Jayantilal Patel (13.62% shareholder of the company), decided to take an exit from the company. Out of the 15,33,900 shares held by Ms. Patel, 25,000 shares each were bought by Piyush Patel (Promoter) and Shrinal Patel (son of the promoter) respectively and the balance 14,83,900 shares were gifted by Ms. Patel to Mrs. Mirali S Patel (daughter-in-law of the promoter). This gift transaction increased the shareholding of the promoters significantly. This event can be interpreted to suggest that the largest public shareholder of Ishan Dyes & Chemicals Ltd, Ms. Shardaben Jayantilal Patel might be a close acquaintance of the promoters’ family.

An investor may read the complete analysis of Ishan Dyes & Chemicals Ltd in the following article: Analysis: Ishan Dyes & Chemicals Ltd

Therefore, we advise that when investors analyse the low reported shareholding by promoters of many companies, the investors should further assess the details of large public shareholders to understand whether there is any probability of large public shareholders being friends/acquaintances of promoters. The presence of large public shareholders who are known to promoters and are willing to vote with the decision of promoters should give the comfort to shareholders that the promoters would be able to guide the company as per their vision.

a. i) Promoter buying the shares of her company:

The purchase of shares of a company by its promoters is the sign of a good promoter. It shows that promoters believe that shares of the company represent a good investment opportunity at current prices. An investor would appreciate that no one knows about a company better than its promoters do. Therefore, when promoters buy shares, you should buy them too.

Also read: How Promoters use Loopholes to Inflate their Shareholding

However, the selling of shares by promoters is not necessarily a negative sign. A company’s shares are usually a promoter’s biggest asset and they sell it whenever any cash requirement arises in personal life. As per Peter Lynch, in an average company, for every insider buyer, there are about three insider sellers.

a. ii) Foreign Institutional Investors (FII) Holding:

The popular belief is that higher FII holding is better as such companies are extensively tracked by market analysts. Information and opinions about such companies are easily available in public sources.

However, I prefer companies, which have very low/nil FII holding. There are many reasons for preferring companies with low FII stake:

There is no surety that FIIs are always right with their investment decisions. Decision-makers at the FII investment committee are also human beings and they too make mistakes and lose money in markets. I prefer to do my own research about companies and not get swayed by the existing investment by any FII. FII investment is not a great comfort. There are many reasons for FIIs to buy a stock. Not all these reasons are related to the quality of the company. Sometimes FIIs are sold monkeys by target-driven investment bankers/merchant bankers. An investor may also fall into the same trap if she gets influenced by FII holdings.

The investment value of companies with high FII stakes has already been recognized by the market & investors. Stocks of such companies already trade at high valuations (P/E multiple). Therefore, the returns from the expansion of P/E multiple are excluded from an investor in such companies.

Finding good companies is like a treasure hunt and I like to find companies before other market participants recognize the value of a good company. I usually search for investment opportunities in small market capitalization companies and try to invest in good companies in this space before they grow further, become big and get noticed by other large investors like FIIs.

b) Succession Planning as Management Analysis:

Equity investing is a long-term concept where an investor is expected to hold on to the good companies for years, sometimes even for decades. In such a long-term association with the company, the assessment of management succession as a part of management analysis becomes paramount. Therefore, an investor should always study the succession plans in depth before investing her hard-earned money in stocks of any company.

Companies usually follow either/mix of two approaches for management succession: bringing in promoters’ children/young family members or professionals in the company.

There is no ideal succession plan as both have their pros and cons.

Companies with a lot of family members in the senior management run the risk of related party transactions at the cost of the interests of minority shareholders as discussed in this article above.

Whereas the companies with all the professionals at senior management positions run the risk of business decisions with a short-term focus on the share price as mentioned in this article above.

Companies with predominantly professionals’ presence suffer from a lack of loyalty as professionals keep on shifting their loyalties by handing over notice periods of 90 days (i.e. resignations and job changes).

Further advised reading: Are professionally managed companies safer for shareholders?

Therefore, in management analysis, I prefer companies, which have a promoter in charge of the company and who has delegated day to day functioning of the company to professionals hired from the market who bring in fresh perspectives, market intelligence and competitors’ knowledgebase to the company.

With this, we have come to the end of this series of articles, where I stressed the importance and steps of management analysis while making stock investments. In this series, we have covered some of the important tools for management analysis:

Checklist of Management Analysis

  1. Promoters’ background check
  2. Promoters’ salary
  3. Related party transaction
  4. Warrants
  5. Management focused on share price
  6. Dividend payments
  7. Accounting juggleries
  8. Competence
  9. Promoters’ faith in the business

These are the critical tools that an investor should use to differentiate good management from bad management. I believe that if an investor assesses the management of her target company on these parameters and finds that the promoter/management is scoring well on all these parameters, then she has found a company that is being run by competent and shareholder-friendly management.

In such a case, if the company meets all the other parameters like financial, business, valuation and operating performance/efficiency parameters, then she should buy shares of the company and look forward to a long association with the promoters.

An investor should always keep in mind that:

Investment in a great business might be futile if its management is not shareholder friendly

At the end of these guidelines for management analysis, I would like to give one last piece of advice to investors:

“Never Rely on the Awards”

Never Rely On Awards

The Golden Peacock Award for corporate governance in 2002 was won by Satyam Computer Services Limited, which later turned out to be the biggest corporate fraud in India.

Therefore, invariably, an investor should do her own research while investing her hard-earned money.

Please share whether you consider management analysis as a relevant parameter in stock analysis and your experience of management decisions in the investment experience until date. You may share your inputs in the comments section below.

Please share whether you consider management analysis as a relevant parameter in stock analysis and your experience of management decisions in the investment experience until date. You may share your inputs in the comments section below.

Let us now address some of the important queries related to management analysis asked by investors.

Readers’ Queries on Steps to do Management Analysis


1. What kind of managerial remuneration is considered good?

In your management analysis section, you mentioned 2-4% of profits is ideal. If it’s greater than 5 % of profits and is in the range of 10-12% then is it ok? For e.g. Greenply management pays itself ~12% of profits. Would you be comfortable with such % of remuneration?

2. When a company shows someone as an independent director, but in reality, they are not independent, then how would you see the management?

Would you see it as a red flag on management or just consider it as a kind of yellow flag? For e.g., Greenply industries shows Sonali Dalal (AR 2016, page 82) as an independent director. But she is also the director of Greenlam. So for all practical purposes, she is not independent. Similarly, in the case of APM industries, Ram Ratan Bhagri is shown as an independent director (AR 2015 page 17). But Ram Bhagri was previously director of Faridabad paper mills in which Sanjay Rajgharia (son of R.K Rajgharia, director APM) is a director. So he is not truly independent.

What do you think of such managements? Would you be comfortable with investing with them?

3. What kind of remuneration is justified for independent directors?

For example, in Greenply Industries, the independent directors are getting a lot of commission (10 lacs each). I think higher pay for independent directors takes away their independence. They should be only paid a nominal sitting fee. Would like to know your views on the same.

With thanks & regards,

Author’s Response:


Thanks for writing to me!

First of all, let me appreciate you for the hard work and the diligence that you have put in while analysing the companies. It’s my good luck that readers like you visit my website and provide their inputs.

Here are my views on your queries:

1) Management Remuneration:

Opining on management remuneration is a very subjective arena. It has to be assessed on a case to case basis. If management has pulled the company from dire straits and revived it from deep losses into healthy profits, then I am ok with them taking the maximum salary permitted under the statute. However, management that takes steep hikes while the business dwindles or stagnates, then I would wish to avoid it.

The following article will help you: How to identify Promoters extracting Money via High Salaries

2 & 3) Independent directors:

It’s again a subjective area. If it is a company specializing in a unique area where there is a dearth of professionals then you might find repeatedly the same people on boards but still be ok with it. Whereas in a run of the mill business, such repetition might not be ok. Even otherwise, we have seen that independent directors are rarely able to safeguard minority shareholders.

E.g. In the Satyam case, the merger of the software company Satyam with real estate & infra company Maytas was approved by a committee that had only independent directors and these directors were who’s who of corporate & academic world.

Therefore, most of the time, an investor’s only safeguard is to have a shareholder-friendly majority shareholder.

Read: Why Management Assessment is the Most Critical Factor in Stock Investing?

On similar lines, the salary/commission of independent directors is immaterial if the majority shareholder is not concerned for minority shareholders.

Keep up the good work. Hope these answers help you a bit in the resolution of your queries.

Once you have analysed all the above areas, then I would definitely appreciate you for understanding the “art” aspect of stock investing.

All the best for your investing journey!


Dr Vijay Malik

Is it always bad when promoter sell some shares in the company?

Hi Sir,

Hope you are doing great. Very educative post. I do not understand your point where you say that it might not always be a negative sign when a promoter sells her stake a little.

My argument is how these rich promoters have a need for a little money for personal reasons.

I would also love to hear your views on what you think of the Siddhartha Lal family of reducing the stake in Eicher Motors by 4%.


Author’s Response:


Thanks for writing to me!

It is usually not preferable to have the cash parked in bank accounts if an investor can find better productive uses/investment opportunities for it. The same is applicable for investors and promoters alike. Therefore, it is assumed that promoters of good businesses usually have most of their net worth invested in their company and any funds requirement which is more than normal day to day requirement needs to be met through company shares.

I do not track Eicher and therefore do not have any views on Eicher promoters’ stake sale.

All the best for your investing journey!



Should we meet the management of companies?


Two questions:

  1. How Important is meeting the management as companies typically do not disclose all the details in annual reports and most of the information is not available online regarding the company. What is your approach regarding this?
  2. Since reading the Indo count analysis – I had a different thought, given that management has increased stake in the company, definitely, they expect stocks to give them a better return. Wouldn’t it be in fact be likely for us to invest some portion and track the progress? As we can see in the case of Indo count itself, it has a good return. I am sure management would not risk their equity valuation going down.

What would be your take on this?

Author’s Response:


Thanks for writing to me!

1) I do not believe that meeting the management is necessary for making an investment decision. On the contrary, meeting the management might introduce biases in the investor’s analysis. I believe that the major stress should be given on analysis of publically available information about the company, management’s decisions and their outcomes to create an opinion about the competence and shareholder friendliness of the management.

An investor may attend analyst conference calls or meet investor relations/company management to understand the business of the company, however, one should not get influenced and misinterpret the management vision as a sign of competence.

The investor should have her own independent opinion about the management quality based on the data evidence.

Read: Why Management Assessment is the Most Critical Factor in Stock Investing?

2) The interpretation of the events like warrants allotment & their usage for personal benefits is dependent on the investor. A market is a place where different people interpret the same information differently and then take opposite sides of the trade (buy & sell).

I believe that an investor should choose an investing approach, which she feels comfortable about. In case, an investor believes that the warrants subscription by the promoters is a sign that the share price is going to rise, then she may take an appropriate investing decision.

On the contrary, if an investor believes that such a step is like taking advantage of minority shareholders, which most of the time, cannot influence such decisions, then she may refrain from investing in such stocks.

Read: Choosing the Stock Picking Approach Suitable to You

Hope it clarifies your queries!

All the best for your investing journey!


Dr. Vijay Malik

Is it ok if promoters have their friends as independent directors?

Read: Analysis – National Fittings Limited

Thank you Dr Vijay,

But I have a doubt. In the management analysis of national fittings ltd, I don’t think that there is a big problem. Obviously, Muthuswami Lognatan (independent director) may not be an independent director in the true sense. But the fact that he has a stake in many other private co’s of promoters does not stop him from acting as a good director of national fittings ltd.

Moreover, 3 out of 4 directors being close to promoters is only good for the company as they will have an emotional attachment with the company i.e. they will feel that it’s their company.

Loans given as interest-free is quite alarming; but the company was able to purchase products from these entities for ‘competitive prices’, which, in a very small way, is a MOAT.

Author’s Response:


Thanks for writing to me and sharing your inputs!

I believe that if >=75% of directors are close to promoters/majority shareholders, then any decision/proposal being put forward by promoter would be passed irrespective of merit/suitability of minority shareholders. The decision to outsource the purchase of products might be one such decision.

Read: Why Management Assessment is the Most Critical Factor in Stock Investing?

Markets have investors having opposite interpretations from the same set of information inputs. That makes the market participants take opposite views on the future of the stock and makes the trade (buy and sell) possible at any point in time.

All the best for your investing journey!



Can we assess Management Quality by looking at Educational Qualifications

Read: Analysis: Chaman Lal Setia Exports Limited (Maharani Basmati Rice)

Dear Dr. Vijay Malik and Faisal,

Thank you for the thorough and insightful analysis of the company.

On page no. 21 of the annual report for FY 2016 remuneration, experience and education background of the top ten employees of the company is given. From the given information it feels like the company has no managing staff of significant importance.

Even after considering that it’s a family-run business, the remuneration and educational background of the highest-paid employees looks insignificant compared to the newly joined third generation of the family, i.e., Ankit, Sukarn and Sankesh. Further, the educational background of Ankit, Sukarn and Sankesh is not mentioned which creates doubt about their capability of running the business in the future. Also, as discussed earlier, the remuneration of the promoters is higher than the maximum allowable limits.

Are these worrying signs of high nepotism? And how important is it from investors’ perspective?

Author’s Response: 


Thanks for sharing your valuable inputs. We appreciate the in-depth assessment of the annual report done by you.

You have beautifully explained your point of view. However, as with assessing people in general, the assessment of the management of a company also has a significant amount of subjective component. Therefore, every investor needs to make her own point of view about the management.

In general, I personally would be ok with the promoter family being completely in charge until they are leading the company well and generating good growth in the business along with taking care of the minority shareholders, I am ok with the promoters driven organization.

Hope it clarifies your queries!

All the best for your investing journey!



Why do promoters hold shares in their companies through different companies and not in their individual names?

Hi Sir,

Why is the shareholding of promoters in any company usually in the names of different companies and not in their individual names?

Is this common practice to have promoters’ shareholding in different companies’ names?

Can this lead to chances of manipulation and fraud in any way?

Author’s Response:


Thanks for writing to us!

Many times, promoters hold shares via companies and therefore, the name of the companies in whose name shares are held is shown in the list of shareholders.

It allows promoters to create multiple layers in the shareholding structure and this, in turn, helps them create holding companies, create cross-holding structures, raise equity at different levels in the shareholding structure and also in succession planning of family assets among different stakeholders/family members.

However, it also makes it difficult to find the true identity of the person who might be the real economic beneficiary of the shares.

Therefore, multilayered shareholding has its benefits as well as pitfalls. It differs from person to person, what they choose to use it for.

Further advised reading: How Promoters use Loopholes to Inflate their Shareholding

Hope it answers your queries.

All the best for your investing journey!


Dr. Vijay Malik

Does high dividend payout indicate incompetent management?

Sir, I have a problem with high dividend payout companies. I feel that these companies give their profits to shareholders instead of using that money for expansions or acquisition etc. which can increase the business growth

Author’s Response:


There is no one yardstick to measure all the companies. Companies may be paying a high dividend when they feel that investing in their business might not be a good investment and it’s better to give/return money to shareholders so that shareholders can decide for themselves about the best opportunities to invest the capital/money.

The problem arises when poorly performing companies & their managements do not give dividends and destroy the value for shareholders.

Therefore, it depends from case to case, whether the dividend policy of any company is sound or not.

Hope it helps.


Capital allocation skills of the management

Dr. Vijay, your premium services are very useful and a must-have.

I have a query regarding the assessment of the “capital allocation skill” of promoter/management. Many companies earn healthy profits and have FCF also but when it comes to placement of this fund, they fail at this stage by unnecessary acquisitions or moving into the business that they don’t know.

Promoters’ decision to generate more profit or keep cash on hand is very crucial for investors.

Please provide your views.


Author’s Response:


Thanks for writing to me!

You have raised a pertinent point as the efficient allocation of funds by the promoters is a key parameter. Many investors use incremental ROE as the parameter for this assessment. However, I do not prefer sticking to the incremental ROE and like to assess the allocation in terms of

  1. Whether the new deployment of funds is in the related area/unrelated area
  2. Whether the project/expansion was completed smoothly within time & cost projections and
  3. Whether the new plant has begun production in time and the impact is visible in the financial results.

The new capacity might not start producing to the full capacity immediately, therefore, the same needs to be kept in mind. Putting oneself in the shoes of the promoter would help in such a situation.

Further Advised Reading: How to Identify if Management is Misallocating Capital

Hope it clarifies your query.

All the best for your investing journey!



Different combinations of management and businesses

Respected Vijay sir, I read your article regarding Mr Nandakumar, promoter of Manappuram Finance Ltd. If we come across such a promoter in our research can we invest in that company even fundamentals of such a company are not so encouraging?

Author’s Response:


Thanks for writing to me!

There can be different combinations of management and business.

  1. Good business + good management: Best possible investment opportunity
  2. Good business + not so good management: avoidable situation
  3. Not so good business + good management: investment decision is subjective to what the management is doing to turn the not so good business into a good business. If the management is not doing anything and is continuing with the status quo, then the management is not good management.
  4. Not so good business + not so good management: Avoid

Read: Why Management Assessment is the Most Critical Factor in Stock Investing?

Hope it clarifies your queries!

All the best for your investing journey!



Fully Public Companies with minuscule Promoters’ Shareholding

Hi Dr Vijay,

I see some of the companies are completely public, which means that these companies do not have any promoter holding e.g. ITC Ltd.

I have some questions related to it:

  • What is the purpose of making a company fully public?
  • Are there any criteria to make a company fully public?
  • What type of industry can be fully public?
  • As an investor, I prefer a promoter holding of more than 50%. However, in these cases what should we check?
  • Are these companies less prone to corporate governance issues?
  • What are the factors we should check while analysing such companies?

I did some research and found some answers on Google about this. Therefore, here are my views.

It is permissible for companies to have zero promoter holding. The SEBI regulations require a minimum of 25 per cent of public shareholding but there is no legal requirement of minimum promoter group holding. There are instances of companies with no promoter holding and therefore, professionals can manage the companies.

So going to my previous questions:

What is the purpose of making the company fully public?

Because it gives the promoters flexibility by doing away with several rules on various matters, including the purchase and sale of shares in the company. Is there any other reason apart from this?

Are there any criteria to make the company fully public?

SEBI rules require that the promoters should hold at least 20 per cent of the post-public issue capital and this should be locked in for at least three years. After this, promoters can reduce their stake. For fully public companies, promoters’ stake should be less than 20%.

What type of industry can be fully public?

I think companies in any industry can be fully public.

As per your experience, while analysing such companies what type of governance issue can happen as it is fully public. This question needs an answer of a 360 view, which I do not have right now. Could you please help me with this?


Author’s Response:


Thanks for writing to us! We are happy to see that you are doing your own equity analysis and spending time and effort to understand different concepts.

1) Reasons for making a public fully public i.e. promoter shareholding less than 20%:

Apart from the reasons mentioned by you, many times, the promoter may witness their shareholding reducing to very low levels if they have to continuously raise more and more money by equity dilution to run their core business.

A good example of such companies is the start-up world where the business survives because of money poured in by equity investors. Each such round of funding dilutes/reduces the stake of promoters. E.g. in the case of Flipkart, the stake of the promoters had declined to single digits before Walmart bought out most of the existing investors.

Alternatively, the promoters may sell their stake in their existing business to fund their other businesses. E.g. one of the reasons Amazon has a low promoter stake is that its promoter has funded his other businesses by selling a stake in the public company.

2) Governance issues in fully public companies:

We would request you to go through the following article where we have highlighted cases where the management of fully public companies chose to focus more on the share price rather than the core business:

How to do management analysis of companies?

The above article also covers our preference criteria for companies based on promoter shareholding & management succession under the section “9) Promoters’ Faith in the Business”.

All the best for your investing journey!


Dr Vijay Malik

Why do trading members hold shares on behalf of beneficial owners?

Hi Sir,

One doubt –In shareholding pattern in BSE they show something as “Details of disclosure made by the Trading Members holding 1% or more of the Total No. of shares of the company.” below it

Details Of Holding By Trading Members

Sl. No.–Name of the Trading Member –Name of the Beneficial Owner—No. of shares held— % of total no. of shares–Date of reporting by the Trading Member

Here, I wanted to know what the trading members do by holding the shares of the beneficial owner. Do they regularly trade with those stocks & maintain liquidity in the market? Or do they trade on behalf of Promoters & earn a profit?

Thank you.

Author’s response:


Thanks for writing to us!

Let us take the example of a sample case where a trading member may hold shares on behalf of the beneficial owner.

If an investor buys shares of a company through a stockbroker (i.e. trading member), then the stock exchange/clearing corporation sends the shares to the stockbroker (also called a trading member). These stocks usually remain in a common pool account with the stockbroker unless the investor gives instructions to the stockbroker to shift these shares to the investor’s Demat account (CDSL or NSDL).

These shares lying in the common pool account of the stockbroker, which are not transferred by the investor to her Demat account, is one example of the trading member holding shares on behalf of the beneficial owner (the investor).

Investors (beneficial owners) may leave the shares in the common pool account for many purposes:

  1. To take financing (margin funding) from the broker
  2. Allow the broker to trade on behalf of the investor etc. or any other reason.

Read: How to Safeguard Stocks with Discount Brokers?

All the best for your investing journey!


Dr Vijay Malik

Employee Stock Option Plans (ESOPs): Advantages to the company, promoters, shareholders

Hello Sir,

I want to know about employee stock option plans (ESOPs). I have tried to find out the details regarding ESOP but could not get much information about it on the internet. Every page on the internet has given the basics of ESOPs but not about:

  1. How is it going to change the number of shares,
  2. Advantages to company/retailer and
  3. Can promoters use it as a tool to get cheap share etc?
  4. Does the company has to diverge the price at which they are providing ESOP?


Author’s Response:


Thanks for writing to us! We are happy to see that you are doing your own equity analysis and spending time and effort to understand different concepts.

1) Change in the number of shares:

When employees exercise ESOPs, the company creates new shares and issues them to employees. This, in turn, increases the total number of shares of the company. An investor would appreciate that as the total number of shares (denominator of the equation) increases, the percentage shareholding of all the other existing shareholders comes down proportionately.

Advised reading: Understanding the Annual Report Of A Company

2) The advantage to the company/retailer:

ESOPs incentivise the management to work hard, which will result in good business performance and in turn higher market price of the stock of the company. Holders of ESOPs benefit from the higher market price. However, a large amount of ESOPs also have the potential of changing the priorities of the management from a focus on company business to a focus on managing share price as the fortune of the management (though ESOPs) is linked to the movement of the share price.

3) Can promoter use it to get shares cheap?

If the promoter is working in the company in an executive position like CEO/Executive Director etc. then she can also get ESOPs allotted to her and in turn, get shares at a cheaper price just like other employees.

4) Does the company has to declare the price at which they have allotted ESOPs?

The company declares the total amount of ESOPs, which are outstanding and the price at which they are allotted in the annual report.

Hope it answers your queries.

All the best for your investing journey!


Dr Vijay Malik

Companies paying out dividends instead of repaying debt

Hi Vijay,

Your website has been a great source of learning and guiding light for small retail investors like me. Thank you for the great work.

Across your analysis of various companies (Omkar Speciality Chemicals Limited, Granules India Limited, etc.) and a few more, which I track personally (e.g.: Shemaroo), it is a common observation as to how companies instead of paying off their debt continue to pay dividends.

I have a couple of follow-up questions –

  1. Why do companies pay dividends rather than try to lower their debt? Except to please shareholders I can’t think of any other reason. Am I missing out anything?
  2. Is it worth investing in companies who pay me dividend either by raising equity or raising debt? Is there any positive angle to it which I am not able to follow?

Looking forward to your thoughts.


Author’s Response:


Thanks for your feedback! We are happy that you found the articles useful!

Another aspect apart from the reasons mentioned by you, which needs to be looked at is that dividends are an important source of income for the majority shareholders primarily the promoters.

We advise investors not to take any comfort of the dividend yield of the companies, which fund their dividends from debt or equity dilution.

Hope it answers your queries.

All the best for your investing journey!


Dr Vijay Malik



  • I am not registered with SEBI as a research analyst under SEBI (Research Analyst) Regulations, 2014..
  • Out of the companies discussed in the above article, I own shares of Manappuram Finance Limited and Ambika Cotton Mills Limited in my portfolio.

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