Controversy revives on obscene CMD/CEO salaries….take Oswal Chemicals for example

This Sunday morning Biocon’s Kiran Mazumdar-Shaw’s opinion on CEO Salaries and Austerity Measures in DNA caught my eye…just a few days ago,Minister,Salman Khurshid had commented that Corporate CEOs should display austerity…Shaw comments that Government has no business dictating terms to Corporates on this matter as it is decided by shareholders..therefore the controversy and debate is uncalled for !

She must surely realise the influence that Promoters exert over the Board of Directors and the Remuneration Committee….Minority Shareholders simply don’t matter…so any remuneration agenda is easily passed by majority,read Promoter,Shareholders.

Shareholders,Investors and the Public in General often feel angry,cheated,frustrated when they see the obscene levels of salaries that the Heads of quite a few Listed Companies get….particularly when the company makes a loss or even a low profit and never even pays a dividend……. and yet the CMD/CEO Salary levels are into space…Shareholders are not rewarded but Promoters managements are !

Take Oswal Chemicals & Fertilizers for example…Gautam,this should answer your query too.

For FY 09 the company has shown a net profit of Rs 23.86 crs…and has c/f a loss of Rs 305 crs to this year….Networth is Rs 2170 crs with Equity (FV Rs10) at Rs 257 crs (Promoters hold 59.55%) and Reserves at Rs 1913 crs …gives a book value of over Rs 84….no debt…but huge assets of Rs 1309 crs are lying in Advances with the auditors, T R Chadha & Co, qualifying accounts for non-confirmation and non-reconciliation of certain debit and credit balances…With such a high quantum involved ,it would have been proper for the auditors to have specified the Aggregate Amount that they were unable to confirm or reconcile.

The Company has sold of it’s Fertilizer business and is now largely deploying funds in Investments and Real Estate…The Company yet has to change it’s name to reflect the exit of old business and entry into the new business verticals…It should have done this by now

In FY 08 the topline was Rs 629 crs and it earned a net of Rs 249.82 crs as it sold flats and plots aggregating Rs 489 crs….but in FY 09 the topline dropped to just Rs 139 crs and the net dropped to just Rs 23.86 crs as real estate business was affected….The Income came largely from Interest of Rs 81 crs from funds parked in Inter Corporate Deposits and Rs 17 crs from FDRs….another Rs 6 crs were from Trading in Shares/MFs and Bonds….Investment Segment shows a deployment of Rs 741 crs…so it’s 14% return….But the Real Estate Segment shows deployment of Rs 895 crs,while only Rs 25 crs is the revenue through sale of Plots….There is an adhoc provison of Rs 25 crs for Loss in the  Real Estate Business and a w/o of Rs 40 crs for Balances. There has been no dividend declarations as there yet is c/f loss

At March 31,2009,Inventories reveal only Rs 98 crs in Plots/Land and Rs 51 crs in Flats…Investments show Rs 20 crs,Cash and Bank Balances are Rs 192 crs (includes Rs 131 crs in an Escrow A/c with Kribhco Shyam Fertilizers) with the big component of Rs 1309 crs given out as Advances recoverable in Cash or in Kind or in Value

Clearly the Advances can be linked to the Deployment of Funds in Real Estate…I would have been more comfortable if a significant quantum,than shown,was lying as Inventories…because Advances tend to raise question marks on title,status of projects,further loss,recoverability and liquidity issues….Inventory is a Physical Asset

Employees Costs show Rs 8.44 crs in FY 09 (Rs 9.29 crs in FY 08) of which the total Directors Remuneration is a high 71% at Rs 6 crs…This computes to 25% of the Net Profit……Chairman & Managing Director,Abhey Oswal cost the company Rs 4.33 crs of which Rs 25 lakhs per month or Rs 3 crs for the year was the basic salary…The Remuneration Committee consists of three Non-Executive Independent Directors and one Non-Executive Non Independent Director…It did not meet even once in 2008/9…The Company has no incentive linked plan or stock options for Directors

To jog your memory,Abhey Oswal had promoted Oswal Agro Furane and Bindal Agro in the 1980s and shareholders lost heavily and have simply have no kind word for him…..proves the point my blog makes that in India,promoters never get sick even if their Companies do ! 

Some would view Oswal Chemicals as an interesting proposition at the current Rs 20(quoted only on NSE)….Would You ?…notwithstanding Corporate Governance and Prudent Fund Deployment Issues that exist ?

There is no doubt,the Promoter and Top Management are already being rewarded well…but will you !?