board of Fortis Healthcare will meet on Thursday, April 19, to evaluate three competing bids of its hospitals business.
One is a revised binding bid by Manipal Hospital Enterprises, backed by investment company TPG, which is 21% higher than the previous offer and values the business at Rs 155 a share. The second is an offer of Rs 1,250 crore (Rs 500 crore binding and Rs 750 crore non-binding) by Sunil Kant Munjal’s Hero Enterprise Investment Office and the Burman family of Dabur. The third is Malaysia’s IHH’s non-binding expression of interest, at up to Rs 160 a share.
The board’s decision will be eventually voted by minority shareholders. But the board has to decide what the minority shareholders will vote on and hence has a tough task at hand.
Deciding the Best
They have to decide what is in the best of interest of all stakeholders –patients, employees, shareholders, now and for the future. Will a revised bid by Manipal-TPG at Rs 155 per share capture the best fit for the company? Or is the deal structure too complicated?
Or is the need of the hour an immediate infusion of Rs 500 crore by the Munjal–Burman combine despite the remaining Rs 750 crore being non-binding? And should IHH be considered, at all?
While the board will make its decision anyhow, it is pertinent to ask is if the board in its current state is best able to make this decision? And whether there is a corporate governance issue here?
Following are the hard truths:
Currently, the Fortis board comprises four people namely Brian Tempest, Harpal Singh, Lt. Gen. Tejinder Singh and Sabina Vaisoha.
Compare this to the eight board members listed in the company’s 2016-17 annual report. That means the board strength is currently only 50% of what was its full strength.The reason the board is a shadow of its former self is due to six exits in the past six months. The departure of the founders, the Singh brothers under a cloud is well known, but there have also been four independent directors who stepped down – all citing personal reasons – since November 2017.
November 14, 2017: Shradha Suri Marwah steps down due to personal reasons. February 8, 2018: Malvinder Singh, executive chairman, steps down February 8, 2018: Shivinder Singh, non-executive chairman, steps down. March 8, 2018: Joji Sekhon Gill resigns due to personal reasons March 19, 2018: Preetinder Singh Joshi exits due to personal reasons. March 22, 2018: Pradeep Raniga steps down due to personal reasons In April 2017, two independent directors stepped down as well, citing personal reasons. April 12, 2017: Lynette Joy Hepburn Brown steps down due to personal reasons. April 12, 2017: Ravi Umesh Mehrotra resigns due to personal reasons.
Of the current board, Lt. Gen Tejinder Singh was named additional director only on February 12, 2018, while Sabina Vaisoha was appointed as recently as March 27, 2018. The Manipal deal itself was announced on March 27, 2018.
In his report titled ‘Fortis: Questions on Board Competence’ JN Gupta, founder of SES, a shareholder advisory service, has raised his concerns over the board’s shrinkage. He said only three board members were there when the Manipal deal was decided. Of the three, Lt Gen. Tejinder Singh had spent only 40 days in the company.
Hence, only two were aware of company affairs due to their longer association, according to him. That means only 20% of the normal board strength took such a big decision on restructuring. Also the Manipal–TPG combine raised the offer higher by 21% – without any nudge from the board.
Lastly, the association of the board members with group companies raises questions of effective control. A simple Google search brings up associations of board members with Ranbaxy, Religare and SRL Diagnostics.
For example, Brian Tempest is the ex-CEO of Ranbaxy and board member of Religare Capital Markets and SRL Diangostics. Harpal Singh too was on the board of Religare, resigning only in January 2018, and is listed on the board of SRL Diagnostics. Likewise, Sabina Vaisoha was appointed on the Religare board in October 2017.
Lt Gen Tejinder Singh, one of the latest inductees, is also on the board of SRL Diagnostics.
Governance experts are not happy and they have questioned the sudden spate of exits from the board, the current board strength, associations of current board members with ex-promoters, competence of the board to get the best valuation, lack of experience for new board members in Fortis Hospital operations, the pending probe on alleged fund diversion by the promoters as well as the audited numbers.
Investors and bidders too are aware of the situation. While most key stakeholders have not questioned the ability of the current board, they agree it should be strengthened. However, strengthening of the board according to them is not priority in light of the liquidity crunch the company is facing.
However, there are other options available to the board. For example, they could set up an independent panel that can evaluate the three deals or call a shareholders meet to vote on the best option of the three.
But that too could be fraught with challenges. It will be time consuming and shareholders might lack the expertise to evaluate complex bids.So whatever the decision, the issue of the board remains. I will leave you with an excerpt from JN Gupta’s report, which sums up the current situation:
“In short, the question is, given past governance standards, SEBI probe and alleged diversion of funds, can a depleted board bind the company and enter into a deal envisaging major structural change? While legally the board may be competent and there may not be any infirmity with the decision, governance wise it certainly raises issues of prudence.” Ekta Batra is an anchor and associate editor, research at CNBCTV18. She has been tracking pharma and healthcare for almost a decade.