Tighten corporate governance, Saudi firms urged as MSCI looms

Investors watch stock movements inside The Tadawul — Saudi Arabia’s stock exchange — which has already risen 11 percent so far this year. (Getty Images)
Updated 01 June 2018
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Tighten corporate governance, Saudi firms urged as MSCI looms

  • Andrew Tarbuck, chairman of the Middle East Investor Relations Association: Saudi corporates need to be proactive in bringing their corporate governance and investor relations functions up to the international standards demanded by fund managers.
  • Market authorities in the country have introduced a series of reforms in the past 18 months to attract foreign investors, including lower restrictions on international investors, and the introduction of short-selling and T+2 settlement cycles.

LONDON: Saudi companies should boost efforts to align their corporate governance and investor relations functions with international standards ahead of a possible upgrade by emerging markets index provider MSCI.

Foreign investors have been net buyers of Saudi shares on a weekly basis for all but two weeks so far this year, attracted by the Kingdom’s economic privatization program, capital market reforms, and the upcoming listing of shares in Saudi Aramco.

In the face of such interest, Saudi corporates need to be proactive in bringing their corporate governance and investor relations functions up to the international standards demanded by fund managers, according to Andrew Tarbuck, chairman of the Middle East Investor Relations Association.

“In terms of the depth of penetration of investor relations and corporate transparency, Saudi Arabia could be higher on the spectrum,” Tarbuck told Arab News.

“Some of the bigger names are very good in their approach, but there are too many public companies that have not embraced fully the concept of investor relations and need encouragement to participate.”

Market authorities in the country have introduced a series of reforms in the past 18 months to attract foreign investors, including lower restrictions on international investors, and the introduction of short-selling and T+2 settlement cycles.

Such reforms prompted index provider FTSE Russell to upgrade the Kingdom to emerging market status in March, opening the country’s stocks up to billions worth of passive and active inflows from foreign investors.

FTSE’s move — together with a widely-anticipated emerging market upgrade by fellow index provider MSCI next month — is expected to result in up to $46 billion worth of inflows, according to forecasts from investment bank EFG-Hermes.

The Tadawul — Saudi Arabia’s stock exchange — has already risen 11 percent so far this year.

While many of the blue-chip names listed on the exchange have been proactive in putting strong governance and IR practices in place, Tarbuck said that many of the Kingdom’s listed firms required further encouragement and education to convince them of the benefits of such an approach.

“Public companies whose shares are slightly less liquid, or who perhaps have a large family shareholding tranche and a smaller free float, are less willing to spend time and money and effort on investor relations when there’s not a full enough understanding of the benefits such an approach brings,” he said.

Greater transparency from management, and the appointment of independent board members, are of particular interest to those investors considering investments in Saudi equities, according to Ross Teverson, head of strategy, emerging markets equities at Jupiter Asset Management.

“Further improvements in transparency and alignment of interests between management and shareholders (for example, through greater use of long-term equity-based incentive schemes) will certainly help to raise foreign investor interest and confidence in the Saudi market,” he told Arab News.

“Board composition will be another area of focus and companies with a higher proportion of well-qualified independent directors, who are willing to meet with investors, will benefit.”

High governance and transparency standards are a key component of Saudi Arabia’s Vision 2030 economic transformation program, which calls for the adoption of “leading international standards and administrative practices, helping us reach the highest levels of transparency and governance in all sectors.”

The message is already being taken seriously, said Tarbuck, with authorities already taking action to put such standards in place.

“The successful privatization and listing of Aramco and other state entities is likely to require material foreign investment, and it would be reasonable for international institutions to expect that good governance and transparency. are at least maintained, if not enhanced, on an ongoing basis.”

Saudi Arabia’s Capital Market Authority last year announced a series of regulations on corporate governance — which came into effect last April — extending the rights of shareholders, boards and stakeholders and requiring greater corporate transparency.

These regulations were complemented by recent amendments to Saudi Arabia’s companies law, focusing on enhancing the protection of minority shareholders and the further development of corporate governance matters, including new provisions on conflicts of interests relating to joint stock companies.

“International investors recognize that new corporate governance regulations form the Capital Market Authority and the revised companies law significantly improve the corporate governance standards and transparency of listed Saudi corporates,” said Teverson.

“Of course, there is always more that can be done to boost confidence in a market, but importantly for Saudi Arabia, the direction of travel is being viewed positively.”

After MEIRA establisheding  a Saudi chapter last year, the Institute of Finance (a department of the Saudi Arabian Monetary Agency) assisted by the MEIRA Saudi Chapter, earlier this month ran a pilot training course on investor relations and corporate governance.

“They’re taking the subject very seriously from an institutional level,” said Tarbuck.


India’s small renewables firms fighting consolidation wave

Updated 21 August 2018
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India’s small renewables firms fighting consolidation wave

  • With many smaller operators being gobbled up or offering themselves for sale, the number of projects being developed could fall
  • Besides loans, other funding options have been dead ends for the smaller companies, further limiting growth opportunities

MUMBAI: Small to mid-sized renewable energy companies in India are starting to look like attractive takeover targets as lenders and investors withhold funds, worried by the stiff competition, weak bond markets, low tariffs and high debt besetting the sector.
The small companies’ difficulty in raising cash is keeping them away from government power project auctions, restricting their growth and crippling their ability to refinance loans, said a consultant from a top global consultancy firm.
With many smaller operators being gobbled up or offering themselves for sale, the number of projects being developed could fall, potentially keeping India from its renewable energy targets, said the consultant, who did not wish to be named as he is directly involved with a company that canceled a bond issue.
“India’s solar industry is becoming a big boys’ club,” said Rahul Goswami, managing director of Greenstone Energy Advisers.
In a few years, there may be only a few big companies and a few regional firms active in India’s renewable sector, he said.
The trend goes back at least to 2016, when Tata Power bought solar and wind company Welspun Renewable Energy, but the pace is expected to pick up.
“Smaller players are being squeezed out ... due to two main factors: cost of equipment and ... financing,” said Alok Verma, executive director at Kotak Investment Banking, an arm of Kotak Mahindra Bank.
One of India’s largest renewables companies, Greenko Group, said in June that it was buying 750 megawatts (MWs) of solar and wind assets from Orange Renewables, because the Singapore-based company saw few opportunities for growth. The deal has yet to be closed.
Essel Infra, with a renewable power capacity of 685 MWs, and Shapoorji Pallonji Group’s 400-MW solar arm are also in talks to sell off their assets, one firm and two banks doing the due diligence for these companies have said.
Besides loans, other funding options have also been dead ends for the smaller companies, further limiting growth opportunities.
ACME Solar postponed an initial public offering (IPO) announced in September last year as the proposed share issue did not generate enough interest from investors, confirmed a banker who was directly involved in the listing attempt.
Mytrah Energy, a major mid-sized renewables company, called off a $300 million to $500 million bond issue earlier this year as that option also went dry for the sector, and it canned IPO plans as well, said a separate banker directly involved there.
The companies have all declined to comment.
This dearth of financing and trend toward consolidation could be a significant threat to India’s target of 175 gigawatts (GWs) of renewables capacity by 2022, up from 71 GWs now, some analysts said.
Others said a concentration of bigger players, with more cash and better financing, could mean things move faster.
“Consolidation in the renewable energy industry augurs well for the overall success of the program ... Large players have access to required capital at reasonable rates and can procure the latest technology,” said Debasish Mishra, head of Energy, Resources and Industrials at Deloitte Touche Tohmatsu India.
Tata Power, one of India’s largest power generators, said in May it plans to invest $5 billion to increase its renewable capacity in India fourfold over the next decade to 12 GWs.
More than doubling India’s renewables capacity by 2022 will require $76 billion, including debt of $53 billion, the Ministry of New and Renewable Energy said in July.
Another problem in India’s renewable sector is debt.
“Many mid-sized firms have taken debt to fund their equity,” the partner of an investment firm said, adding that many such companies will need financial restructuring or have to put themselves up for auction.
This model of financing debt through equity is called mezzanine financing and tends to involve high interest rates and an option to convert debt to equity in future.
Both ACME and Mytrah are funded by Piramal Finance Ltd. via mezzanine financing, according to statements by the companies at the time of funding.
For lending banks, this quasi-equity is seen as debt, making the liabilities of these companies look higher than usual, said the partner, who asked not to be named. The investment firm handles all kinds of financing, including mezzanine.
When companies with mezzanine financing go to banks for funds for upcoming projects, banks ask them for higher collateral or offer less cash in loan, said Kotak’s Verma.
Fitch Solutions said in a note last week that India would likely miss its renewable capacity targets due to “risks stemming from bureaucratic, financing and logistical delays.”