Source: Google

As can be seen from the charts, JSPL is the only stock in red over the previous month. While it is down 8%, Tata Steel is up 15% and JSW Steel is up 6%.

Did Market ignore the Controversy?

There are two ways to look at it. As the one-month stock price charts of JSPL and its peers, Tata Steel and JSW Steel reflect, the market didn’t completely ignore the issue. But considering that the issue was one of corporate governance and that the value of Jindal Power formed a significant part of overall JSPL’s valuation, one can’t help but ask: Should the stock have reacted more? That’s because even on relative performance, JSPL has always been more sensitive and volatile, as can be seen in Figure 2. On May 10th 2021, the JSPL stock was up almost 8x since its April 2020 lows and hence, it was natural that it would fall a little more when the sentiment weakened. So, it is fair that the market didn’t react as much as it could have in case of a serious governance issue.

The other side of the Equation

We, at EMAlpha, think a better explanation for the stock reaction could be that, for the broader markets and majority investors, JSPL has never been a company with top notch corporate governance credibility. Therefore, an announcement like the one on 2nd May, which involved a related party transaction seemingly more in favour of majority owners at the expense of minority shareholders didn’t come across as that big of a surprise. Yes, it was a negative development for investors but they knew what they were getting into when they bought into JSPL. You can’t expect to make an earthen pot and not have clay in your hands. With companies having a very good track record on Corporate Governance, such announcements would probably have had more impact. This is always the case when the extent of shock and surprise on a corporate action is dependent on what is expected from the owners and management.

Did JSPL track record offer any clues?

We think there is enough in JSPL’s past to understand the perceptions about its corporate governance track record:

• Mr. Naveen Jindal’s political affiliation – In 2004, Mr. Naveen Jindal contested the Parliamentary elections from the Kurukshetra constituency in Haryana on a Congress ticket. He won the seat comfortably and was re-elected in 2009. He lost the 2014 Lok Sabha election from the same constituency. His father, Late Mr. O P Jindal was also active in politics and was an elected representative from Haryana. Among his brothers, Mr. Naveen Jindal was the only one who had an interest in active politics.
• The Coal Block allocation controversy – In 2012, the Top Auditor of the Government, Comptroller and Auditor General (CAG) alleged in a report that irregularities in the allocation of coal leases caused a notional loss of INR 1.86 trillion to the Government and JSPL was named as one of the beneficiaries. Between 1996 and 2009, JSPL and its unit Jindal Power Ltd (JPL) were allotted nine coal fields translating into reserves of 2.59 billion tonnes, or 5.97% of the 43.35 billion tonnes allotted by the Centre.
• The extortion controversy between JSPL and ZEE Group – In 2012, Mr Naveen Jindal released a video recording of meetings with executives of Zee TV and claimed that Zee TV had tried to extort money from him. Mr Jindal claimed that the news channel told his company’s executives that if they did not spend INR 1 billion on advertising, the channel would run negative stories on allocation of coal blocks to his firm. Later, the media group also sent a defamation notice to Mr Jindal.

There were also controversies around JSPL related to forceful eviction of tribal people and villagers in the land acquisition process for setting up coal mines, power plants and steel manufacturing units. Between 2008 and 2010, there were also controversies around excessive profiteering by JSPL on sale of merchant power. It is clear that controversies and JSPL go cheek by jowl. Overall, it is fair to conclude that over the past ten to fifteen years, there have been quite a few controversies which could have signalled the investors about a chequered history on governance standards at JSPL. It goes without saying that the writing’s on the wall when it comes to JSPL’s governance. After all you don’t need a weatherman to know which way the wind blows.

How EMAlpha can help in such situations?

In India, JSPL has been one of the most intriguing companies from the perspective of stock price movement over 2020 and 2021. EMAlpha AI has repeatedly picked up the company for a number of reasons including turnaround in steel sector, excellent stock price performance since April 2020 and change in operating and financial results for the company as well as the recent controversy. Mentioned below are some important takeaways from the controversy:

• The historical track record matters and the AI-ML based EMAlpha algorithms can help in the news flow analysis to better understand the blind spots. Anyone who has tracked JSPL for long enough would not have been surprised at the controversy around Jindal Power’s sale by JSPL to majority owners.
• Can the local news flow collection pick up issues earlier than the English media? Considering how vocal some of the institutional investors have been on Sustainability and ESG issues, it is evident that these issues matter. The local language along with English news analysis can be tracked for the companies experiencing ESG related issues.
• Can regular analysis of social media be used as an input before taking an investment decision? Many of these issues which may impact price tend to appear very quickly on social media. It is here that EMAlpha’s analysis of unstructured data becomes a key tool for investors. The unstructured data analysis can also be used to assess the potential impact on some of the larger companies in a country where the activity levels are higher.
• Predicting the behaviour of majority owners on the basis of historical track record can help forecast the potential governance shocks. This is one of the key features of EMAlpha product as it combines technology with domain expertise. The news flow analysis provided by EMAlpha is useful in picking up the signals.