Investment Advisory Service

Friday, 19 October 2012

J B Chemicals- Corporate Disclosures

Aaron Levenstein said “ Statistics are like a bikini. What they reveal is interesting, but what they conceal is vital.”
Reading the following announcement provides an uncanny familiarity to the above quote.

Scripcode : 506943    Company : JB Chemicals


With reference to the earlier announcement dated May 24, 2011 informing the Exchange about the Company’s sale of Russia-CIS OTC business undertaking to Cilag GmbH International, Switzerland, (‘Cilag'), a subsidiary of Johnson & Johnson, and announcement dated July 14, 2011 informing the exchange about the closure of the said transaction and the receipt part from the consideration, the balance being kept in the agreed Escrow Account, JB Chemicals & Pharmaceuticals Ltd has now informed BSE that the company and its subsidiaries have received claims by the Johnson & Johnson group entities which corresponds to the amount held in the Escrow account.

The Company and its board of directors consider this action untenable, do not accept the claims and are seeking appropriate legal advice in relation to the same.

The Company shall spare no efforts to protect the interest of all its stakeholders.

Please check the announcement here as well.

In the JB Chemicals- Johnson & Johnson deal, the release of the money kept in the escrow account has been challenged by the buyer; Johnson & Johnson. That’s informative but the announcement is silent on the amount of money kept in the escrow account. And how much claim has the company received from Johnson and Johnson ? Silence again. The announcement is plain English language and has no element of God’s language “Mathematics” in it which is what the shareholders would be very interested in. That leads me to a slightly modified quote of Levenstein that what the announcement has revealed is interesting but what it had concealed is vital.

JB Chemicals had sold its Russian OTC business to a subsidiary of Johnson and Johnson in July 2011. The total sale consideration was 738 crs plus $35 mil to be paid for the inventory and receivables of the said division. Despite being an important part of the transaction, the amount kept in the escrow account was never voluntarily revealed in the public domain and it was only on checking with the company that a figure of 175 crs was mentioned as being kept in the escrow account.

It is very important for the companies to leave opacity behind and lay bare the facts as transparently as possible; obviously without jeopardising the business interests. The lesson for the investors is to be very cautious of the money kept in the escrow account. In the recent times, many a deals like Gwalior Chemicals (now Gee Cee Ventures) had money in the escrow account which never reached the treasury and pockets of the shareholders.

Contrast the above announcement of JB Chemicals with that of announcements made by Ashiana Housing Limited here and here.

On both the occasions, negative developments surfaced with respect to the business of the company. Not only did the company promptly informed the stock exchanges, it also informed the shareholders about the monetary impact and the total amount invested in the projects impacted by the negative developments. That speaks highly about the quality of the corporate disclosures.

To be fair to the promoters of JB Chemicals, let me state that there is no act of dishonesty which I came across in my research on the company. There has been no incident of corporate misgovernance either. But it is imperative that the companies raise the bar of corporate disclosures a bit higher with every passing day. Shareholders would highly appreciate the effort without keeping any part of their love in the escrow account.