21 September, 2020

 

Mr. B. L. Gaggar,
Chairman of the Board,
N.B.I. Industrial Finance Co. Ltd.
21 Strand Road
Kolkata 700 001
India

Dear Mr. Gaggar,

Thank you very much for your reply of 21 July, 2020.

Your point about the need to maintain NBI’s stock market listing in order to provide liquidity to shareholders is well noted.

It is also encouraging to hear that the company is preparing for the changes in dividend taxation for financial year 2020-21.

On the topic of dividend pay-out, your letter mentions Berkshire Hathaway as an example of an investment company that, like NBI Industrial Finance, has almost never paid out a dividend[1].

We think there is quite a large difference between Berkshire Hathaway, a company with a long track record of successfully managing a portfolio of public and private investments, and NBI Industrial Finance, which has held around 95% of its assets in one stock ever since listing on the NSE.

Nevertheless, since Berkshire Hathaway has been brought up, let us refer to the chairman Warren Buffett for his thoughts on dividends[2]:

our first priority with available funds will always be to examine whether they can be intelligently deployed in our various businesses. [our emphasis]

In NBI’s case, funds from investments have been re-invested primarily in listed equities and mutual funds. Does this count as “intelligent deployment”?

We would argue that it does not.

From an external shareholder’s perspective, this re-investment destroys value, as it results in an additional layer of dividend and capital gains taxes due to NBI’s status as a regular corporation rather than a fund.

It would be far better to return this value to shareholders and avoid the double taxation. But are dividends the only method?

Returning to Buffett:

[Another] use of funds – repurchases – is sensible for a company when its shares sell at a meaningful discount to conservatively calculated intrinsic value. Indeed, disciplined repurchases are the surest way to use funds intelligently: It’s hard to go wrong when you’re buying dollar bills for 80¢ or less. [our emphasis]

As shareholders, we can only agree. And Berkshire Hathaway has led by example, frequently buying back its own shares when they trade cheap. In NBI’s case, the above quotation can even be revised to: “… buying dollar bills for 20¢ or less.”

Notwithstanding the taxation of share buybacks – unique to India – many of NBI’s peers have this year taken advantage of depressed valuations to buy back shares through open market purchases or tender offers (39 announcements year-to-date according to Bloomberg).

We hereby request that NBI does the same, or finds alternative means to address its persistently large share price discount.

Not only would this benefit all shareholders, as well as the company, it would also be positive for the Board, who would be overseeing a company with a market valuation of as much as five times today’s level.

The 28 September AGM

We were looking forward to discussing the above points with the Board at the upcoming AGM and were disappointed to learn that a video conferencing facility will not be available, despite the countrywide restrictions on mass gatherings. We do hope that the company will take every possible safety precaution given the advanced age of some of the likely attendees.

In any case, our proposal is as follows: we will publish this letter on our website https://nbi-shareholders.com, and we invite the company to make public a response either through a posting on NBI’s own website or via a stock exchange release.

We request that this response is made available before the e-Voting period starts on 25 September. This will give all shareholders, including those that cannot travel to Kolkata for the AGM, the information they need in deciding how to vote.

The upcoming AGM is a critical one due to its inclusion of a Special Resolution to re-elect you as Chairman – necessary on account of your reaching the age of 75. With a voting threshold of 75%, NBI must earn the support of as many shareholders as possible to ensure that the resolution is carried.

We believe that a prompt and thorough response from the company will be very helpful in motivating the shareholder base to vote accordingly.

Sincerely,

 

 

 

Damian L. Edwards
Chief Investment Officer
Metrica Partners Pte. Ltd.

 

About Metrica:

Metrica Partners Pte. Ltd. is a Singapore-based investment manager founded in 2016 by Damian L. Edwards and David Mulvenna. Investors in Metrica’s funds include global institutions, family offices, high net worth individuals and its employees. Metrica promotes good corporate governance and works with its portfolio companies to enhance shareholder value. More information is available at https://metricapartners.com.

[1] According to our research, each company has paid a dividend precisely once in its history (considering the NSE listing period in NBI’s case.)

[2] Letter to Berkshire Hathaway shareholders, 30 April 2013.