Essar Energy needs board reshuffle

David Hellier
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WHEN the London Stock Exchange tried a couple of weeks ago to reassure investors about the performance of recently floated companies, it did not dwell too long on the experience of Essar Energy, the Indian energy group that is now a component of the FTSE 100 (just).

Essar Energy floated at a price of 420p in mid-2010 but after a miserable 2011 its shares are hovering around 170p. The shares fell 5p to 173p yesterday after Ravi Ruia, the billionaire founder of Essar Group, stepped down temporarily from his post as chairman of London-listed Essar Energy, following a legal ruling in New Delhi.

The ruling stated that Ruia is to face charges in front of a special court established to look into a telecoms scandal that is estimated to have cost India as much as $39bn in lost revenues.

Ruia intends to resume the chairmanship as soon as he can but in the mean-time his nephew Prashant will be taking over as interim chairman.

It is true that shareholders invested in Essar Energy knowing that it was family controlled – the family own around 78 per cent of the shares.

And it is also true that many investors are comforted by knowing that the people at the top of the London-listed company’s board have their financial interests aligned with those of other investors.

But surely Essar could now appoint the independent director it promised at the time of the float and go for an independent chairman as well?

Companies listing on the London market need to comply or explain why they’re not adhering to the corporate governance code.

If Essar Energy was chaired in London by an independent director it would be far better equipped to cope with scandals, alleged or otherwise, that the controlling family might be dragged into at home. And it could also be seen to put the interests of the listed company first.

Sometimes it’s a matter of perception more than anything else but there’s almost certainly a corporate governance discount associated with Essar Energy’s share price and that won’t go away until some big changes have been made on the board. When bankers are doing their best to soothe nerves ahead of share listings from overseas-owned groups with dominant shareholders, this latest development wasn’t quite what they needed. Essar’s advisers need to push hard for change.

It may be that I have underestimated the value of the Hoare Govett name, now being sold off along with a loss-making business by RBS. After writing yesterday that much of the interest in the firm seems to centre around the value of the name and that this could be somewhat irrational, brand specialist Hamish Pringle of 23red has written to me to differ. “Clearly,” he says, “the Hoare Govett brand has serious and possibly insurmountable problems at a functional level, but as you’ve pointed out it remains a household City name.

“This represents a huge emotional and psychological asset that cost many millions to create, has survived despite appalling management over many years, and whose power could be rejuvenated, added to, and leveraged with the right stewardship. The Hoare Govett brand can be immortal.”

Allister Heath is away.