IIMK PGPBL | 2021 | BLCG Course | Group Submission 09 | Group 04 | Section A

GROUP ASSIGNMENT # 9
1. Q1.Lehman reported the repurchase transactions as a sale transaction. Why?

Lehman Brothers had a significantly high leverage ratio. It wanted to reduce the debts on its books to
show a good picture to the investment world. To achieve this goal, it has used a conniving
accounting practice repo 105. Under this accounting practice, Lehman brothers using its UK
subsidiary has procured short term securities backed loans from other financial firms. These
transactions were carried out just before the quarterly results. All these transactions were treated as
sales, thereby reducing the debt of the company. Using this practice, the Lehman brothers removed
$39 billion from the balance sheet in the last quarter of 2007 and similarly $49 and $50 billion in the
subsequent quarters to portray a positive balance sheet with a lower leverage ratio.

2. Q5. What lessons does the case hold for the other key stakeholders (lenders, retail
investors and employees)?

 Should be cautious on the related party transactions. If the related party and the
current firm has any commonality in the board member, transactions need to be
observed carefully
 Lenders should not look for leveraging the opportunity that exceeds the repaying
capacity of the borrower
 Retail Investors should look ratio of daily stock turnover to the free float market cap.
If the ratio is well above the market standard, Investors need to be cautious
 Having a close track of auditing reports and the credit ratings
 Stake holders should improve financial acumen, and review the annual report before
taking decision
 Any frequent and high cash flow transactions need to be monitored and understand
 Retail Investors should be careful and do not put all the investments in one basket
alone irrespective of the Brand value
 Employee should act as whistleblower in case of any suspicious transaction are
observed

3. Reflections on Corporate India using the note of Corporate Governance Systems: The US,
Japan and Germany within 200 words.

With respect to India, the board structure differed for the public and private companies. Public
companies must have a minimum of three directors, and public companies must have a minimum of
two directors. In Indian corporates, shares are typically owned by “promoters” and “non-promoters.”
In the past couple of decades, the average proportion of shareholding by promoters is around 50%
which is quite different from the US. Such a heavy dominance of promoters can be detrimental for
the minority stakeholders if promoters take advantage of their control and pursue their own interests.
If we talk about shareholder activism in the Indian context, it is on the rise. There are many instances
where shareholders have challenged promoters and management. For example, in Pune-based
Kinetic Engineering Ltd., shareholders did not support the increase in the remuneration of MD.