Thursday, November 18, 2010

Promoters are Not like you and me. They have special rights...

- George Orwell, Animal Farm
So long as a promoter does not invite others to be shareholders in his company,
He can legally and morally do what he wants with the company. There is no one to whom he is answerable. The moment his company has other shareholders, he can no longer have the right to do his bidding. He has to have the consent of other shareholders for most actions that impact the shareholders as a universe. This is the spirit and letter of the law. In real life, though, this receives scant attention from the promoters. They use the company as their personal fiefdom. When it comes to raising fresh capital, the law states that there is a right of refusal to all the shareholders. In other words, if I am a shareholder, I cannot be denied a right to subscribe (as proportionately as possible) to any shares / warrants or such instrument.
However, the law has been perverted by the businessman. They introduced an obnoxious amendment to the law which permits issuance of shares on a ‘selective’ basis. This could be in the form of a private placement with an institutional investor(s), or to a collaborator, or to the promoters. In each case, to deny the general shareholder, a ‘special’ resolution needs to be passed. This means that seventy five percent of shareholders present at a shareholder meeting have to agree to this. In India, this is easier done than said. Not many attend meetings. And institutional shareholders always side the promoters. Mutual funds do not generally vote. So, it is a simple thing for a promoter to do what he chooses.
To me the most obnoxious practice by a promoter is the subject of ‘preferential’ warrants to himself. He has only to pay 25% of the conversion price and has 18 months to make the balance payment, at a time of his convenience. This provision is the one used by promoters to abuse the markets and the shareholders. First they ramp up the stock prices, and then sell their holdings. Then they screw up the performance, drop the share price and then issue warrants to themselves. This is like a ‘merry go round’. This is the one clause that SEBI has to get rid of. I also wonder where is it that promoters get the money to subscribe to these shares and warrants. In some cases, I would not be surprised if it is through money skimmed off the company through some devious means.
Why should a promoter not pick up shares from the secondary market instead of issuing warrants to himself? SEBI permits the promoter to do so. With such a window available, I do not see any rationale for issuance of warrants to promoters.
One argument that some promoters put forth is that when new shares are issued to themselves, the company gets the money. If the company really needs the money, surely a ‘rights’ issue is possible? And when ordinary people are buying shares from the market by paying spot cash, why should a promoter have the luxury of getting extended credit for buying shares? The legal system has been in league with the promoters and will perhaps continue to be such forever.
I also wonder when promoters decide to acquire a company or a football team or a cricket team or buy a personal aircraft with the shareholders’ money. These kinds of acts are the clearest indications that they give a damn for the other shareholders. And in no time we see kith and kin in action, burning shareholder money for some unrelated activities like ‘art’ shows, ‘social’ initiatives etc., If a promoter wants to fly in a private aircraft, let him do so with his own money. In this age of instant communication where is the need for intensive travel? As a shareholder, I am perfectly content to see the CEO travelling economy or business class. A co paid aircraft is used by family members, friends and political contacts.
Corporate governance is a fashionable term that does not exist in the real world. Same is the case with Corporate Social Responsibility (CSR). It is fashionable to devote two pages in the Annual Report to CSR and half a sentence to explain the losses borne by the company. Perhaps if the CSR were eschewed, the losses would have been smaller. And in matters of CSR, you always see the beaming faces of the friends and family members of the promoter on page three. I invest in a company for dividends and capital appreciation. No fund manager or investor gives a share a higher price because of CSR. So, let the promoter give me the money and let me decide whether I want to be charitable and if so I will choose the path I wonder how is it that CSR related expenses are permitted by the tax authorities as legally deductible ‘business expenses’?
The whole world is happy to build this facade of CSR, corporate governance etc to assuage their guilt. And the media is a willing partner.

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