Promoters are not like you and me. They have special rights that are sanctioned by the regulator
“All animals are equal, but some are more equal than others.” — George Orwell, Animal Farm In a private company, a promoter can do what he wants to. But if he has public shareholders, he has to take their consent for most of his actions. This is the letter of the law. But, the promoters use the company as their personal fiefdom.
When it comes to raising fresh capital, the law states that there is a first right of refusal for all shareholders. However, the law has been thwarted by businessmen. They managed to introduce a rule 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. For this, a ‘special’ resolution needs to be passed. This means that 75% of shareholders present at a shareholders’ meeting have to grant their consent. In India, not many shareholders attend meetings. And institutional shareholders always side with promoters. Mutual funds do not generally vote. So, it is simple for a promoter to do what he chooses.
To me, the most obnoxious practice by a promoter is the issuing 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 can be freely used by promoters to abuse the markets and the shareholders. First, they ramp up the stock prices; then, they sell their holdings. The share price drops and then promoters issue warrants to themselves. It is like a merry-go-round. This is the one clause that the Securities and Exchange Board (SEBI) has to get rid of. I also wonder from where promoters get the money to subscribe to the shares and warrants. I would not be surprised if, in some cases, it is money skimmed off the company through devious means.
Why should a promoter not pick up shares from the secondary market instead of issuing warrants to himself? With such a window available, I do not see any rationale for issuance of warrants to promoters. But SEBI allows promoters to do so. One argument by promoters is that when new shares are issued to them, the company gets money. But if the company really needs the money, isn’t a ‘rights’ issue possible? And when ordinary people are buying shares from the market by paying cash, why should a promoter have the luxury of getting extended credit for buying shares? The legal system has been in league with promoters and will perhaps continue to be so forever.
Governance From issuing shares to themselves at low prices to misgovernance is a short step. These days, promoters are buying trophy assets—a cricket team, a football team or a personal jet—with shareholders’ money. These are clear 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 buy one with his own money. An aircraft maintained with the company’s money is frequently used by family members, friends and political contacts. In essence, corporate governance is a fashionable term that does not exist in the real world.
This is the case also with corporate social responsibility (CSR). It is fashionable to devote two pages in the company’s annual report to CSR and half a sentence to explain business losses. And, in matters of CSR, you always see the beaming faces of friends and family members of the promoter on page three. People invest in a company for dividends and capital appreciation, not for its CSR. It is far better for the promoter to distribute surplus cash to shareholders and let them decide whether, and how, they want to use it for charity. I wonder how the tax authorities permit CSR-related expenses as legally deductible ‘business expenses’.— R Balakrishnan
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