Sucheta Dalal :Fungibility capers (4 May 2003)
Sucheta Dalal

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Fungibility capers (4 May 2003)  

Capital market intermediaries have been quietly lobbying with the Securities and Exchange Board of India (Sebi) for yet another dilution to the minimum public offer requirement of 10 per cent of a company’s equity capital. On the one hand, they claim, there are companies such as the NTPC whose capital is so large that a 10 per cent dilution would require a mega issue. On the other hand, many companies can only hope to get a decent price if the public float is low and the scarcity of stock keeps the share price high. Investment bankers argue that if equity listed overseas (ADRs and GDRs) is now fungible with domestic equity, then the 10 per cent public offer should include the overseas offering. This means that if an unlisted company goes public for the first time by listing eight per cent of its equity overseas, then it should be allowed to get listed on an Indian stock exchange with a mere two per cent offering. Such a move will only export the Indian IPO market abroad, and Sebi has wisely ignored this demand. Also, Finance Minister Jaswant Singh had told Parliament that the minimum floating stock should in fact go back to 25 per cent of capital in order to ensure adequate liquidity. Investor associations need to watch out and ensure that there is no dilution of rules and even companies with large equity capital should be forced to restructure capital instead of seeking a change in rules.

Form v/s substance While corporate India is worried that reporting requirements under the Naresh Chandra Committee and the Narayana Murthy Committee are getting more stringent, they continue to fudge their current disclosure requirements. Prithvi Haldea, who heads Prime Database, a collator of capital market related information, says that varying definitions of what constitutes a ‘promoter’, allow companies to misreport their actual equity holding, especially those shares held through Private Corporate Bodies. Without accurate information, Sebi’s ability to track insider trading by promoters or covert takeover attempts is bound to be hampered. Isn’t it time then to get rid of the archaic definition of ‘promoter’ and replace it with that of ‘controlling interest’? After all, all companies need not be promoted from scratch; they can be acquired through a takeover. Sebi needs to move with the times.

Ungagging the NBA

Defamation cases are an important tool for the corporate sector to gag the media and NGO activists. Fortunately, the Indian judiciary has not been overly eager to hand out gag orders. But the S. Kumars’ group, which had filed defamation suit against the Narmada Bachao Andolan (NBA) group protesting against its Shree Maheshwar Hydel Power Project, had obtained such a gag order and followed it up with a contempt motion last year. However, on March 29, Judge Roshan Dalvi of the Mumbai City Civil Court, dismissed the motion by S.Kumars’ and Shree Maheshwar for an injunction against the NBA. Although she allowed the plaintiffs to appeal against the order, the Judge made it clear that ‘that the public right to know and the right of public scrutiny cannot be subordinated to any personal interest’. She said, ‘Public frauds and public scams have increased unabated in India. It therefore calls for … public scrutiny’. The judge also felt an injunction against the NBA would only stifle public —expression. More importantly, the judgement acknowledged that the NBA had proved its charge of diversion of funds by Shree Maheshwar at the interim stage itself when the company admitted in Court to giving Rs 106.4 crore to agencies that did not fulfil their contracts of which Rs 37.81 crore with interest was still to be returned. The Judge said that the NBA had clearly established wilful default too. Yet, the Life Insurance Corporation is now being coerced to lend Rs 100 crore to the project without even waiting for a credit rating.

Different rules

Industrialists are right when they allege that the government imposes stringent reporting requirements on them but flouts even the basic norms separating the regulator from the regulated entities. Last week, the finance ministry continued its attempts to stifle the insurance regulator by appointing a joint secretary of government on to the Insurance Regulatory Development Authority. What makes it worse is that the same individual is also on the boards of the two public sector insurance companies. This is exactly the sort of situation that prevailed at the National Housing Bank in 1992 and ended up causing the government acute embarrassment after the securities scam.

-- Sucheta Dalal