We do not make rules and regulations for the benefit of the citizens

Our government never makes rules for the benefit of the common citizens. They do everything thing (or majority of things) either for the benefit of the politicians or vested interests or big business. SEBI’s guidelines for disclosure pledged shares is a good example.

When I had first heard that taking the Satyam’s case into consideration, SEBI is going to ask promoters to reveal information about pledged shares, I immediately stated that just revealing the information will do no good. Why? Because promoters will reveal the information and after some time people will forget about it. So I, a simple not so intelligent guy came up with a series of steps that SEBI should take to protect the shareholders of the company aas well as safeguard the public money in the hands of the promoters. These steps were:

(a) Promoters should only be allowed to pledge shares only for loans raised for the same company in which he holds the shares. What is happening now is that promoters pledge shares to start other businesses thus over extending themselves as well as diverting their interest in other areas. For instance, Raju was pledging his shares to start other businesses where he would hold controlling interest. He overextended himself and resorted to diversion of funds. This step would also ensure that the promoter’s interest remains in the company in which he is holding the shares.

(b) If the promoter is allowed to pledge shares so that he can invest in other businesses, then his voting rights should come down by the number of shares so pledged. As it is most of the promoters have small shareholding and they control huge companies. Their power and control over huge resources is highly disproportionate to their shareholding. On top of this, the financial institutions which hold a large percent share of various companies generally do not vote against the incumbent government. So the promoter ends up controlling the company with hardly any investment as Raju did. Now if I am not mistaken, Raju had pledged all his shareholdings. In effect, he did not have any financial interest in Satyam. In fact, one can say that he was not even a shareholder. But he was controlling the company and all its finances.

The basic principle behind what I am suggesting goes back to 1975-80 when I was working for Escorts. What I realized was that only those dealerships were run efficiently and effectively which had owners managing it, that is, the person whose money was involved in the business. In the case of promoters who have pledged most of their shareholding and invested money elsewhere, we are under the illusion that the company is being run by a person who has money invested in it. The reality is different. By pledging his shares, the promoter has become a surrogate owner and as such his interest in managing the company effectively is diminished. By pledging his shares, he has more or less reduced his investment in the company.

If the interest of the promoter is to start other businesses, then logically he should leave the management of the company to someone else.

(c) I also think that unless the promoter holds a substantial stake (lets say at least 50%), he should not be allowed to invest company’s money in any venture which:

(i) Is not a wholly owned subsidiary of the company, or
(ii) Has the promoter as one of the investors in his individual or other capacity, or
(iii) Has investors associated with the promoters (freinds, family, relatives etc.)

Also, the above conditions should also apply to inter-corporate loans.

Why am I suggesting the above? Let us take the case of Satyam where Raju started investing Satyam’s funds in a real estate company. Now he had a minor share in Satyam but he was able to divert funds to other businesses in which he had controlling stake. Also, a promoters interest will be more in a company where he has controlling interest rather than in a company where he has minority interest.

You now have the example of UB Group. Vijay Mallya has invested United Spirits, a public company in which public has shareholding, in totally unrelated busines, that is, Airline. I don’t think promoters should be allowed to do so.

If you guys remember, Mukesh Ambani invested Rs. 50 crores in his personal capacity in the telecom business and if I remember right Rs. 18000 crores was invested by Reliance. However, Mukesh Ambani’s shareholding in the telecom business was much higher which was supposedly given as sweat equity. Even if one bought the argument of sweat equity, it was still too high. At that time, I had calculated and it was also reported in the papers that Mukesh would have made Rs. 7500 crores on the deal. Actually, that money belonged to the shareholders of Reliance whose money was invested. If it wasn’t for Anil Ambani, Reliance shareholders would have lost Rs. 7500 crores.

Shareholders in our country are not very active. Financial Analysts do not analyze. We have seen what independent directors do. Newspapers just report whatever these big shot executive say without asking penetrating questions or doing in-depth research. Some of the newspapers also take money to print positive news about companies and promoters.

Now some of you out there will ask how will the company diversify. Actually, there is no need for companies to diversify into unrelated businesses. There is a theory about this which states that shareholders don’t need a company’s assistance to diversify or reduce his risk. He can always do so by investing in a variety of compnies through the stock market. If the company has extra cash, it should be returned to the shareholders. Of course, there is nothing wrong with expansion into related businesses.

But today I read in Hindustan Times what guidelines SEBI has issued for disclosure of promoter’s pledged shares? Its a total wash out.

I don’t know what to think. Is it that SEBI officials do not think while making SEBI rules and regulations? Or that they cannot think far enough? Or do they issue guidelines after taking advise from the big corporate honchos? There is something seriously wrong. The interest of the common citizen who is the owner of this country is totally ignored.

I understand that the guidelinee they have come up with are that promoters have to disclose pleding of shares in their quarterly reports and in case the shares are more than 1% of the issued shares, then they have to disclose the same within 7 days. Here is the catch. Holding companies will not be required to disclose information on shares pledged. As expected, SEBI had to provide a loop hole for the corporate bigwigs to do what they want at the expense of the common shareholders of the company.

Today, most industrialist and big time businessmen control companies through holding companies and their associates. There a very few who hold the controlling shares directly. So the affect of these rules is minimized as most are using holding companies and those who are not will form holding companies in very near future. Its a complete sham. SEBI should revisit the issue and include me (fat chance of their doing that) in their panel for making sure that promoters reveal proper information for the benefit of the shareholders.

The rule should have read that promoters including “deemed” promoters (holding companies, associates etc) have to reveal infomation on pledged shares within 1 month of such act. No exemptions. If public money is involved, all safeguard have to taken to ensure safety of their investments.

I don’t think we need such information in the case of private limited companies.

Why is it that we can’t seem to do anything right. Its about time that we start electing people who will ensure that the citizen owner of the country becomes “King.”

Avinash Narula