Who looks after the minority investor?
A scandal has erupted in commodity exchange NSEL due to a lack of proper oversight by the regulator FMO.ht view Updated: May 08, 2015 21:06 IST
Stock Exchanges in India used to be self regulatory organisations (SROs) earlier. After being hit by the scandals of Harshad Mehta, and then of Ketan Parikh, the Government decided that self regulation was not working, and set up SEBI as a regulator. Thereafter, due to some stellar work by SEBI, there has not been any major crisis in stock markets.
A scandal has erupted, though, in a commodity exchange, NSEL, due to a lack of proper oversight by the regulator FMO, (or by the absence of adequate power given to FMO to regulate it) and also by the inexplicable latitude given to NSEL by the then Ministry of Corporate Affairs in granting exemptions. NSEL await justice for an outright fraud and the delay by the Government is inexplicable, and dissuades investors.
The danger to minority investors, globally, now comes more from corporate scandals, and it is here that the question in the title needs to be answered.
The case of Satyam is well known; the CEO confessed to having falsified accounts for several years, through the simple strategy of obtaining a duplicate receipt for a bank fixed deposit, encashing it, yet showing it on the books as intact, on the strength of the duplicate receipt. Now, how can a minority investor possibly discover falsified accounts? Who looks after his interests? Directors, who are, perhaps, cronies of the management and happy to be given their status? Auditors, who, though appointed by shareholders, are selected by management, to whom they are thus beholden? Or regulators?
More recent is the case of United Spirits, in which Diageo, the British multinational, acquired a majority stake from Vijay Mallya, and has asked the latter to resign as Chairman. Mallya refused. An independent report found instances of related-company transactions by USL, prior to the takeover, not disclosed earlier. Recovery of amounts lent to related companies is in doubt, to the detriment of minority shareholdes. How would they know of these transactions? Who protects them? Even now, although NSE and BSE have asked USL to make the independent report public, it refuses to.
Such corporate misbehaviour is a global phenomenon. Sometimes, as in the case of Humboldt nuclear power plant, it poses a danger to society.
This nuclear plant, owned by PG&E Corp., was shut in 1976. It has to be completely, and safely, shut down, at a cost of $ 441 m. PG&E is $ 308 m. short! It has not provided enough for a complete shut down! Perhaps this is due to pressure from institutional shareholders, eyeing quarterly results, and arm twisting management to show a higher profit by under provisioning? Perhaps it is due to top management also wanting to show higher profits, to benefit from a bigger bonus or enhanced value of their stock options? Who is responsible to protect minority shareholders; and also the public? As many as 82 of the 117 nuclear power plants in the USA are underprovided! Are auditors questioned about this? Is the US Nuclear Regulatory Commission, supposed to oversee this and ensure enough money is set aside for a proper shut down, responsible?
This assumes importance as India, too, is pursuing the nuclear power option to coal. Imagine the eventual disaster if improper accounting and provisioning were to result in inadequate funding for shutdown. If, in the US, a stricter regime, PG&E can get away with underprovisioning, imagine the consequences in a 'chalta hai' society.
India should explore, according to ICICI Securities, the option of gas hydrates, of which it has plentiful reserves, about 1500 times its gas reserves.
Farmer protest against land acquisition for industry has also manifested itself in Java, Indonesia, where a 2000 MW JV with a Japanese company has been stalled due to farmer protest . Although Indonesia exports coal for power plants, it is, itself, starved of it. The coal fired power plant is needed for economic growth, but unlikely now, after the protest.
The market fell very sharply midweek (ironically on the day the Lok Sabha passed the GST Bill), on investor concerns over the slowness of reforms, the tax claim on FIIs for MAT, and likelihood of a below-normal monsoon. It recovered on Friday, and the sensex ended the week at 27,105, for a weekly gain of 94 points.
The downward correction may continue for a while. Thereafter, the main factor to look out for is the stance of the US Fed in raising interest rates. If they are raised, global markets will fall. However, the Fed does not seem to have the gumption to make the necessary raise. So the party may continue. The hangover, later, will be severe.