SEBI’s red card on abuse of IPO funds is only the beginning
In the strange world of Indian stock markets, publicly listed companies may well be called privately listless companies. This is because public holdings often tend to be not significant enough for shareholder democracy to kick in. And that makes the hapless minority shareholders listless.
Jokes apart, there is cause for concern. That should make us welcome a decision by the stock market regulator, the Securities and Exchange Board of India (SEBI) to provide an exit option to shareholders of a company if the money the companies raise through public issues is not utilised for the reason stated in the offer documents that go with initial public offers (IPOs) or follow-on public offers (FPOs). It has begun a consultation process to frame rules for this.
This exit option is the least shareholders can expect in India, where the number of listed companies is huge by world standards, but corporate governance and accountability are appallingly low.
India has about 5,500 listed companies between the two leading bourses, the BSE and the National Stock Exchange. Compared with this, the New York Stock Exchange has only 2,800 listed companies. Yet, the numbers are not everything. Corporate disclosures, even of things as minor as quarterly results, are not properly made or monitored in India. Use of funds and their diversion to aid the interests of promoters (founders/sponsors) is a key issue. The word “promoter” is often in India a code word for the family or families that control the ownership of a company.
Minority shareholders in hundreds, if not thousands, of companies are hit by negligence or worse after IPOs as there is hardly any measure to ensure accountability of the funds received.
The deeper reason for the malaise could lie in the fact that shareholdings in public companies in India are not truly dispersed to create a culture of shareholder democracy. A lack of transparency leads promoters unto temptations that wreck corporate governance.
In a research paper, “Ownership Trends in Corporate India,” published in 2013 by the Indian Institute of Management, Bengaluru, N. Balasubramanian and R.V. Anand painstakingly compiled data for Indian companies between 2001 and 2011 and came up with some telling insights. For instance, only 13 of the CNX 100 index companies were under professional management (with widely dispersed holdings). Typically in such cases minority shareholders have a louder voice.
As many as 51 were under “domestic private sector” – a broad term that includes promoters and domestic financial institutions. It is common knowledge that Indian financial institutions are not activist investors and are happy to play second fiddle to promoters.
“Corporate ownership, and hence control, in India is predominantly concentrated in the hands of a few, sponsors or promoters, unlike say in the US and UK,” the paper said, adding, “In India where the norm is concentrated ownership in the hands of promoters, horizontal agency or agency Type-II problems are more prevalent. Issues such as board composition, board monitoring, director independence, risk management, communication, disclosure practices, and so on must all be seen in this context.”
Type I problems in corporate governance jargon refers to tussles between owners and managers, while Type II problems typically involve tussles between majority and minority shareholders, or in other cases, between stockholders and creditors.
In India, it is more common to see a tussle between promoters and creditors, as we have seen prominently in the Kingfisher Airlines case in recent years.
It is also pertinent that cash-strapped promoters in India often pledge their stakes to raise more cash --- and any smart minority shareholder should see a red signal when those in control of a company are not strong enough as it tempts them towards mismanagement or inefficiencies.
A report in Mint newspaper said this year that promoters in as many as 41 BSE firms have pledged 100% of their stakes as collateral to raise cash, while twice that number pledged 90% of their holdings and 359 put up half their holdings.
In such a context, it is but natural for minority shareholders – the folks who risk their savings in IPOs without having a meaningful say in the management of the investee companies – to be worried about what happens to their cash. What SEBI is doing for them for them is the least. There is a long, long way to go still.