Waiting for the active(ist) investor
In the movie Guru, there is a scene where Gurubhai declares that he will get the money his business needs by selling shares to the public.
Gurubhai, played by Abhishek Bachchan and clearly based on Dhirubhai Ambani, later addresses the annual general meeting (AGM) of a huge mass of his companies’ shareholders in a stadium.
Those aware of the history of Indian business know that Reliance is supposed to be the progenitor of the so-called ‘cult of equity’ in India.
Before Reliance, AGMs were held in rooms, perhaps even in large rooms, but never in a stadium. Of the many historical references in Guru, this is one that is often missed by those in the audience who aren’t aware of the background. The fact that a company’s shares can be owned by a large number of people is a relatively new phenomenon in India.
I see from some recent annual reports that large companies have a lot of shareholders. Reliance has 18 lakh; ITC 5 lakh, as does Infosys. These are big numbers and they are of course much bigger than those of the bulk of Indian companies. Broad ownership is good simply because in the long term, shares earn more than other avenues of savings. Stock ownership allows people to be owners of businesses and earn the kind of returns that owners do.
Investment in fixed-income instruments makes them lenders and put an upper limit to the returns that they can earn. However, the shareholders’ numbers one reads in these companies’ annual reports are not accurate. I don’t mean that Reliance and ITC and Infosys are lying, but the number of people who have an ownership stake in these companies is actually much larger.
I am talking of the mutual funds that have a stake in these companies and lakhs of people who own units in those funds. There are 238 mutual funds that have a stake in Reliance, 198 in Infosys and 155 in ITC. The number of unique (de-duplicated) investors who own units in these funds is impossible to know accurately, but my guess is that around 60-80 lakh people have an ownership stake in Reliance through the mutual funds they own.
The multipliers for many other big companies are probably similar. On any scale, the number of Indians who own shares add up to a whole lot of people. To make a completely random and utterly meaningless comparison, these numbers are probably in the same order of magnitude as the number of Indians who voted for the Left parties but we’ll let that be because that’s not the point I’m trying to make today.
The real democratisation of stock ownership in India now comes as much from mutual fund investors as it does from direct investing in stocks. And, with time, participation in corporate ownership through funds will be far more prevalent than direct ownership. This brings up another issue. Owners don’t just make money out of businesses they also take decisions.
So far, mutual funds (and by extension, their unit-holders) have been more-or-less passive owners. As far as I can remember, the exceptions have been politically driven cases as when UTI’s stake saved ITC from falling into BAT’s hands. Eventually, this will change.
To protect the interests of their unit holders, mutual funds will not only have to keep a sharp eye on how companies conduct and perform but also be prepared to intervene when necessary. Will we see such interventions in the future? Perhaps sooner than you think.
(The writer is CEO, Value Research India Pvt Ltd)