Restrict promoters power to invest company’s money

In my earlier post, I had given some suggestions with respect to pledging of shares by promoters. Some other related issues have also to be taken care of.

I think 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:

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

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

Why am I suggesting the above? Let us take the case of Satyam where Raju started investing Satyam’s 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 seat 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 comapnies 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.

So I ask the government that laws restricting the promoter from using company’s money as well pledging of his shares should be enacted if we want to avoid Satyam like situations and protect the shareholder’s investment.

Avinash Natula

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Comments

Hi Guys!

Have you read 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?

I understand that the guidelines 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 within 7 days. Here is the catch. Holding companies will not be required to disclose information on shares pledged. They had to provide a loop hole for the corporate bigwigs to do what they want.

Today, most industrialist and big time businessmen control companies through holding companies and their associates. There are 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 very soon. 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 an 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.

Avinash Narula

Reply

I shall be obliged if you can kindly help me to know from you on SEBI ‘s role on MF & AMC compliance on the following points :-
1. Does any Mutual fund or AMC company in case of any fraud or accounting or redemption mistake within the company and by the company has to inform the same to SEBI or you AMFI , on the loss taken in the particular Fund due to Fraud or if any Error by the company wherein a loss has been taken
2. Does the Fund auditor and AMC auditor has to report the abovesaid kind of transaction of if any fraud or error and the loss borne by the fund or the company,while certifying its Profit and loss statement and the balance sheet. Has the same to be appear in the Auditors report
3.Is the abovesaid kind of eventuality has to be reported by the Board of Director’s and further by the Trustees in their report of either responsibility statement, which either to the unit holders or the to compliance authorities.
4 In case the AMC – MF company says they are not required to report any fraud or accounting and redemption mistake made by the AMC to SEBI, while their Fund Auditors and AMC claims there if no Fraud within the company or on the company, but the AMC has stated the fraud or accounting and redemption mistake made by the AMC, how do they justify the claim – lawfully, within the guidlines or are their claim are wrong?

your kind inputs and advise would be highly appreciated

Reply

Avinash Narula Reply:

Hi!

Regret for the delay in replying to you but I am sorry I do not have the information desired by you.

Avinash Narula

Reply

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