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Open up the wealth street to Aam Adami

February 15, 2008 12:59 IST

The ministry of finance is injecting a dose of socialism into the casino-type stock markets. It has talked of distribution of wealth among the retail investors who buy shares of companies listed on the stock market.

It is a refreshing addition to the concern for Aam Adami, the electoral mascot of ruling coalition, United Progressive Alliance. The ministry should, however, ensure that at least the farmers, landless labourers, etc. affected by greenfield projects are given access to potential wealth to be generated by projects.

As put by the ministry in its Discussion Paper titled Requirement of Public Holding for Listing, "the larger the public float, the more effective is the instrument of listing as a tool for redistribution of wealth in the country. The minimum public float provides an opportunity to the general public to have a share in the increased wealth generated by the competitive private enterprise and prevents cornering of the benefits flowing from the policies of the Government and public institutions by a handful of promoters."

It continues: "These are the consideration behind the requirement of minimum public offer/float under the SCRA (Securities Contracts (Regulations) Rules)."

After reviewing the past and existing listing norms, the paper has rightly pointed the absence of the definition of the word 'public' in the existing regulations. Public means non-promoters that includes not only retail investors, institutional investors but also the pampered or manipulative strategic investors that are allotted shares preferentially.

It is very important to distinguish retail investors from institutional and corporate investors as the percentage share of real public investors is shrinking due to relentless preferential allotment and conversion of debt into equity in many firms.

There have also been several instances of institutional investors acquiring 15% or more shares in listed companies through preferential route in the first instance and increasing it further through mandatory 20% public offer. In spite of holding significant chunks of equity, these pampered investors operate as non-promoters and get the the generic label of public investors.

What is worse, they wallow in back-seat driving of the companies by tying the willing promoters (constituting the management) into web of stipulations relating to conduct of board meeting and access to sensitive internal information. And yet they have been kept outside the ambit of insider trading regulations.

Preferential allotment of shares to big-ticket investors or to existing promoters themselves decreases the percentage stake of the retail investors. It also deprives the real public of an opportunity to acquire new shares through the rights issue or public offer.

Unfortunately, the discussion paper has not a said a word about the impact of rampant practice of preferential allotment and all the associated pitfalls. Rights issue has reduced to trickle under the tide of preferential issues.

The paper is also silent on the impact of share buyback by companies permitted under the Companies Act. Ditto for creeping acquisitions by promoters allowed under the takeover regulations of Securities and Exchange Board of India.

Both buybacks and creeping acquisitions reduce the non-promoters shares. The ministry should have factored in these two practices in its Paper and proposed their alignment with its own package of suggestions.

It deserves full marks on its proposal for fair treatment or level-playing field for all corporates. Public enterprises have been given exemptions for compliance with minimum public offer over the years. An initiative in this direction would force central and state governments to share their wealth locked in public enterprises with the investing public.

The paper thus says: "there should not be any discrimination between a government company and non-government company. The powers of the stock exchange to relax any of the conditions of listing with the prior approval of Sebi in respect of government company needs to be withdrawn. Similarly, the powers of Sebi to relax listing requirements may be withdrawn."

The ministry's proposal that public stake in a company must be 25 per cent both at the time of listed and for continued listing ought to be welcome. It has also rightly proposed to introduce uniform norms for initial and continuous listing of shares.

The ministry should have come with some suggestion to discourage delisting of shares, which has become a trend among subsidiaries of multinational companies.

Even some of the Indian promoters opt for delisting when the share price is subdued, cool their heels for mandatory three years and then unveil initial public offer to get listed on the stock market during the bull phase.

In such cases, the hapless retail investor first sells their share at lower prices to avoid being kept in dark by promoters after the delisting. A few years down the line, he is lured into buying fresh shares whose inflated price is determined through book-building method.

The retail investor is thus taken for ride twice by the promoters.

Finance Minister P Chidambaram should protect minority investors by proposing to introduce delisting tax of 10-20 per cent under the Income Tax on companies opting for delisting.

Simultaneously, the period between delisting and re-listing should be increased to 10 years. These two initiatives would ensure that delisting is resorted to by only companies that have valid reasons to escape public glare.

Reverting to larger issue of using listing as tool for wealth redistribution by companies benefiting from economic reforms, the Ministry should forcefully tell the entire corporate sector that it ought to share the benefits through multi-tier channel - by refraining from crafty accounting and tax avoidance, by sincerely participating in corporate social responsibility projects and by offering shares to land oustees and others affected by new projects and through listing on the stock market.

The stick of wealth redistribution through listing should, however, be used against all including multinationals that entered India after opening up of the economic in mid-1991. Most of them operate under a veil of secrecy that comes by virtue of 100 per cent ownership of Indian subsidiaries.

The government must enact a law to ask all such companies to either go for listing of 25 per cent shares on the bourses or alternatively pay 10 per cent tax for cornering profits earned from Indian market.

And this 10 per cent tax should also be levied on unlisted Indian companies with asset base of say Rs 100 crore (Rs 1 billion) or paid-up capital of Rs 1 crore. The ministry can set such ceiling after seeking public comments on its Paper.

In any case, the government must arm existing and prospective public investors with information that helps them make wise investments. For this, it must ask all listed and unlisted companies with annual sales of Rs 20 crore (Rs 200 million) or more to launch their websites on which they should display full annual report as well as any regulatory notice served on them.

The e-empowerment of investing public, coupled through cleansing of stock market regulations, would ensure that the wealth street does not remain largely the preserve of promoters, their associates and high net worth individuals.

The ministry ought to take a holistic and broader view on all direct and indirect factors that affect the investing public. It should thus take a leaf out of dozen or so reports prepared by expert panels constituted by Sebi. It is here pertinent to mention the report on integrated disclosures which Sebi made public last month.

The government must show concern for Aam Adami by ensuring re-distribution of wealth generated by corporates with the aid of favourable Indian policies and burgeoning markets.
Naresh Minocha,