Don’t Twist Corporate Democracy

Many promoters of companies, multinationals as well as Indian businessmen, are voting themselves new allotments of shares at highly preferential prices, sometimes one-fifth the market price. This benefits promoters at the cost of minority shareholders, and would be banned in many countries. Yet, company after company is doing this in India, all -the-name of corporate democracy. This is a terrible twisting of the meaning of democracy, which must be exposed.

The companies argue that if a majority of shareholders vote for a preferential allotment for promoters, that is simply an exercise of corporate democracy. According to them, any outside interference in this process subverts corporate democracy, and means a return to the bad old licence-permit raj.

Such people do not know what democracy means. No doubt democracy is about the rights of a majority. But it is also, quite critically, about the rights of minorities. To protect minorities from being savaged by majority groups, all countries have a Constitution limiting the power of the majority.

LIMITED POWER: It is easy to see why Constitutions limit the power of majorities. Would it be fair for a Hindu majority to lay down that Muslims must pay a special tax to subsidise Hindus? Or to lay down that Hindi-speaking states should be subsidised by Bengalis and Tamilians? Of course not. There may conceivably be a majority of MPs willing to vote for such laws. But these would immediately be struck down by the courts as violating the Constitution, which says there can be no discrimination against minorities to benefit the majority.

And yet Indian and foreign promoters speaking in the name of corporate democracy are proposing precisely this sort of discrimination. Alloting shares at below-market prices to promoters means a huge monetary advantage to those who control the company, at the expense of minority shareholders. This is not democracy but a perversion of it.

Some foreign companies argue that it is not worthwhile for their their stake at the very high prices ruling in the stock market. Yet, they say, if a foreign company raises its stake from say 40 per cent to 60 per cent, that will greatly increase the interest of the parent multinational in Indian operations and bring in new technology and projects which will benefit all shareholders, not just the promoters. In other words, the minority may find it advantageous to provide a short-run subsidy to the majority in order to reap substantial long-term benefits.

FOLLOW SEBI: In many cases this argument is a self-serving piece of hypocrisy, but in others it may have merit. Minority shareholders may actually be willing to give the promoters a prefer ential allotment. So perhaps the best solution is the suggestion made by the Securities and Ex change Board of India (SEBI) that promoters should not be allowed to vote on any board re solution seeking to give them preferential allotments. This Will stop greedy promoters from en riching themselves, yet allow such? allotment when minority share holders see a long-term advantage in it.

Foreign companies say they were earlier forced by the Foreign Exchange Regulation Act to sell their shares at low prices, and that preferential allotments simply remedy the historical injustice they suffered. Indian promoters say that heavy wealth tax in earlier days forced them to sell share’s and thus dilute their holdings, and want redress.

I find this argument astounding:There is no group that has not suffered some injustice in the past, but we cannot keep changing our rules to remedy every historical injustice (particularly since perceptions differ greatly on what constitutes injustice). The principle of equality before the law must take precedence over historical redress, save in the case of really glaring, centuries-old discrimination against poor social groups like Harijans in India or blacks in the USA.

TAX BURDEN: Neither multi-nationals nor Indian businessmen can claim to be oppressed minorities that have suffered socially for centuries. I agree that the policies forcing them to dilute their holdings in the past were misconceived, and against the national interest. But I also believe that taxpayers like me were forced to pay far too much income tax. Does this mean we should all be given an income tax refund today ? Of course not.

Many Indian companies benefited greatly from excessive protection from imports in the past. Would they agree to pay a penalty today to redress that historical wrong Of course not. The SEBI proposal will not be a blow to corporate democracy. It will be the equivalent of a Constitutional amendment to safeguard the rights of minorities. It will allow unhindered corporate democracy in matters which treat all shareholders alike. But it will limit the power of big share holders to misuse democratic rules.

Correction

In last week’s column. I identified the Rs 400-crore Allana group as owning Al-Kabeer. Mr Allana tells me that though his group is a significant meal exporter, it docs not own AI-Kabeer. and has mistakenly been dragged into controversies concerning AI-Kabeer.

What do you think?