Column

Several years ago, when the stock market had just begun buzzing and new buyers were rushing to buy every share in sight, an investment newspaper carried a news report that a (then) well-known yarn company would diversify into shipping. This was enough to set off a buying spree into the company’s stock.

As it turned out, the company was not diversifying, at least not into shipping. What had happened was this: the owner wanted to buy a big yacht for himself and his family; the yacht was put on the company’s books and this was leaked to a reporter, deliberately or otherwise, who made a news item out of it. Soon after, this company went bust, one more in the sorry saga of well-known organisations that could not survive, despite the vast amounts of money they raised from the public. All it did was make the promoters rich in the short term at the cost of a lot of gullible investors.

This was in the late 1980s, when the markets were in their first big boom after Rajiv Gandhi liberalised the economy. Since then, we have been through several boom-bust cycles. Much has changed on the investment scene — regulatory bodies have been set up, institutions have been strengthened, checks and balances have increased, companies have become more professional and investors have become savvier. With increasing media coverage, there is more news floating around too. But the one thing that has not yet totally disappeared is the tendency of promoters and owners to take their shareholders for granted.

What else to infer from the fiasco of the Satyam-Maytas deal in which the promoters of the former used the investor funds lying with them to purchase the latter company? Here is a case of a listed company, Satyam, using all the cash lying around with it to buy out another company Maytas (Satyam spelt backwards) which by a happy coincidence is owned by the son of the former company’s chairman. The promoter’s own stake in Satyam is less than 10 per cent, but that did not stop him from taking this monumental decision.

It gets better — the directors on the board of Satyam, heavyweights in the world of commerce, far from raising an objection to this cunning plan just nodded their heads and went off for a well-deserved lunch. The luminaries on the board include a Silicon Valley entrepreneur and the head of a leading business school; I would love to see this becoming a case study for its high-flying management students. To think that Satyam was the recipient of a good governance award recently.

As we know, the script did not work out exactly the way the bosses of Satyam envisaged it. The American markets, where Satyam had listed very proudly, hammered the script, bringing it down to half its value in one session. If you want to be part of the US investment scene, you have to follow some very stringent rules; besides, the investors are a very demanding lot and will not take kindly to being conned.

In India, the evening business shows raised questions, the press the next day was sharply critical and by the time the market opened, the investors had decided to sell. The media is calling it “shareholder activism” but in fact in normal circumstances, retail shareholders have very limited opportunities to make their voice heard. As for big investors, which have the clout to affect the market price, many companies have government financial institutions as their biggest shareholders; it is more a case of passivism than activism — the interest of the small investor is farthest from their minds.

If that were not the case, wouldn’t we have heard some objections to examples of the cavalier attitude of many companies towards shareholder funds? The flamboyant lifestyles of our tycoons, the personal aircrafts, the lavish parties — how much of this comes from company money and how much from their own pockets? Or take executive compensation, for example — many promoters continue giving themselves hefty pay hikes every year. Are these justified?

Not every company indulges in these things and in recent years, a new class of entrepreneur has tended not to siphon off money. But there are many ways in which the shareholder is short-changed. Blatant abuse like in the latest case makes everyone sit up, but a lot of cheating goes unnoticed.

In the West, investor bodies are alert and activism can be brutal, though of course there is no dearth of abuses. Here, we have yet to reach that level of investor sophistication and regrettably, the institutions, private and public-owned, and analysts and brokers are part of a cosy ring that feeds off each other.

Perhaps there is a need for an “I am angry and will not take this nonsense” movement of the kind we just saw against politicians after the terror attacks. We have painted politicians as villains, but in recent years, businessmen have become holy cows; they too need to be told that they are custodians of the trust placed in them by millions of investors. The aftermath of the Satyam affair, where the company eventually had to back down and eat humble pie should be a strong message to promoters; as for investors, it is time to keep an eye on how your money is being used.