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Market Governance

The greed of Indian corporate promoters is unparalleled. There is a saying in the stock market that promoters recover their investment by bringing in their first IPO in which they sell their shares to the public at highly inflated prices. This saying has more than a grain of truth in it; almost all share issues are priced at many times of their face value; typically, a share with a face value of Rs.10 is offered to the public at Rs.600-Rs.700 

Devendera Saksena |


The corporate sector is on a roll in India. Public participation in corporates is at an all-time high, what with the number of demat accounts reaching 10 crore in August 2022, from 4.09 crore in March 2020. High participation of retail investors, enabled the Indian stock market to withstand the pressure of the sell-off of around Rs.1.25 lakh crore worth of shares by Foreign Institutional Investors (FIIs), in the year gone by. Retail investors are making their presence felt in the stock market, accounting for 52 per cent of daily transactions – far ahead of Domestic Institutional Investors (mostly mutual funds) (29 per cent), and FIIs (19 per cent). 

However, almost too often, retail investors get a bad bargain. After the one-way bull run from April 2020 to October 2021, which took the Nifty from 7,511 to 18,604, markets have turned highly volatile, and many small investors have lost money. Many a times, small investors have been fooled by outrageous schemes and at other times they have lost money in day trading, and by speculating in derivatives – which is beyond the competence of most investors, except the most savvy. 

However, more often than not, small investors lose their shirts, as a result of fraud and/or manipulation of share prices by promoters. Procedural loopholes, easy manoeuvrability of markets and the poor moral fibre of regulators first came into focus in the Harshad Mehta Scam of 1992, involving Rs.4,000 crore, but no lessons were learnt – the Ketan Parekh scam, involving Rs.40,000 crore, on similar lines, followed in 2001. 

With wholescale computerisation of stock exchanges, realtime information, along with advanced analytical tools became available to regulators, and it was hoped that there would be no major scams in future. But scamsters also adopted advanced technology – the NSE Colocation Scam, involving Rs.70,000 crore, perpetrated since 2010, was detected only six years later. Several other scams, like the UTI scam and the Karvy scam defrauded hapless investors of thousands of crores of rupees.

The greed of Indian corporate promoters is unparalleled. There is a saying in the stock market that promoters recover their investment by bringing in their first IPO – in which they sell their shares to the public at highly inflated prices. This saying has more than a grain of truth in it; almost all share issues are priced at many times of their face value; typically, a share with a face value of Rs.10 is offered to the public at Rs.600-Rs.700. Such high valuations are often illusory; shares of even reputed companies like LIC and SBI Cards traded much below their IPO price, the day after their IPO closed. 

Over-valued shares ensure that there is no space for investors interested only in dividends. The only way an investor can make money in shares is through an appreciation in share prices, which is the reason for the frenzied activity in the stock market. Shares of Adani Enterprises Ltd. (AEL), which was in the news recently, had a face value of Rs.1, but were being offered to the public at prices ranging between Rs.3,112 and Rs.3,276. Significantly, AEL traded much below this price band during the FPO period and touched a low of Rs.1,017, the day after the FPO closed. Inexplicably, many publicly-owned financial institutions bought AEL shares at the FPO valuation. Thankfully, Mr. Adani aborted the AEL FPO, putting a lid on an unsavoury controversy.

However, l’affaire Adani has revealed another modus operandi for getting hold of public money i.e., by selling shares to public institutions like banks and LIC at fancy prices in private sales. Defending themselves against the Hindenburg Report, the Adani Group had said that most of the allegations in the Report had already been disclosed by the Group in their offer document. It, therefore, defies reason why public institutions, with their army of analysts, were not able to draw proper conclusions from adverse facts that were in common knowledge, and had thereafter, foolhardily embarked on a course of action, which would have caused loss of public money, had the AEL FPO sailed through 

To understand the recent happenings in the share market, one should also examine the role of the corporate regulator, Securities and Exchange Board of India (SEBI), which is mandated to ‘protect the interests of investors in securities and to promote the development of, and to regulate the securities market…’ For added efficacy, SEBI Act has granted SEBI quasi-legislative, quasi-judicial and quasi-executive powers; SEBI drafts regulations in its legislative capacity, conducts investigation and enforcement in its executive capacity, and passes orders in its judicial capacity, making it Brahma, Vishnu and Mahesh for the corporate sector. 

But in l’affaire Adani, SEBI was found wanting; firstly, in giving the go-ahead to the Adani share issue, and then, in not warning the public about potential risks, even after the Hindenburg Report came to its notice. Otherwise also, except in the most egregious cases, SEBI hardly ever penalises the management of a company. Rather, SEBI often takes punitive actions like moving a company’s share to Z-category, for not complying with LODR requirements, which is punishment for shareholders, and not for management. The share market can attain its full potential only with better vigilance and more proactive action from SEBI. 

  Prior to SEBI, Controller of Capital Issues, fixed the price at which shares could be offered to the public. After the SEBI Act came into force, a company had to route its IPO prospectus through SEBI, which was expected to exercise a modicum of control over pricing of shares and related matters. However, in an ecosystem where overpriced shares are the norm, offer prices of new issues have touched the sky, and promoters have often made merry at the cost of investors. 

Corporate promoters seldom miss a chance to make easy money. After the global meltdown of 2007-08, to rejuvenate the economy, the Indian Government followed a policy of easy loans to corporates. Tens of lakhs of crores of rupees were lent by banks to corporates, only to vanish in thin air. Speaking in the Rajya Sabha in December 2022, the FM informed the House that during the last five years, banks had written-off bad loans worth Rs.10,09,511 crores. The corporate system has promoted fugitive billionaires like Vijay Mallya and Nirav Modi on one side; and on the other, sophisticated operators who gave banks a haircut of 69 per cent in Insolvency and Bankruptcy Code (IBC) proceedings.

 One consequence of the Hindenburg Report is that it has re-started a public debate on corporate governance issues in Indian companies. Kumar Mangalam Birla committee (1999), Naresh Chandra committee (2002) and the Narayana Murthy committee (2003), had rued poor corporate governance in India. The practice of having Independent Directors on Board of public companies, started as a result of the recommendation of these Committees.

 Inter-alia, Independent Directors have the following duties: 

– Satisfy themselves on the reliability of financial information and financial controls; 

– Protect the interests of all stakeholders, mainly minority shareholders.

 Currently, if a listed company has an Executive Chairperson, one-half of its Directors are Independent Directors. Still, most Independent Directors, being management appointees, invariably toe the management line, failing to achieve the purpose for which they were appointed. Perhaps, we can take a leaf from US regulators. New York Stock Exchange requires that all listed companies should have a majority of Independent Directors; the Boards of three prominent US corporates, McDonald’s, Kraft Heinz, and Transocean, comprise only of Independent Directors. 

Good governance is essential for corporates. The plummeting fortunes of the younger Ambani brother, who separated on an equal footing from his elder sibling, demonstrates the ill-effects of poor corporate governance. Of course, only shareholders and employees have suffered from the Anil Ambani Group companies’ bankruptcy; court proceedings, in London in 2020, revealed that the younger Ambani was still living in relative comfort. Again, small investors kept away from the Adani FPO because of credible allegations of misgovernance. At a time when the Government expects the corporate sector to raise its share of funds for the country’s development, it is necessary that the Government promote good corporate governance and dis-incentivise poor governance – necessary steps, which would prompt common people to invest in shares. 

Finally, we can understand the convoluted goings on in the stock market only if we remember: “The main purpose of the stock market is to make fools of as many men as possible.” (Bernard Baruch, American Financier and Statesman)

(The writer is a retired principal chief Commissioner of Income tax)