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A plea for a better deal for investors
December, 14th 2006
How about calling upon corporates to pay user charges for the capital they have mobilised?

Time was when banks and financial institutions (lenders) had to put up with endless jokes at their expense "you borrow in lakhs, you are in trouble with the bank; you borrow in crores, the bank is in trouble with you." The Government, increasingly aware that lenders were frustrated by the legal process that came in the way of realising their securities on default by borrowers, ushered in the Securitisation Act a couple of years ago that, among other things, enables them to realise their dues without legal intervention.

The lenders have since been breathing easier but many of them have had willy-nilly to clean up their balance-sheets, a euphemism for writing off their Non-Performing Assets (NPAs), or bad debts.

The bottomline now is that the lenders' balance-sheets, by and large, appear healthier and cleaner, partially because of the fear of the Securitisation Act which rightly refuses to mollycoddle defaults, as the Sick Industrial Companies (Special Provisions) Act, 1985 did and partly because of the huge provisioning they have had to make.

One wishes the Government would intervene again, this time for another set of players in the capital market the equity investors. It would be almost tantamount to an abdication of duties should the government stay away from disciplining the equity market on the specious ground that investors have to suffer the consequences of having in the first place ventured to play with fire.

True, investment in equity is, by definition, the riskiest, just as the rewards therefrom are potentially the highest. And the government cannot possibly do anything specific to sober down the secondary market. Indeed, no such step is warranted because the secondary market has inbuilt mechanisms to find its equilibrium. But the primary market is a different kettle of fish.

The listed companies themselves are not players in the secondary market and, therefore, do not get a share of the spoils of a bull-run directly, except when they decide to ride piggyback on the boom in the secondary market and make rights or public issues. But companies are players in and beneficiaries of the primary market. It would therefore be wrong to maintain a hands-off policy with regard to the primary market.

It is all very well to allow companies making a public issue to discover the price through the book-building mechanism, in which the QIBs (Qualified Institutional Buyers) alone have a say, and ask the retail investors to tail them. But the price thus discovered often enables the company to collect a considerable premium, which is often mind-boggling. Shouldn't the government, for starters, mandate the payment of user charges in the form of interest at the prevailing bank rate, at least on the premium portion?

This suggestion should not be shrugged off on the ground that equity investors have to collect their rewards from the secondary market and not from the company, a disingenuous argument indeed. Besides being rational, this would also have the effect of sobering down the issue price. When one can cavil at the supply of free electricity and water to farmers, surely they should have no objection if corporates are called upon to pay user charges for the capital they have mobilised.

True, interest to equity-holders would be a novelty, but so be it. The practical difficulty in identifying the shares that have borne different premiums can be easily overcome by reverting to the regime of allotting distinctive numbers to shares that was abolished in the wake of ushering in of the depositories regime.

In addition the government should also make the offer of a safety net by promoters mandatory; it is now only optional.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)

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