The Securities and Exchange Board of India (SEBI) has abolished equity shares with differential voting rights, perhaps taking a cue from the Companies Bill 2008. That there have been a few takers for the dispensation that appears patently iniquitous to many could be the reason why it has been abandoned. Well, shares with differential voting rights may be behind us but shares carrying disproportionate voting rights have been the norm for ages. And yet, neither our policymakers nor our regulators seems to be the least perturbed about it. Contribution matters When it comes to voting in the International Monetary Fund (IMF), what matters is one’s contribution to the IMF’s corpus. The one who has contributed more gets more voting rights. This is as it should be, but ironically it is the target of critics’ barbs. Their refrain is that the US, thanks to its money power, has come to control the IMF. May be not everything is hunky-dory with the IMF but that does not mean its voting system is also wrong. Voting rights ought to be in proportion to one’s contribution financially. One-man-one-vote principle must hold sway only in political democracy; corporate democracy would work only if it respects the financial contributions made by the shareholders. Do we in India respect the contributions made by the various shareholders? The answer is an emphatic ‘no’. Promoters hog the lion’s share of voting with a minuscule contribution in financial terms vis-À-vis what is brought to the table by non-promoter shareholders. Let us say a company is started with a capital of Rs 18 crore brought in by the promoters at par, that is, in the form of shares with a face value of Rs 10. Soon it makes a public issue of the same Rs 10 shares but at a mind-boggling premium of Rs 500 and collects Rs 1,020 crore. It would be apparent even to a layman that the non-promoter contribution is more than 55 times the promoter contribution but this is not going to be reflected in their inter se voting rights. And the reason is not far to seek. The increase in the paid-up share capital of the company is a measly Rs 20 crore despite a massive infusion of funds by the non-promoter shareholders. Voting structure The bottom line is a lop-sided voting structure — 47.37 per cent of voting strength hogged by promoters with a financial contribution of just 1.73 per cent with the non-promoters being fobbed off with a voting clout of 52.63 per cent on a financial contribution of 98.27 per cent, if we take Rs 1,038 crore (Rs 18 crore + Rs 1,020 crore) as the equity contribution made in aggregate. How has this apparent inequity been perpetuated and perpetrated? Well, by taking advantage of the law which says that while finding out the voting rights, one’s contribution to equity capital account alone would be taken into account and not one’s contribution to the securities premium account, which would go abegging just as it goes abegging while finding out the dividend entitlement. It is amazing that the blatant inequity against non-promoter shareholders has not exercised the minds of our policymakers and regulators. The supposedly enlightened QIBs with deep pockets too do not seem to be unduly perturbed because for them what matters more is financial rewards — which consists in capital gains conferred by the bourses rather than the dividend paid by the company — and not control of a company through exercise of voting rights. The recent government move directing all listed companies to increase public shareholding to at least 25 per cent at best is a feeble and small attempt at addressing this problem. While dividend may be payable per share irrespective of the quantum of premium on each share, voting rights ought to be with reference to what one has brought to the table or, if you like, to the coffers of the company. If this proposal, rooted in fairness as it is, were accepted, many of our companies may come to be controlled by the QIBs but that is no reason to oust them or keep them away from power. As it is, promoters hog the voting power thanks to: There being no voting rights on shares represented by Global Depository Receipts (GDRs) or American Depository Receipts (ADRs) on the facile plea that GDRs and ADRs are not shares until such time they are converted into their underlying shares in the manner prescribed; There being no voting rights on Foreign Institutional Investors (FIIs) becoming shareholders through the secondary market; and There being no voting rights on the premium component of one’s contribution to the company’s equity. While the first two distortions do not bedevil the voting structure of all companies given the fact that GDR/ADR are esoteric products not available to all companies and the FIIs patronise but the blue-chip stocks, the third one affects all companies secularly. Conferment of voting rights in proportion to one’s contribution to the coffers of the company would incidentally have the effect of promoters scaling down their vaulting ambitions in the matter of premium fixation. A new kid on the block with nothing to show by way of production leave alone profits would not have the gumption to charge a premium of Rs 420-440 on its Rs 10 share. Price discovery The primary market reforms brook no delay. Its main weakness lies in the price discovery process and the resultant premium fixation. In a milieu of extreme licentiousness, even loss-making companies or companies that are yet to produce even a unit of product/service ask for premium without batting an eyelid. Mandating payment of minimum user charges on premium collected would go some way in scaling down the premium. But what would flutter the promoters’ dovecots would be the conferment of voting power in proportion to one’s contribution to the company’s coffers. To be sure, non-promoters do not take their voting rights seriously so much so that it is possible that the promoters may continue to call the shots despite being in the minority. But when it comes to the crunch or when a scandal breaks out, even non-promoter shareholders rally round the company and train their guns at the delinquent promoters. The policymakers then ought to be more exercised about the phenomenon of shares carrying disproportionate voting rights rather than about shares carrying differential voting rights which at least had a noble motive — to reward the retail investors with a higher dividend for forsaking voting rights
