The Hindu Business Line : Don't short-change small shareholders

"SMALL investors may lose direct access to markets" says a report (Business Line, July 18). This reported move, apart from being retrograde, does not say much of the `vision' of the authorities concerned and needs to be opposed strongly. The Chairman of the High-Level Committee on Corporate Governance, Mr Naresh Chandra, has said that the Government is thinking of restricting direct access to the capital market for small investors. He has expressed concern that in spite of increased regulation, "it is the very minority investor who takes the maximum hit in any scam".

The argument is that the small shareholders put their money in acquiring shares without any substantial knowledge of the functioning of the stock market.

He has further raised the point of the cost of sending annual reports to small shareholders for reaching this decision. Instead, he feels that the small investors should put their money in mutual funds. These are not sound arguments.

Importance of small shareholders

Small shareholders, in a way, provide oxygen to the market. Only recently, the authorities were euphoricabout the massive participation of the small shareholders in responding to the Maruti IPO. Coming closely after this, the current move seems a sharp `U turn'.

No empty rhetoric

Advocates of corporate sector never tire of talking about the merits of the Anglo-Saxon concepts of company law. Scams cannot be used as a reason for depriving the small shareholders their right to access the capital market.

Even with the best of regulations, scandals will continue to occur and investors will continue to lose. Is it not the duty of the regulators to spread investor education?

For instance, the unified Financial Services Authority of the UK. Ever since its inception, it has accorded priority to consumer education. If small investors are not knowledgeable enough to operate in the stock market, education needs to be imparted. Barring the small investor from buying shares is not the way out.

The manner in which the regulatory organisations authorities dealt with the `vanishing companies' is a pointer to the regulatory inadequacies. Even after several years, the authorities have not been able to punish any one involved in this scandal.

No wonder small investors deserted the market. Institutional and small investors are equally important. While the share of the former in the stock market is going up continuously and that of the latter declining, they cannot be eliminated. That would be the worst treatment to the market economy.

Corporates don't brook any opposition

Perhaps, the lack of warmth for small shareholders is because they have begun to take active interest in company affairs, especially after the recent corporate scandals in the West. Increased shareholder activism has made company chairmen, their directors and top officials uncomfortable.

While institutional investors make `noises' behind closed doors, the small shareholder comes out openly in exercising his voting rights at annual general meetings, questioning the wrong strategies and extravagant expenditures of the company bosses. While institutional investors deal with large volume of shares, it is other people's money they are handling, while for small shareholders, it is their own. If the British authorities are toying with the idea of banning small shareholders from attending annual general meetings, Indians authorities have gone one step ahead. They are closing the doors of the stock exchange for small shareholders.

Public opposition to the move in UK

The move of Sir Richard Sykes, who recently aired the idea of banning small shareholders from attending annual general meetings, has justifiably met with stiff opposition in the UK. Newspapers without exception voiced their opposition to such a move. Mr Claude Bebear, chairman of the French insurer, Axa, even made a suggestion that those holding shares for a longer duration will have greater voting rights.

Thus, a person who bought a company's share at its formation and has been holding it during its formative years will have a greater say in the company's meetings in terms of votes.

When shareholder activism abroad is taking such reformist measures, it is disappointing to note that in India, the authorities are trying to put the clock back on flimsy grounds. It may not be too wise to depend on institutional shareholding and deprive the rightful role of small shareholders.

Move with the times

There have been several cases of active participation of the NGOs and environmental organisations in the annual general meetings of companies which have polluted the atmosphere.

These activist group(s) buy one or two shares in the company and attend the annual general meeting to highlight the wrong doings of companies. In this light, it will be unrealistic to think of shunning shareholders from stock market operations.

No doubt, small shareholders, some of them knowledgeable in their own fields and anxious to see that the companies in which they have put their hard-earned savings do not run into difficulties, point out the company's wrong-doings and raise awkward questions at the AGMs.

This may prove to be uncomfortable for the smooth operations of the company. There may be scandals in several top companies, giving the CEOs and top bosses uncomfortable time at the AGMs; shareholder activism may even put the concerned regulators on the mat.

Media apathy

As soon as the comments of Sir William Sykes were revealed in the press, several writers in the UK opposed the move to deny a role for small shareholders. However, there has been very little reaction to this from the Indian media.

It is equally disappointing that the several investors' fora in the country have not even reacted on the part of a regulator's committee.

The need of the hour is to ensure a wider participation in market operations. The stock exchanges, the regulator and the government must think of measures for spreading investor education and recommendations for improving the regulatory efficacy.

(The author is former Executive Director, LIC.)

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