The Hindu Business Line : Promoter, public disconnect

In the case of a company whose projects have not gone on stream, thus having nothing to show by way of profits, should there not be parity between the promoter and the public in the matter of price paid per share?

It is by now common knowledge that while the Indian bourses have an excellent system in place, not all is well with our primary market. Concentration of lion's share of shares in the hands of promoters, not uncommonly in the region of 85 to 90 per cent, thus making a mockery of the concept of listed company and mind-boggling premium charged on IPO even by loss-making companies are the two maladies that need to be addressed urgently.

The promoter invariably subscribes to the shares at the inception of the company at par, but when the company makes a public issue, he asks for an unconscionable price from them, which for good measure is validated by the so-called price discovery mechanism called book-building.

Big price, small stake

Let us take a typical scenario. The authorised share capital of a company is Rs 100 crore divided into shares of the face value of Rs 10 each and the promoter forks out Rs 80 crore for an 80 per cent stake at par. So far so good. But soon he launches a public issue where he contrives to issue the shares at, say, Rs 450 each, translating into a whopping premium of 4400 per cent.

The shares offered to the public are just 20 per cent of the total capital of the company, but these are the ones that bring disproportionately huge cash into the coffers of the company. As against Rs 80 crore brought in by the promoter for an 80 per cent stake, the public has brought in Rs 900 crore for a measly 20 per cent stake thus effectively vindicating Pareto's law in the context of capital market too.

Not for start-ups

In the case of a running company with track record, appropriate premium from newcomers is perfectly justified mainly on the ground that the existing shareholders should be compensated for the dilution in the EPS as well as in the market value engendered by the larger number of shares.

No such case can be made out for a company whose projects are just in the anvil or whose projects have not gone on stream, thus having nothing to show by way of profits. In such circumstances, should it not be the law that there must be parity between the promoter and the public in the matter of price paid per share.

In the above example, doesn't fairness require that the promoter should also pay Rs 450 per share if this is what he is asking the public to pay? In other words, before the company is allowed to offer 20 per cent stake to the public at Rs 450 per share, the promoter should be called upon to make good the deficiency - he should bring in Rs 3,520 crore to the company's share premium account.

Need for parity

This would set the record straight. The share capital of the company is Rs 100 crore, of which, the promoter's share is 80 per cent, that is, Rs 80 crore and the share premium of the company is Rs 4,400 crore, of which, the promoter has forked out 80 per cent, that is, Rs 3,520 crore.

If the public has brought in Rs 900 crore for a 20 per cent stake, the promoter should bring in four times this amount, that is, Rs 3,600 (80+3520) crore for an 80 per cent stake.

Such parity in treatment is warranted in respect of a company that is an unknown quantity albeit with a bright future. More importantly, it would bring some sense of proportion in price fixation. A promoter often is blithe about the mind-boggling premium the public pays. But the shoe would start pinching when he himself is called upon to pay the same premium.

Faced with this unappetising prospect, he may even sober down and scale down his vaulting ambitions. In a way therefore promoter public parity would have the salutary effect of stopping the buccaneer promoters on their tracks.

In the realm of infrastructure building, PPP (Public Private Partnership) has been working wonders. One hopes another PPP ( Promoter Public Parity) restores the confidence of the public in the primary capital market somewhat bruised by the recent occurrences.

S. MURLIDHARAN

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