Concentrated holdings the order of the day

D. Sampathkumar

FROM being just a vegetable oil company that it set out to be decades ago, Wipro has come a long way. It can now legitimately claim to be a company at the cutting edge of technology with a strong presence in the information technology sector, not to mention medical electronics and fluid coupling devices. But in one respect, it continues to be not too different from the days of its more humble beginnings.

It started out as a closely-held company. But decades hence, even after a stock exchange listing and market capitalisation that puts it among the bluest of the blue chips, it continues to be a closely-held company. As a report appearing in this newspaper some time ago revealed, a mere hundred odd shareholders account for practically the whole of the company's stock.

The phenomenon of concentrated ownership is not peculiar to this company alone. There are a number of companies in the IT sector or rather, the `convergence sector', with levels of concentration of stock ownership that are close to Wipro's, if not of quite the same magnitude. Why should this be so? An answer is to be found in the very nature of this business and the forces of entrepreneurship unleashed by it.

The convergence sector, generally, and information technology, in particular, is of relatively more recent origin. Entrepreneurs currently on view are, by and large, first-time entrants into the business. In a way, it is a tribute to their entrepreneurial spirit that they were the first ones to spot the potential of this business and entered into it. Equally, it is a reflection on the blinkered vision of the traditional business community that they never saw in computer software, a business opportunity of global dimension that the Narayana Murthys of the world spotted.

For the harsh reality is that, with the exception of Tatas with their Tata Consultancy Services, other large industrial houses did not quite wake up to the potential in this business until it could be ignored no longer. Wipro, too, no doubt is an early entrant. But it hardly qualifies as a Birla or a Singhania in terms of conglomerate character of business interests. On the other hand, it is only now that one hears of large industrial houses setting up information technology businesses. But that is another story.

The relatively nascent origin of the IT business and the inexperience (in entrepreneurship) of those who entered this field has meant that promoters' stake in the aftermath of public listing is quite high in the total capital of the enterprise promoted by them. It is early days yet for any dramatic restructuring of ownership pattern. But the high initial stake of promoters could be sustained in the future as well, for a variety of other reasons.

For one, the business has generated enormous profits. The average return on net worth in this industry is in the region of 30 per cent, while in the traditional sectors of the economy any return in excess of 15 per cent should be construed as an extra ordinary achievement. So, even after allowing for generous pay outs by way of dividends, these enterprises could plough large sums of money back into the enterprise, rendering recourse to fresh external funding unnecessary.

Complementing the above situation is the nature of the business itself, which is not as capital-intensive as an integrated steel plant or an oil refinery. The possibility of the investment needs of these enterprises outstripping internal accruals, therefore, is remote. To sum up, then, concentrated shareholding in favour of promoters of these enterprises is here to stay.

Companies in the more traditional sectors of the economy are, of course, somewhat differently placed. They evolved in an era when capital was scarce. The most difficult thing in those days was to get a licence from the Government to manufacture a product. In the manner of a school-boy spreading his investment bets across a range of numbers on the roulette wheel operating outside the school compound, entrepreneurs of an earlier era would put in their bids for manufacturing licences across a number of projects, hoping that some of them at least would find favour with the Government.

The moment they got the licence, it was only natural that they should scramble to get the project up and running. If funds had to be tapped from the market they went ahead and did it, as every day lost was an opportunity lost in making money. It was after the era of shortages, and a licence to produce any item was virtually a licence to print money. So the possibility of diluting the promoters' stake did not worry them too much.

They did not also have to fear a loss of management control in these companies despite a less than majority ownership stake. The market for corporate control did not exist even in management text books those days, leave alone in the real world. In any case, shareholding outside of promoters' stake was largely in the hands of financial institutions. If a promoter had a successful track record of managing the heads of financial institutions or their political masters, there was nothing to worry.

But things are changing. The old economy companies are increasingly coming under pressure to generate reasonable returns. Management now runs the risk of investment holdings becoming worthless if the company is not performing in the product market place. The fact that management control has passed on to second and third generations of the original promoters with its implication of more hands at the helm is not also helping the cause of a harmonious management of companies during what are undoubtedly turbulent times.

Something had to give way, and we are witnessing signs of it. We now see evidence of restructuring of ownership along divisional lines, and control is being ceded in favour of a new entrepreneur -- often a foreign enterprise. One would not be surprised if some of the new rich entrepreneurs from the IT sector decide to try their hands at manufacturing business and attempt to take over something belonging to promoters of a bygone era. That is when the market for corporate control could be said to have really opened up.