Current disclosures on pledged shares of promoters and related-party transactions of listed entities are helpful but fall short of providing a complete picture to minority shareholders.
We see a need for stronger corporate governance standards in view of the recent spate of allegations of impropriety in and revelations of ‘large’ debt of majority shareholders/promoters of a few large, listed Indian companies. The developments may warrant a closer look by regulators at additional disclosures on financials and the debt of related unlisted entities of listed companies and secondly, simplification of holding companies of promoters.
Additional disclosures on promoter entities important In our view, additional disclosures on financials and the debt position of all unlisted entities of promoters with a majority or significant ownership (26%) that hold shares of a listed entity and other meaningful unlisted entities (based on a the relative size of such entities to the listed entity) would help minority investors better assess the true health of Indian promoter groups.
Current disclosures on pledged shares of promoters and related-party transactions of listed entities are helpful but fall short of providing a complete picture to minority shareholders. Promoter shareholding in promoter’s name may be a good beginning We believe current disclosures on promoter holdings are inadequate as most Indian promoters hold shares through holding companies and not in their own names. Stock exchanges simply report the total number of shares held by promoters without disclosing the primary entity/(ies) that holds the shares.
There could be multiple levels of such holding companies; also, inadequate data on the debt (if any) or pledged shares of some such holding company/(ies) may give an incomplete picture to minority shareholders. As an aside, a retail investor will typically hold shares of companies under his/her name. Managing the impact of ‘exposes’ in the era of social media Indian regulators could well consider restoring circuit limits for all stocks.
Currently, F&O stocks do not have any limits for upward or downward movements and exercising their extant powers to suspend trading in a stock in an extraordinary event. We understand that there is a fine line between maintaining the sanctity of the market and over-enthusiastic regulation but we believe wild allegations and equally wild market responses serve little purpose and probably dent the confidence of small investors in the market.
We note that the US Securities and Exchange Commission (SEC) and Hong Kong’s Hong Kong Exchanges and Clearing Limited (HKEX) regularly suspend the trading of securities in the case of extraordinary events and/or concerns about the financials of a company. Role & responsibilities of boards—stricter standards and penalties The regulator may be compelled to implement stricter standards for directors of companies entrusted with financial propriety.
We do not believe that promoters alone can be held responsible for financial impropriety when a purportedly independent board of directors oversees the conduct of the management/promoters. The threat of regulatory action (including complete ban from all directorships) will either spur directors to exercise their fiduciary responsibility better or quit boards of companies that appear to violate the spirit of corporate governance.
Edited extracts from Kotak Institutional Equities Research