Curious case of Escorts' largest shareholder

Trust holding 30% stake allows promoters to control far more voting rights than the shares they own, say experts; firm says it's all legal

Who is the largest shareholder of tractor maker Escorts? It is not any of the Nanda family members. A man in his 80s named Surendra Ambalal Dave holds that title.

A former chairman of the Securities and Exchange Board of India (Sebi), he holds 37.3 million Escorts shares in his capacity as the trustee of Escorts Benefit and Welfare Trust, according to filings with the exchanges. This is 30.43 per cent of the capital. A clutch of Nanda family members and entities owned by them own 12.58 per cent.

In addition, Dave owns 10,000 shares in his personal capacity. He is also listed as an independent director (ID) of the company.

The multiple hats worn by Dave and the role played by the trust he is custodian of has come under the scanner of corporate governance experts. According to the trust structure, the company itself is the beneficiary of the trust.

The decisions of the trustee are guided by the board. The board is in turn controlled by the promoter, by virtue of holdings, including that of the trust. The voting record at Escorts showed the trustees have been voting along with promoters on most resolutions.

This has created a circular structure, where promoters are exercising control over 40 per cent of the voting rights without actually owning most of these shares.

There is also the question of loss of dividend distribution tax during the payment of the dividend to the trust, which comes back to the company, as it is the beneficiary of the trust.

In response to a questionnaire sent to Escorts, Ajay Sharma, group counsel and company secretary, said: “The referred trust is in existence with requisite statutory compliances & approvals. It’s a separate and distinct legal entity, governed and controlled through its constituting documents under the prevailing and applicable laws.”

J N Gupta, managing director, Stakeholders’ Empowerment Services (SES), said: “Although the Trust came into being post approval of a scheme by the High Court of Punjab and Haryana, the entire structure has created an ownership structure which is neither compliant with law nor gives equal rights to all shareholders in proportion of their shareholding.”

Such disproportionate rights — directly or indirectly, factually or in fiction, exercised or not — to promoters need to be curbed, he says.

“Either trust shares shall not be allowed to be voted or trust shares must be cancelled or distributed to shareholders proportionately.” The restructuring allowed the Nanda family to exercise control over 40 per cent of the shares without making an open offer, as the scheme was done through a court process. Additionally, it amounts to exclusive control over property (trust shares) which never belonged exclusively to the Nanda family, Gupta contended.

SES has also said Dave cannot act as an ID on the board. “One fails to understand how a person of repute like Mr Dave, who has been chairman of Sebi, has certified himself to be independent despite him being shown as a promoter shareholder by the company,” Gupta said.

S C Bhargava, another ID, is also listed as a promoter shareholder by Escorts.