The Supreme Court-appointed Special Investigation Team (SIT) on Black Money doesn’t seem convinced that all’s well in the world of Participatory Notes (P-notes). This paper reported last week that the SIT had asked for the P-note data, with details of beneficial owners and transfer trails.
Coming after public assurances by the chairman of the Securities and Exchange Board of India (Sebi) and a couple of rounds of “tightening” of norms for such instruments, there seems some merit in the lingering suspicion on unaccounted money belonging to promoters and their friends continuing to find their way into Indian stocks.
The value of assets held through P-notes, Rs 2.16 lakh crore, seems small in relation to the overall market capitalisation (around Rs 100 lakh crore on the BSE) and assets held by foreign portfolio investors (Rs 25 lakh crore). However, not so small when compared with another metric, bad debts in the system. P-note assets are about a third of the bad debts of the banking sector. This is not to suggest every defaulting promoter has taken money out and put it in P-notes but it is good to be sure that they have not. We don’t have enough data to conclude one way or the other. Let us hope the SIT would be able to throw some light on this.
The support from these institutions, one of which had acquired the shares only months before the transaction, raises the question of whether there was a tacit understanding or an agreement between the promoter and these institutions.
In the second case, there were pre-meditated and agreed transactions, reported as market transactions, between foreign funds and the promoter. Documents gone through by this writer showed an array of conditions and rights having been agreed upon by both parties. The records also showed that while the investment happens through a foreign vehicle, executives positioned in the local sister concern are in constant touch with the promoters to help structure the deal. However, the broader market is blissfully oblivious of these arrangements.
Curiously, one foreign vehicle was common in both the cases discussed here.
The issue here is whether sale of promoter stake in such a manner can be considered a real divestment. May these shares be counted for the determination of minimum public shareholding? Should these shareholders, apparently in some covert partnership with the promoters, vote on related-party transactions that have an impact on the promoters?
A few months earlier, Sebi had a discussion paper on the affirmative rights of investors and the impact of these on control. After its recent board meet, another discussion paper on compensation agreements between promoters and private equity funds will close for comments on Tuesday. Sebi has sought comments on bringing such compensation agreements under disclosure norms and making these subject to the approval of board and shareholders. This move itself was triggered by one stark case coming to light.
Instead of dealing with various kinds of promoter deals and hidden agreements in a piecemeal manner, Sebi and other agencies should work on a comprehensive framework that addresses anti-money laundering, corporate governance and minority investor protection issues in toto.
Coming after public assurances by the chairman of the Securities and Exchange Board of India (Sebi) and a couple of rounds of “tightening” of norms for such instruments, there seems some merit in the lingering suspicion on unaccounted money belonging to promoters and their friends continuing to find their way into Indian stocks.
The value of assets held through P-notes, Rs 2.16 lakh crore, seems small in relation to the overall market capitalisation (around Rs 100 lakh crore on the BSE) and assets held by foreign portfolio investors (Rs 25 lakh crore). However, not so small when compared with another metric, bad debts in the system. P-note assets are about a third of the bad debts of the banking sector. This is not to suggest every defaulting promoter has taken money out and put it in P-notes but it is good to be sure that they have not. We don’t have enough data to conclude one way or the other. Let us hope the SIT would be able to throw some light on this.
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Apart from the outrightly illegal activity of roundtripping, promoter-foreign investor relationships of certain other natures, which fall in a grey area, have come up in recent weeks. First, the case where a couple of foreign institutions voted in favour of a resolution to pay a non-compete fee to the promoter. This happened despite proxy advisory firms and the Association of Mutual Funds in India openly opposing the move as ‘anti-minority investor’.
The support from these institutions, one of which had acquired the shares only months before the transaction, raises the question of whether there was a tacit understanding or an agreement between the promoter and these institutions.
In the second case, there were pre-meditated and agreed transactions, reported as market transactions, between foreign funds and the promoter. Documents gone through by this writer showed an array of conditions and rights having been agreed upon by both parties. The records also showed that while the investment happens through a foreign vehicle, executives positioned in the local sister concern are in constant touch with the promoters to help structure the deal. However, the broader market is blissfully oblivious of these arrangements.
Curiously, one foreign vehicle was common in both the cases discussed here.
The issue here is whether sale of promoter stake in such a manner can be considered a real divestment. May these shares be counted for the determination of minimum public shareholding? Should these shareholders, apparently in some covert partnership with the promoters, vote on related-party transactions that have an impact on the promoters?
A few months earlier, Sebi had a discussion paper on the affirmative rights of investors and the impact of these on control. After its recent board meet, another discussion paper on compensation agreements between promoters and private equity funds will close for comments on Tuesday. Sebi has sought comments on bringing such compensation agreements under disclosure norms and making these subject to the approval of board and shareholders. This move itself was triggered by one stark case coming to light.
Instead of dealing with various kinds of promoter deals and hidden agreements in a piecemeal manner, Sebi and other agencies should work on a comprehensive framework that addresses anti-money laundering, corporate governance and minority investor protection issues in toto.