The Hindu Business Line : Corporates, capital- or capitalist-owned?

A promoter may dilute his stake so much that other shareholders end up owning the company. Yet, he may call the shots, simply by being able to manage the company better than anyone and, more important, being so perceived by shareholders. If companies follow this principle, capitalism would have arrived, with precedence of `capital' over the `capitalist'. Maximising shareholder wealth becomes an objective function, transcending promoter family pulls and pressures, says Harish Damodaran.

"Management is the trustee of the shareholders' capital and not the owner."

THIS is one of the six `principles' that Infosys Technologies swears by in its "corporate governance philosophy". Echoing a similar claim is the Reliance Industries Vice-Chairman and Managing Director, Mr Anil Ambani. In a recent article for an economic daily, the younger scion of the Reliance Empire quoted his father, Dhirubhai Ambani, as having said that a modern enterprise "is not about ownership, it is about trusteeship. It is not about amassing personal fortune, but about enlarging the collective wealth of millions of shareholders".

Underlying these statements is a belief that in the Corporate India of today, ownership is not — or rather should not be — a fundamental concern for running a company. A company's promoter must subsume his role as `owner' to that of being a `manager' or `trustee' of the capital contributed by all shareholders (of which he may or may not be the dominant one). In other words, the individual capitalist is not as important as the company in which he has invested capital along with many other shareholders.

The promoter may, over the years, even dilute his stake to the extent that there would be other categories of shareholders who end up owning the company more than he does. Yet, he may still remain a `more-than-equal' shareholder, simply by virtue of being able to manage the company's fortunes better than anyone and, more important, being perceived so by the majority of shareholders. In case they feel otherwise, the promoter ceases to even be manager and is reduced to an ordinary shareholder.

Suppose most companies in the country were to one day adhere to this principle, capitalism would be seen to have truly arrived, wherein `capital' occupies precedence over the `capitalist'. Under the circumstances, maximising return on capital or shareholders' wealth becomes an objective function of the company, transcending brotherly spats or personal whims of the promoter and his family members. Capital, thus, acquires an impersonal form, presenting itself, as Karl Marx wrote, "as an independent substance, endowed with a motion of its own, passing through a life-process of its own".

It would be useful in this light to consider companies where this transition has already taken place and compare them to those, where the promoter calls the shots both as owner and manager. To start, take Infosys, where the promoters hold 21.98 per cent stake, which is lower than the 40.57 per cent share of foreign institutional investors (FII).

If to this, one adds the 7.93 per cent American Depository Shares (ADS) component and the 0.70 per cent stake of Non-Resident Indians/Overseas Corporate Bodies (NRI/OCB), the total foreign shareholding in Infosys now comes to 49.2 per cent.

In the event of the company's proposed `sponsored' ADS offering — involving the issue of new such shares to replace an equal volume of existing domestic equity shares — sailing through, the aggregate foreign stake in Infosys will touch 55.18 per cent. This would, in a sense, make Infosys no less `foreign' than a Hindustan Lever, where the current foreign shareholding is 64.5 per cent, including the 51.55 per cent of the foreign promoter (Unilever and affiliates)! But the significant point is that as a category of shareholders, the promoters today have a lower stake in Infosys than the FIIs.

The same can be said for Moser Baer or Satyam Computer Services. The promoters' holding in Moser Baer — which is the world's third largest manufacturer of recordable optical media (CDs, DVDs, etc) — is currently 16.39 per cent. Against this, the combined stake of FIIs (21.98 per cent), foreign direct investors (35.75 per cent) and global depository receipt holders (13.18 per cent) adds up to 70.91 per cent.

Similarly, in Satyam, the promoters hold only 16.23 per cent, against the 54.04 per cent share of FIIs. The aggregate foreign stake in the company, after accounting for ADS holders and NRI/OCBs, works out to 65.98 per cent. Like Infosys, Satyam is also contemplating a sponsored ADS issue that would take the total foreign holding in it to 75.42 per cent. So much for being an `Indian' IT company!

Besides these, one can also cite examples of Housing Development Finance Corporation (HDFC) and Spectramind. HDFC was founded by H. T. Parekh in 1977 and following his death in 1993, his nephew, Deepak S. Parekh took over as Chairman. However, the interesting fact about HDFC is that there is no promoter equity stake in it at all! In fact, HDFC's Web site emphatically states that the corporation "is neither owned nor controlled, directly or indirectly, by any person, entity or government and also does not owe allegiance to any promoter or promoter group".

The largest chunk of shares in the company is owned by the FIIs (63.15 per cent). The single biggest shareholder in HFDC today is the British insurance major, Standard Life, which, through two Mauritius-based investment arms, controls 14.35 per cent. Standard Life, incidentally, is also an 18.6 per cent joint venture partner of HDFC in HDFC Standard Life Insurance Company.

Spectramind is a somewhat different case. The business process outsourcing (BPO) company's original promoter was Raman Roy, before it was taken over by Wipro in July 2002. But even after becoming part of Wipro, Mr Roy continues to head Spectramind as President and CEO.

Likewise, with Sanjeev Aggarwal, who set up Daksh e-Services in early 2000 before selling it to IBM only last April. These probably represent extreme examples, where the promoter altogether ceases to be a shareholder (let alone owner) and yet continues to manage the affairs of the company. The crucial factor here is the faith reposed on them as veritable `trustees' of shareholders' (read the new owners) capital.

One may now look at companies where the promoters have no pretensions about according `capital' primacy over the `capitalist'; they manage the company without compromising one bit on ownership. In Reliance Industries, the promoters and `persons acting in concert' control 46.67 per cent, which is more than the aggregate stake of the other large shareholding category, namely the FIIs, at 22.85 per cent.

If this were seen as being peculiar to only the Old Economy companies, one needs to only consider IT majors such as Wipro and Tata Consultancy Services (TCS). In Wipro, the promoters hold 83.66 per cent, making it the undisputed property of Azim Premji. This is also true for TCS, where Tata Sons and the Jamsetji Tata and Navajbai Ratan Tata trusts together own 84.85 per cent.

So, what really explains the difference between the two sets of companies, going by the degree of willingness among promoters to dilute, if not relinquish, ownership control, even while continuing to hold the management reins? One way to see it is the circumstances under which these companies were formed. The promoters of the first set of companies were mainly `ordinary' middle-class folks — people with Big Ideas but with no real Big Capital of their own.

For them, establishing businesses required external capital infusion, particularly when a stage was reached where going global and up-scaling operations had become inevitable. This meant offering increasing stake in their companies to outside investors, to a level where the promoters were forced to relinquish control.

It is another point, though, that the outside investors here were mostly `impersonal' capitalists' having no enduring or emotional stake in the company. As long as the promoters running the company secured them sufficient returns on their capital, there would no tussle over ownership or unsavoury management disputes.

A Wipro or a TCS, on the other hand, basically represent Big Capital chasing Big Ideas. The promoters of these companies were never capital-constrained. Azim Premji, for one, had already made sizeable fortunes in vanaspati and laundry soap manufacturing before Wipro's foray into infotech in the 1980s.

TCS, on its part, was till recently the Tatas' exclusive cash cow. Indeed, it was the resource-raising arm for the Tatas to hike its stake in all other group companies to the minimum 26 per cent necessary for the promoters to block special resolutions. A classic instance of the `capitalist' using all available means to ward off any takeover threat by `capital', more so in the post-FII entry era!

Another aspect that probably distinguishes `capital-owned' companies from `capitalist-owned' corporations is the manner in which the promoters hold their equity stake. In Infosys, the identity of promoters is clear: The family members of Messrs N. R. Narayana Murthy, Nandan Nilekani, S. Gopalakrishnan and K. Dinesh.

Similarly, Moser Baer's promoters are Deepak Puri, Ratul Puri, Nita Puri and Sabena Puri. But when it comes to Reliance Industries, the promoters are Petroleum Trust, Sanchayita Mercantile Pvt Ltd, Florentine Trading, Velocity Trading, Ornate Traders, Amur Trading, etc.

It is ironical — perhaps telling — to see promoter control in capitalist-owned companies being manifested in the most impersonal organisational forms. There is no such ambiguity in the case of capital-owned companies where promoters accord no primacy to absolute ownership and neither do they need to devise complex cross-holding structures to attain this objective.