The Hindu Business Line : Non-merit subsidy to companies

The mega and by far the biggest public issue ever by DLF brings into sharp relief the urgent need for redress by the Government of some of the facets of equity caught in the time-warp and accepted as given and unchallengeable by the financial world. It must, however, be made clear that this is by no means an attack on DLF — it has been cited only as an example.

The price band of Rs 500-550 for every Rs 2 share, within which one is expected to bid, translates into a minimum premium of 24,900 per cent and a maximum of 27,400 per cent. In the ensuing discussion, it is being assumed that the final issue price would be Rs 550 per share. One doesn't know the precise justification for such a mind-boggling premium apart from presumption of the usual glib rationalisation that the future is bright. But surely there ought to be a here and now justification as well.

Opting out of grading

It is instructive to note in this connection that the company has not opted for grading of the issue. Given the fact that the issue represents 10.26 per cent of the fully diluted post-issue capital of the company, the value of the land bank, a criterion the realty sector sets store by, owned by the company ought to be Rs 93,811 crore at least.

True, premium has never been linked to the intrinsic value of the assets of the company but an industry whose trump and calling card is the value of the land it owns, ought not fight shy of disclosing the present value of its prime assets. Be that as it may, because the larger issue is the need for taking on some of the shibboleths relating to equity. A 100 per cent dividend, which normally gets rave reviews in the media, would in the case on hand translate into a measly 0.36 per cent return on investment.

Studied silence

The financial world, which frowns on non-merit subsidies of all hues and manifestations, curiously maintains a studied silence on the wholly unmerited subsidy to the corporate world unwittingly extended by the shareholders. A system that allows companies to get away with recompense to the shareholders that look impressive prima facie but boils down to almost nothing surely should not be countenanced.

The facile explanation for this non-merit subsidy is that the shareholders should seek their reward from the market and not from the company. And it is this shibboleth that precisely needs to be questioned, challenged and ultimately reformed. To be sure, equity is the riskiest form of investment and investors have only to blame themselves if things sour. But that does not mean that companies can blithely collect whatever premium they want without worrying about recompense for the suppliers thereof.

User should pay

After all, it is not the market that lays its hands on the moolah thus collected. Fairness demands that the one who uses a good or service should pay for such user. A company that preens on its potential must match its confidence with a matching reward to the investors. Therefore, the company law must be amended to mandate payment of a minimum dividend corresponding to the prevailing bank rate on the premium portion of the capital which is several hundred times more than the face value normally these days.

Such a move would halt the rampaging companies on their tracks besides reminding them that there is no free lunch for them either thus in the process bringing about a modicum of sobriety in premium fixation.

There is a view that post-issue quotations often reveal that the issue in retrospect was under-priced. Implicit in this assertion is the homily to investors to collect their rewards from the market. But this misses the main point — Shouldn't the user of fund be called upon to pay for it? — completely and obfuscates the issue.

(The author is a Delhi-based chartered accountant.)

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