Smart disinvestment

The Government, in the recent Budget, announced an ambitious plan to raise ₹1.05 trillion from disinvestment in the current fiscal.

An important factor here is building the capital structure in such a way that the ownership by the current owner — read government — is maintained, with opportunity to raise private capital without diluting voting rights. This question has probably been addressed by corporations worldwide like the US’ Tyson Foods and Facebook.

Tyson Foods’ capital structure contains two classes of common stock — A and B. Class A shares are listed on stock exchanges, while Class B stock is not publicly listed for trade. However, Class B stock is convertible into Class A on a share-for-share basis. The devil lies in the conversion ratio. Holders of Class B stock are entitled to 10 votes per share, while Class A shareholders are entitled to one vote per share on matters submitted for approval.

As of September 2018, the Tyson family owned almost all the Class B shares and just 2.09 per cent of the company’s Class A common stock, giving them an effective control of approximately 70.96 per cent of the total voting power of the company’s outstanding voting stock. Of course, protection and incentives are built-in for Class A investors.

For instance, dividends cannot be paid to holders of Class B stock unless simultaneously paid to holders of Class A stock, and when paid, they should not be more than 90 per cent of the dividend paid to Class A shareholders.

Facebook’s capital structure is similar, with different class of shares having differential voting rights.

As per Section 43(a)(ii) of the Companies Act, 2013, a company is permitted to have equity shares with differential voting rights as part of its share capital. The differential rights may be with respect to dividend, voting, etc. What this unique capital structure provides is a tested way of retaining ownership and creating a new class of shares, where other capital market participants can invest or trade. This gives an opportunity to Class A shares to benefit from value creation in the underlying business.

It is pertinent to note that apart from the strategic sale of public sector entities to the private sector, not all foreign or domestic money is chasing ownership, and they equally value implicit sovereign support that comes with a public-sector undertaking.

Besides differential voting rights, the concept of ‘golden shares’ is also not new for governments trying to preserve strategic national interests in the defence space.

A golden share is a nominal share which is able to outvote all other shares in certain specified circumstances. For example, the Brazilian government holds a golden share in aircraft manufacturer Embraer, giving it the veto power over strategic decisions involving military programmes and any change in its controlling interest. For disinvestments in capital-starved defence PSUs, the government can have a golden share to protect national and strategic interests, while giving free space to run the organisation and raise capital.

Critics may argue that Tyson’s case or golden shares cannot be replicated in the Indian context. Sure it can’t.

But is the arcane world of structuring in finance short on innovation? What is needed right now is to rise above vanilla structures and try something big. After all, the target is also big. Right?

The writer works for SBI, US Operations, in New York. Views expressed are personal and compiled from publicly available information

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