|Stop the shadow play|
|Wednesday, 06 April 2011 00:00|
The corporate affairs ministry’s move, reported in FE yesterday, to prevent companies from disguising their investments in other companies hasn’t come a day too soon. The move has been triggered by the CAG report that pointed out Reliance-ADAG had pumped in R992 crore into Swan Telecom by way of preference capital. But since such capital is not considered to be equity capital, this allowed both firms to say ADAG was not Swan’s owner. Nor is this the only such example. In the case of Loop Telecom, similarly, while the Ruias of Essar claim they own under 10% of the company (under the law, a telecom firm cannot own more than 10% of another in the same telecom circle), the fact that close relatives own the rest has always raised suspicions that the Ruias were in control of the firm—the Enforcement Directorate asked for a probe into the matter. Similarly, the CBI chargesheet points to how a company called Genex Exim bought 1.3 crore shares of Swan for R380 crore, and that Genex got this money from a company called ETA Star, which, in turn, got the money from a firm called Al Waha—all transactions took place on the same day, December 17, 2008, and there is no clarity on who owns these companies, though the belief is Genex is a front for some politicians.
In the case of corporate takeovers, it has been found that many firms have breached the FDI limits by getting Indian partners to hold a certain stake for them—except, in several cases, the Indian partners have raised the money to fund the equity purchases on the basis of bank guarantees or comfort letters issued by the foreign firms! In several other cases, listed companies lend money to firms that are partially owned by their promoters in their personal capacity; some lend money or give bank guarantees to subsidiaries/JVs that have other partners as well. There is clearly no point in declaring certain structures, such as preference capital or bank guarantees, to be illegal. This will just create more problems. But a worthwhile solution to consider is mandating that no company can issue preference capital, give loans, bank guarantees etc to subsidiaries/JVs in a proportion greater than its stake in the subsidiary/JV. This will ensure owners/others don’t get a free ride from listed firms; it will also help the authorities know a little more about the true holding structure of any corporate entity.