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The Vanishing Small Investor

The whole system is loaded in favour of institutional investors

While the equity market is booming, retail investors in the Indian stock markets are becoming scarcer. I am sure that if all the companies were to publish the number of shareholders, along with their quarterly results, it would be an eye-opener. Our regulations are one of the main reasons for this. As I see it, the whole system is geared towards institutionalisation of holdings. There is a provision in the Companies Act that makes it mandatory to offer new shares first to the existing shareholders (in the form of ‘Rights’). However, there is also a section (Section 81), which gives companies the right to evade the existing shareholder. This usually takes the form of ‘private placements’ which could be to strategic investors, to private equity funds, to institutional investors, etc. While a company may need to issue shares en bloc to a strategic partner, it is hard to understand making a similar issue for other groups of investors. Why not offer them to existing shareholders first and, if they do not want them, give them to other bulk buyers? I understand that this would involve some costs to the issuing company, but that is the only way retail participation can increase.

Similarly, promoters issue ‘warrants’ to themselves -- they pay an upfront 10% of the issue price; the balance is to be paid at some point in future. The argument is that when the promoter allots shares to himself, it is a sign of confidence in the company. In reality, the promoter generally makes a private placement en bloc and, to offset this and retain his level of holding in the company, resorts to issuing warrants. These warrants generally involve paying up the balance money in a year or two, so the promoter has locked himself in at a price by merely putting down 10% of the future price. Even if the issue price is at a premium to the prevailing market price, this opportunity is not given to the existing shareholders. The premium may be less than the interest payable for the period between the issuance of warrants and the actual time of exercising the option.

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