Jewels in the crown

PSU banks are important for the government’s social outreach program to be indiscriminately disposed of

Ever since British Prime Minister Margaret Thatcher opened up the London financial markets on 27 October 1986, there is a tendency to slot reforms. Big-bang modifications are sought to demolish entrenched practices in contrast to incremental revisions unveiled one step at a time. The aim of the two approaches is the same: to make the system efficient. A sudden recast can overwhelm stakeholders who have to adapt to the new environment without any transition period. The outcome might not be visible immediately but casualties are in plain sight, raising doubt about the exercise. Both demonetization and the goods and services tax are expected to widen the tax base though high-value notes were scrapped overnight and uniform indirect tax slabs were launched after years of preparation and false starts. What was evident in the short term was the discomfort experienced during the transformation. The introduction of electronic trading and settlement was a major inflection point for investors. The process was undertaken in small doses. Dematerialization of large caps was followed by mid and small caps. The lower valuations attached to physical shares accelerated the push to digital format. Nonetheless, it took 22 years since its introduction to enter a completely paperless regime from end December 2018.The annual budget exercise too is used to plug loopholes and launch initiatives. With a few exceptions, such as in 1991, when the economy was opened across the board, the announcements are not clubbed with measures that irrevocably change the way business is done. Investors tend to separate the run-up and the period after the change as different eras. 

Despite undertaking four major disruptions including making the real estate sector transparent and accountable and passing the bankruptcy law, the appraisal of Narendra Modi’s track record invariably features the sluggish pace of the privatization program. Comparisons are made with the NDA-1 government’s aggressive thrust, when a dedicated ministry was set up to fast-track partial or complete withdrawal from PSUs. Diluting holdings in banks and oil explorers and refiners despite facing resistance are cited as the resolve of the AB Vajpayee government in getting out of running companies. In contrast, the first tenure of the NDA-2 government was marked by PSUs buying shares of other PSUs. Offers for sale to retail and institutional investors were in bits and pieces. Now, 35 profitable and loss-making Central enterprises have been identified for outright disposal despite the bizarre outcome of strategic sale during the previous NDA rule. A hospitality property was resold by the acquirer for a higher price. Another is again on the block. The three hotels of the ITDC group barely managed to scrape through. There were no takers for 51% share capital of Fertilizers and Chemicals Travancore despite the lure of dual pricing and higher subsidy. It took 16 years for the Tatas to get permission to monetize the land that it had bagged with the 25% equity in VSNL in 2002. The failure to get any bidders for over three-fourth holding in Air India due to its Rs 33000-crore debt is a rude reminder that PSU assets are not exciting buyers. It is now clear that the enthusiasm of the disinvestment drive 20 years ago cannot be replicated.

What has changed?  The subsequent UPA- 1 and -2 governments did not build up the momentum by giving operational freedom to even those PSUs that are listed. Petrol prices were de-regulated in 2012 after a committee’s recommendation a decade earlier.  It took another seven years to free diesel. Fuels, however, continue to remain outside GST, enabling the Central and state governments to revise taxes as per political expediency. Phone-banking ensured credit lines to cronies. The pile-up of NPAs turned off investors from PSU banks. Remedies such as recovering bad loans through bankruptcy proceedings, insulating appointments of top officials and business decisions from political interference and capital infusion are making them attractive. Merger of associates with SBI and among three government-owned lenders is leading to consolidation in the space. The use of banks for last-mile transmission of many welfare schemes had triggered a clamor for the government to retreat on concerns that Mudra loans to set up micro enterprises have the potential to turn sour. The din subsided on revelations of governance missteps at some private banks. As Gujarat chief minister, Modi turned around salvageable state organizations by assigning bureaucrats instead of politicians to run them. That the Nifty PSU Bank index has outperformed the Nifty and the Nifty Bank index since the last two phases of the Lok Sabha polls captures the market’s optimism about their return to health rather than ceding of government control.

-Mohan Sule

Heads you lose, tails you lose

Instead of becoming a solution for ease of doing business,  leveling  the field can push players to distort it to gain advantage

Regulators are often criticized for not doing enough to create a level-playing field. The switch to paperless and automated trading was to eliminate forgery, induce transparency in transactions and quicken settlement.  Listing agreements aim to make issuers accountable to their shareholders. Disclosures have to be disseminated to all the stakeholders at the same time so as not to discriminate between small and big investors. The policy makers are, in turn, attacked for focusing on the demand side and ignoring the suppliers of paper. Liberalization of the economy has freed most sectors from the need to apply for licences. The goods and services tax regime has reduced the time and cost of transporting goods from one state to another. Many countries and companies prohibit exchanging monetary compensation for resolution from those with powers to dispense clearances and award contracts. Two recent controversies ironically expose the limitations of a symmetrical environment to carry out business. One shines a light on how even the best practices can be exploited. The other is an apt example of how the fear of being left out from the legitimate pursuit of wealth creation can perpetuate the rotten power structure that is sought to be dismantled for being loaded against the small player. 

If the collective weight of the arbitrary allotment of 2G spectrum and coal mines to cronies paralyzed the economy in the waning days of the UPA-2 government, at the heart of another 2009-2014 era misconduct that is grabbing the market’s attention is once again the issue of breach of faith by the custodians of the interests of investors.  After conniving auditors, careless mutual fund managers and selfish promoters, the role of a bourse has come under scrutiny for violating the sanctity of the market. The National Stock Exchange stands guilty of providing some traders 10:1 speed advantage by allowing them to set up their servers in its premises. The Securities and Exchange Board of India has imposed a hefty penalty and banned NSE’s head of regulations, two brokers and two officials with another intermediary from associating or providing services to participants. The period since receiving a whistle-blower’s complaint in 2015 has been marked by the watchdog’s uneven response. The initial indifference turned to reluctant acknowledgement of the problem. The long-drawn inquiry that at times looked like to have hit a dead-end is an outcome of the complexity of the issue. Just like privileged information, unfair access to data to refine trading strategies is becoming increasingly contentious. Such instances often end with a consent agreement, capturing the frustration of the regulator in digging out convincing evidence of malpractices. A fine without admitting to wrong-doing is a face-saving finale.  Till recently it did appear that the Sebi-NSE confrontation was heading in a similar direction. The abrupt indictments were, therefore, surprising. Confirming the suspicion that the case was fast-tracked to achieve a neat conclusion, the appellate tribunal has held in abeyance the crackdown on some of those who have been punished. The market monitor’s discharge of the exchange’s former technology official and business chief also consolidates the position that the dark-fiber network connecting the trading platform’s server with select brokers might be due to ignorance of the gravity of the misstep. 

In a nod to the difficulty in establishing guilt in securities frauds, the US Securities Exchange Commission is seeking a jury trial in a bribery scandal. It will allow investors a scrutiny of the facts marshaled by the plaintiffs and the defendants even though Cognizant Technology Solutions has agreed to pay US$25 million as settlement under the Foreign Corruption Prevention Act for using its Indian construction services provider as a conduit for US $3.64-million bribes for three years from 2012 to local government officials to secure permits and clearances for campuses in Chennai and Pune. An audit conducted by leading law firms in the US and India, with the help of forensic experts from Hong Kong, in 2017 found no evidence of the involvement of the contractor, L&T, or any of its executives. The top brass of the NSE lost sight of the manipulation of technology deployed for superior user experience. The alleged L&T-Cognizant collusion points to the failure to install appropriate mechanism to check the implementation of economic reforms at the grassroots.  Just like marrying sophisticated tools with manual investigation has reduced but not eliminated insider trading, a level-playing field can lead to efforts to make it lopsided to secure advantage.   

-Mohan Sule

Loss of momentum

Regulatory missteps, selfish promoters and lack of accountability of money managers are undermining investors’ confidence

It is not only macro headwinds that can torpedo growth projections. More than the disruptions caused by interest rate movements, currency fluctuations and crude oil volatility, unnecessary interventions on one hand and reluctance to interfere on the other hand by policy makers can destroy shareholder wealth. How to strike the balance between applying the right amount of pressure to ensure that players stick to the rules and the correct force to pull up those who have misused the opportunity presented to them was at the core of the Supreme Court directive striking down the bad loan resolution steps spelled out by the February 2018 circular of the Reserve Bank of India. The ruling prohibits banks from clubbing all borrowers for application of bankruptcy proceedings if debt is not recovered within 180 days after even a day’s delay in the repayment schedule for loans above Rs 2000 crore. Coal to independent power producers, the aggrieved plaintiffs, is monopolized by a public sector entity. The entry of the private sector to ease bottlenecks and inject competition received a setback when the apex court in September 2014 cancelled the illegal allocation of 204 coal blocks. Of the 84 re-allocated through auctions a year later, only 58 went to the power sector, comprising nearly 25% of the over Rs 1100000-crore NPAs.  Purchasers are electricity boards owned by state governments. They offer free or subsidized services. The Ujwal discom assurance yojna or Uday in late 2015 allowed state governments to take on 75% of the debt of the distributors and issue bonds to the lenders as long as the SEBs reduced the technical and commercial losses to 15% by FY 2019. Only seven of the 24 states that opted for the scheme have managed to meet the target. The deficit of the remaining has widened.

The shakeup to cleanse the system has received a setback because of the inability of the policy makers to unshackle the entire value chain in some sectors. Electricity generation has been opened up. Transmission still remains the domain of the public sector, except for some metros. Till the recent thrust on last-mile connectivity under the Saubhagya, the footprint was limited. The problem is not output capability but the reluctance to charge market rates to retail consumers. The result is erratic supply and under-utilization of plant capacity. Just as the attraction of the power generators due to the huge untapped market turned sour on parceling of coal mines to cronies, the lost of pricing power has turned off investors from the telecom sector that has been a victim of arbitrary distribution of spectrum for 2G services. The dominant operators have the volumes but not the margins that differentiate peers. The churn in the aviation sector has reinforced the view that an emerging sector often leads to cannibalization by the participants. Clamping down on cost is difficult as the movement of aviation turbine fuel is uncertain. Passenger load is dependent not only on tariffs but also on routes and the geo-political situation. The need for constant infusion of funds is hampered by promoters’ reluctance to cede control.  

If telecom and aviation operators perpetually grapple with the dilemma of how to keep the users as well as the shareholders happy, there should be no such conflict for fund managers. They are answerable to the investors who surrender their money to them to earn decent returns.  Many factors that influence the value of the underlying assets are beyond control. Estimates do go wrong even after careful consideration of all available data. In such a situation, investors understand that they have to bear the losses. What is difficult to comprehend is when mutual funds fail to stick to their commitment of providing liquidity. Some have announced partial honoring of the fixed maturity plans that are due for redemption as they have given a grace period to a corporate borrower. The episode raises the issue of accountability of money managers in the risk they assume on behalf of investors. As the Securities and Exchange Board of India has linked fees to the corpus, AMCs have no motivation to perform. Their pedigree influences the choice of many investors rather than the track record. The RBI has started categorizing banks as systematically important based on their size. It is time for Sebi to label the top five fund houses as too important to fail. The portfolios of the schemes of these fund houses should be reviewed periodically to assess the basis of the investment decisions. The process might trigger risk aversion and affect returns. That will be a small price to pay to avoid a repetition of the collapse of UTI.

-Mohan Sule 

The road ahead

If uncertain direction of the domestic and global economy is an overhang, FY 2020 looks equipped to sail through the storm

The new fiscal year has begun with a bang. Resumption of foreign fund inflows propelled the benchmarks to notch historic highs. The economy is showing signs of mending and preparing for a takeoff. Goods and services tax collections in March were the highest ever since the introduction of the regime. Fiscal deficit for the year is under control. Deft inter-PSU buying enabled meeting of the divestment target. Encouraged by the enthusiastic response to the first auction, the Reserve Bank of India will for the second time undertake to exchange rupees worth US$ 5 billion for dollars. The exercise has achieved the twin objectives of making available funds for banks to lend in the local market and stem the slide of the Indian currency. A stronger rupee and a chest brimming with forex reserves are powerful weapons to cushion any transmission of higher oil prices. The US-China trade war has triggered scaling down of the growth trajectory of the global economy. The downside of sluggish export demand will be outweighed by the benefits to domestic manufacturing. The US Federal Reserve for the second time has kept its policy rates on hold. The looming trade disruption was one of the factors contributing to the decision. India’s central bank got the much-needed breathing space. Good liquidity and soft interest rates should boost consumption sectors. Domestic manufacturers will benefit from the weakening of commodity prices on US-induced slowdown in China. Rising input costs was a major overhang on producers’ margins in the December 2018 quarter.    

On the other side is conflicting forecasts of monsoon after an uneven one last year. An output glut has kept food prices soft so far. Supply deficiency can torpedo the benign inflation. The next policy meet of the central bank will be at beginning of the southwest agriculture season. In all probability, the RBI will prefer to take a pause in its rate cut cycle till clarity emerges in August, on the eve of the festive season. The first half of the current fiscal year is likely to be a washout because of the uncertainty. A full-fledged budget is scheduled in July. With election behind, there will no longer pressure on the government to soften the edges. The report on direct taxes is awaited. It is likely to suggest lower rates and elimination of breaks. The GST levy on most items is already at a level that cannot be pulled down any further to spur consumption. The resolution of the global disagreement on tariffs will complicate rather than ease the problem. Crude oil, tamed by the slide in buying from the euro region and China despite cut in production by the exporters’ cartel, is straining to break free on the prospect of a thaw in trade negotiations. Overseas investors will turn their back if the economy back home bounces on the normalization of ties with China. 

The year indeed looks intimidating if resurgent oil prices and possibility of deficient rainfall are viewed as headwinds instead of opportunities. Recovery in the Gulf economies will boost remittances and orders for project exporters. The unraveling of the tech story after the switch to digital and clampdown on US visas has left real estate developers reeling.  The incoming petro dollars will boost their recovery. Commodity producers, exasperated with the tepid usage, will get an opening to nurture their margins. Having faced oil shocks before, the Central government and the RBI are in a better position to handle any blowout. Careful calibration of the share of the subsidy burden with oil marketing companies on one hand and the cost of money on the other can cushion the inflationary impact on retail consumers. Not all the benefit of low crude prices was fully passed on to the refilling stations, though some states did marginally lower taxes. Real interest rates remain high despite low CPI and WPI numbers. Thus, there is plenty of room for the policy makers to sit back and watch the unfolding picture. After two consecutive periods of excess, the levelling of need for and availability of farm produce means the minimum support prices lose the sting to puncture the government’s balance sheet. Instead of a slump, sales of autos, consumer goods and housing-related products will ride on the renewed purchasing power in the rural market, supported by better return on cost of production, nil interest rate short-term loans and insurance cover. The competition in the fast-moving consumer goods segment will recede in favor of strong players with sustaining power. The success in mopping resources from the domestic and overseas debt and local equity markets by corporate India recently points to cash that is impatient to be deployed despite the uncertainty inherent in the run-up to electing a new government. No wonder, stocks did not react significantly on projection of scanty rains.

-Mohan Sule

Sentimental value

To acquire Mindtree, L&T will have to pay more than Rs 9000 crore that it wanted to use for a buyback that Sebi nipped

L&T’s hostile bid for Mindtree has stirred passions last seen in the late 1980s. Ironically, the predator was at the receiving end of unwanted advances from Dhirubhai Ambani and then Kumar Mangalam Birla.  A feisty A M Naik, who was then the CEO and MD of the engineering and construction player, succeeded in convincing financial institutions that a professionally-run company was in a better position to create wealth than becoming part of a promoter-driven enterprise. Subroto Bagchi, one of the founders of the tech solutions provider, has raised the prospect of the entrepreneur-backed venture in the danger of being levelled by the bulldozers of a conglomerate governed by hierarchies. The strategy to resist surrendering to an undesirable new owner remains the same 30 years later: tugging at the heartstrings rather than the purse strings. Loss of identity of an iconic presence remains a potent weapon to mask an underwhelming performance. If the sight of a low-level employee who had risen to the top perch fending off two powerful businessmen got sympathy then, a co-promoter taking a break from his mission to teach school kids in Odisha to come back to rescue his dream project is triggering admiration now. It would be interesting to know if today’s boardrooms and fund managers will be tolerant of a CEO who resists an opportunity for the ordinary shareholders to earn a good return on their investment.

The buyer’s capability to nurture and scale up the acquired business should ideally determine compatibility. The use of uniqueness as a defense mechanism to blunt the edge of money muscle of the bidder underscores the triumph of goodwill over balance-sheet numbers. L&T made an attractive target not only because of its dispersed holding and sluggish growth. It is known as much for its competence as for its unsullied brand, at least till recently, in a segment dotted by unorganized players and public sector companies. Though Mindtree is not among the top five IT exporters by market value, it has sticky, niche clients and an informal work environment. Even in industries whose performance hinges on customer satisfaction rather than securing contracts from government undertakings, those with friendly corporate actions and transparent management get better discounting. The market likes companies ploughing back their profit to expand, disbursing it as dividends or buying back the languishing shares. Many try to substitute these attributes by publicising their socially responsible behaviour. Donating a significant portion of his personal holding to the charitable trust controlling 67% of his company fetched a promoter appreciation but did not move the stock much. On the other hand, an auto maker battered by competition got the much-needed traction when the baton was passed by the second generation to the two heirs without any bloodshed by efficiently carving out the revenue streams.

The Naik-Ambani-Birla feud ended on a satisfactory note. RIL got a preferred executioner for its mega projects. Grasim bagged the cement division, thereby consolidating its position in the industry. L&T got rid of a capital-intensive asset and secured AAA rating in the process. Naik created an employees’ welfare trust to park the 10% stake that Birla sold back after buying it from Ambani. The foundation, controlling nearly 12% share capital, is the largest individual stake-owner and positioned to shield future attacks. The end of the present act will depend on how the players perform. Despite the advantage of size, L&T has been making the right noises. Mindtree and its team will be left alone, at least during the initial years. The response is prudent than conciliatory. If the product portfolio and market presence contribute to the discounting of manufacturers, the number of top-of-the-drawer customers and strength of the business divisions lend to valuations of firms offering generic services. Though it has outperformed the sector index since listing 12 years ago, Mindtree’s five-year EPS CAGR up to FY 2018 pales compared with that of L&T Infotech. Remarkably, cash with both was at the Rs 330-360-crore level last fiscal year, despite sales of L&T Infotech more by nearly a quarter, operating profit 40% higher and net profit twice that of Mindtree.  For the combined entity to become the sixth largest IT player by sales and the third largest by profitability, L&T will be paying Rs 10653 crore for 66.32% equity. The amount exceeds the total cash holding of the three entities. A Rs 9000-crore buyback proposed by L&T was rejected by Sebi as debt would be more than double the reduced paid-up capital and reserves.

-Mohan Sule

One size does not fit all

Mutual funds should be categorized as per their risk profile and allowed to impose flexible or flat fees

If 2018 was the year of reform, 2019 might well be the year of reckoning for mutual funds. After management and administrative charges were revised down and capped last year, increasing scrutiny of their investment style is likely to be the theme in the current year. Shares of listed asset management companies lost value after the Securities and Exchange Board of India in September sharply curtailed fees by introducing an inverse graded structure. The step does not seem to have translated into a rush to get in. Instead, more investors are exiting than entering mutual funds since the beginning of the current calendar year. After recording an increase in November and December, net purchases of all units slid 35% in January from a year ago. Net redemption in February were double of net sales 12 months ago. Net inflows into debt and equity have been nearly flat in the 11 months to February. Those into equity schemes are on a decline: down 63% in January and 73% the next month. Income schemes have seen net outflows for all the months of FY 2019, except April and December 2018. The pace of investment through the systematic investment, the mainstay of mutual funds, slowed down to a two-year low in February. Only 21% more subscribers opted for the route compared with the 52% higher number seen six months ago. The question is if the disappointment of investors is a blip due to the anticipated turbulence in the run-up to the general elections in April and May or a beginning of the end of the infatuation with mutual funds as being safe vehicles providing decent capital appreciation over a long period. 

Just as the collapse of IL&FS triggered risk aversion and drying up of credit to the financial services providers, any disruption in the supply of cash to mutual funds will affect issuers of equity and debt in the primary market. Mature frontline stocks will gain at the expense of risky mid and small caps in need of capital to grow and rapidly multiply the wealth of their shareholders. Fixed income instruments will have to offer higher coupons as bulk buyers become selective and demanding. To provide comfort to investors, Sebi has allowed side-pocketing of assets under stress to protect the remaining portfolio. Some mutual funds have agreed to give promoters time to raise money to get their mortgaged shares released. These solutions have not addressed core concerns. In the race for out-performance, due diligence seems to be the casualty. Small investors are consistently told not to get distracted by intermittent fluctuations. Yet fund managers do not follow their own advice of staying invested even during turmoil. Portfolios are shuffled frequently out of greed and fear. Pledged shares are dumped on signs of company-specific headwinds. The grace period given to borrowers stems the downside but imparts uncertainty to the stock’s direction. Whether investors who stay put rather than exit the scheme containing the affected company benefit or lose depends if the divestment of non-core holdings turns the flagship business attractive or a shadow of its former glory. The cash that becomes available due to prepayment of the loan brings with it the problem of deployment to generate earnings.

The total expense ratio has been capped at 2.25% for open-ended equity-oriented schemes. It slides to a low as 1.05% if assets are more than Rs 50000 crore. The unintended consequence will be an aggressive drive for subscriptions to boost the absolute value of the fee income even if the mandate confines exposure to a limited number of stocks. Overheads can remain low if fund managers ignore lucrative opportunities by staying with their picks. Inflows accelerate in a rising market when stocks are expensive and decline over a bearish phase when quality counters are available at a discount to their highs. If optimal utilization of the corpus during a bull-run can beat the benchmarks, it also makes the investment vulnerable to volatility as old ideas make way for new themes. In the course of a downturn, the mood is cautious. The preference is to remain liquid despite being in a buyer’s market. The push of AMCs for SIP and long-term investing is to even out these bumps. The regulatory thrust on making mutual funds accessible and economical should not mask the fact that rewards are dependent on bold bets long on potential but short on track record. Schemes need to be categorized as per their strategy spelled out in the offer document. Fees chained to returns rather that to the size will act as incentive to perform. SIPs should be for passive instruments such as ETFs with a flat entrance charge to suit the needs of those investors who want a steady income at low cost.    

-Mohan Sule

Clear and present danger

Whistleblowers, companies suddenly changing their business profile and regulatory challenges are risks facing investors

The dangers to the well being of companies are no longer restricted to economic headwinds and familiar governance missteps. As disclosures become more rigorous and access to information improves, the traditional tools of cover-ups and divergences are being pushed aside by newer threats. Unlike clashes of opposing opinions on issues such as use of idle cash, diversification into unrelated areas and share-swap ratios, that can at worst bruise investors, recent eruptions have left behind a trail of havoc. Of the three contributors that have damaged stocks of late, whistleblowers have caused the most destruction. Revelations of links of the promoters of the Essel group to firms being probed for money laundering post demonetization, loans by promoters of DHFL to shell companies and handling of the distribution business of Sun Pharmaceuticals by the co-founder have created doubts about the credibility of those at the helm of these companies. Sun has now replaced the related party with a subsidiary and dismissed accusations such as ties with manipulators and handling of overseas capital-raising exercise by a related entity as old events. The Essel group and DHFL have denied the allegations. Sebi was in the midst of examining and seeking explanation from Sun when the complaint was released into the public domain. The result was asymmetrical dissemination of the compilation of misdeeds, going against the basic principle of maintaining the sanctity of the market. Some institutional investors resorted to panic selling. To plug motivated leakages, without giving the company a chance to defend, the watchdog has to ensure that those who benefit from such selective disgorging of information are made to compensate the small investors to the extent of loss caused by their trades. A whistleblower in 2016 had charged not only the MD and CEO but many board members of Infosys of knowingly undertaking a costly purchase of two Israeli firms. Eventually, the regulator mid 2017 issued a clean chit in the absence of supporting evidence. Undeterred, a whistleblower has approached the SEC to point to delay in filing some forms by the tech solutions provider. Whether the recurring snapping at the management is to harass or trigger a clean-up is not clear.

If vanishing companies dominated headlines at the turn of the century, vanishing businesses are likely to be the talking point at the turn of the current decade. Earlier, promoters latched on to a fad, came into the market with pricey issues, got the shares listed and forgot about them. The stock exchanges did their duty by delisting them for not keeping up with the disclosure requirements.  Though those behind these ventures are banned from entering the capital market, the shareholders have been left holding worthless paper. The new-age entrepreneur is smarter. He prefers to eject the core business and embarks on another adventure, without a thought to the investors who had bought into the original idea. Prabhat Dairy has got out of the milk-processing business that contributed 98% of the revenues, turning to cattle feed instead. How much of the Rs 1700 crore that the transaction has garnered will trickle down to the non-promoter shareholders is not known. The organization has been structured in a way that the cash-generating operation was run by unlisted subsidiaries. The turn of events has brought to the surface the risk of investing in companies with marginal retail presence and a web of holdings that ring-fence the beneficiaries.

Healthy companies thrown into turmoil by owners leveraging their holdings for personal gains is one side of the coin. The other is made up of promoters who create an overhang of uncertainty over their stock. Uday Kotak was supposed to reduce his 30% stake in the private bank he set up in phases, by 10% end December 2018 and 5% end March 2020, when it completes 15 years.  The current controversy hinges on how the Reserve Bank of India’s guidelines on control should be interpreted. The matter is now in court after the central bank turned down the issue of perpetual non-convertible preference shares that would have increased Kotak Mahindra Bank’s paid-up capital and brought down the founder’s holding to just below 20% without diluting the voting prowess. In the process, Kotak seems to have followed the letter but not the spirit of the law that aims to discourage concentration of power. The Kapoor and Kapur families, who established Yes Bank a year later, have already cut their presence to around 20% of the equity capital. Why institutional investors have not stepped in to compel a closure is a mystery.

-Mohan Sule