In his address to the people of India, on the eve of the 64th Republic Day, the President of India noted:
India has changed more in last six decades than in six previous centuries. This is neither accidental nor providential; history shifts its pace when touched by vision. The great dream of raising a new India from the ashes of colonialism reached a historic denouement in 1947; more important, independence became a turning point for an equally dramatic narrative, nation-building. The foundations were laid through our Constitution, adopted on 26 January 1950, which we celebrate each year as Republic Day. Its driving principle was a compact between state and citizen, a powerful public-private partnership nourished by justice, liberty and equality. India did not win freedom from the British in order to deny freedom to Indians. The Constitution represented a second liberation, this time from the stranglehold of traditional inequity in gender, caste, community, along with other fetters that had chained us for too long.
While the state of the nation and our "second liberation" is known to us all from what we experience in our daily lives, the state of the "compact" between minority shareholders and the founding families we invest in is not that openly discussed. The creation of the joint-stock company was, in many ways, a replacement of the feudal system. The growth of activity in India's stock markets - and the liberalisation of the economy since 1982 - was about businesses being driven by market forces and shareholders being equally rewarded for the risks taken, in proportion to the number of shares they held.
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What you will not read in the financial press
One could argue that the financial media, in general, has a vested interest in keeping quiet about the treatment of minority shareholders. Much of the media is owned by large business groups (a global phenomenon) and much of the focus of the media is on the size of the wealth, not on how the business houses made that money. Money talks, the poor walk.
So now that the media has done their annual rankings of the movers and shakers - and we have been carpet-bombed with stories about their ability to spin wealth - it is time to take stock of what investors seem to think about these grand symbols of the Republic.
A previous Honest Truth (Is it the car - or the driver?) had a table listing a sample of 15 of Indians business groups / families where many of you gave your feedback on:
With a total of 200 points being the perfect score, the highest score went to HDFC (187) and DLF (43) got the lowest score (Table 1). Interestingly, the best and the worst both deal in real estate: HDFC makes most of its money giving loans to individuals who wish to buy homes; DLF builds the homes people buy.
- How fair was the group: do they share the rewards of the risks taken with all the shareholders or do they play dirty and keep some extra money for themselves? A score of zero indicated they played dirty and a score of 100 indicated they played fair;
- Has the business been built on connections with the government (zero) or on the ability of the management to thrive on market dynamics where the consumer decides the winners and the losers (100)?
Table 1: How you rated the various business groups
Source: responses from 37 readers
If these business houses were applying for a seat in a college, many would not be given admission. If 80% was the cut-off mark to qualify for accessing your savings and for you to feel comfortable with investing in such companies, only 4 entities (HDFC, Infosys, Tata, and Wipro) would make the grade.
If a 50% pass score was acceptable, an additional 3 entities (Mahindra, Birla, and Bharti) would qualify.
There is a very powerful statement in this table: most of the business houses are not trusted by investors. Not only do they seem to have used their connection with governments to win favours but, even when they make it rich (by means fair or foul as perceived by you), they are not seen to be sharing the spoils of war.
To apply the speech of the President to the relationship between the shareholder and the large business groups - and based on the feedback received from you - it would seem that:
If the Ministry of Finance wishes to see the imports of gold decline and if SEBI wishes to see more activity in the capital markets, the solution does not lie in raising the import duty of gold or in finding ways to energise the distributors of financial products.
- "Colonialism" - seen as a "bad and unfair master" - has given rise to a new, and equally unfair, master in the stock markets;
- "Nation-building" is in short supply; the building of private fortunes by means fair or foul is plentiful;
- The "compact" between shareholder and founding family is not based on "justice, liberty, and equality". Rather it is based on a one-sided relationship of the powerful throwing crumbs to their minority shareholders, as they see fit.
The solution lies in making the stock markets a safer place for investors to place their long-term savings.
But that would mean the school masters have to punish the naughty children caught with their hands in the till - and not be the Chief Guests at the award ceremonies hosted by the financial media where the naughty children end up winning accolade and prizes.
Is that likely to happen?
That, then, is the state of the Republic.
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