Business Times

Controlling shareholders enrich themselves at cost of independent minority shareholders- investor

Independent minority shareholders (IMS) are often defrauded by the frequent antics of ‘Reorganisers of capital’, and ‘conglomerate/corporate restructuring artistes’, whose expertise is not creating greater efficiencies or reducing cost and/or risks, but to confuse, destabilize, distract, tire out, and deprive innocent average public shareholders, while unjustly enriching the CIs (controlling interests) and themselves, says a top investor and whistle-blower.

K.C. Vignarajah, a former chairman of the Ceylon National Chamber of Industries and fast acquiring a reputation of protecting the interests of IMS, says in a letter to the Securities & Exchange Commission (SEC) that, “there are small groups or clubs of such people acting in concert with ‘crooked’ directors, errant auditors, compliant lawyers, independent advisors and company secretaries make them impenetrable fortresses of evil. An upright SEC acting together with honest members and officials of the CSE, utilizing the commitment, knowledge, invaluable experience and insight of IMS, will be the most effective way to handle these issues.”

He said immediate publication of patterns of trading, with disclosure of parties to the transaction (including broker) giving quantity, rate and value of transaction over Rs 1 million would perhaps have been the best way to get maximum information on insider traders, manipulators and those acting in concert.

Mr Vignarajah has listed out his suggestions on the draft rules on Minimum Public Float as a Continuous Listing Requirement General Rules applicable to all public listed companies.
On the proposal for a listed entity on the Main Board to maintain at least a public holding of 20% of its total listed shares in the hands of public shareholders, he says:

“The public holdings in India, Thailand and Malaysia average around 45% to create healthy stock markets.

Please ensure a minimum public float of at least 25% (to increase to 30%) within a period stipulated below. An Income Tax rate incentive of 5% for widely held PLCs should be restored to help rapidly expand the public float and liquidity. A healthy dividend payout policy of 35% of net profit after tax (NPAT as proposed by President Mahinda Rajapaksa in the 2006 budget has been waylaid and scuttled by so called pundits who support creation of ‘shareholder fatigue’) will be equitable to IMS, the state (through Withholding Tax –WHT) and the CSE by increasing the dividend yield.”

On the proposal where the shares are listed on the Diri Savi Board, a listed entity shall maintain at least a public holding of 10% of its total listed shares in the hands of public shareholders, he said:
“This should be 15% within 3 months (to increase to 20% within a year).”

On, “the Exchange may accept under exceptional circumstances a percentage lower than 10% of the total number of listed shares for a limited time period if it is satisfied that such lower percentage is sufficient for a liquid market in such shares and this decision shall be conveyed to the SEC immediately,” he said:

“This should be 15% within 3 months (to increase to 20%) within one year.
He said there have also been cases of employees stage managed as “independent shareholders” for eg the case of a store keeper having Rs 3.6 billion worth of shares in his name, not even being director giving proxy to person who was also not a director but was the ultimate controlling interest! Other examples are where coaches have been engaged by few companies to transport dependant employees each holding some shares, to vociferously support and show preponderant majority to overwhelm the IMS forming the small public float. They take up the time and prevent IMS expressing genuine concerns at the maneuvers and manipulation by the controlling interests to unjustly enrich themselves while depriving the public shareholding of just and expected rewards of their investment.

He said the SEC must be congratulated for recognising the obvious and standing firm against powerful lobbyists to exclude some related parties.

He also suggested that the SEC should not permit entities which have been scheming, ‘reorganising capital’, ‘restructuring subsidiaries /operations’ in order to deprive / marginalize/ sideline IMS after having sensed the public pressure for the ‘public float to be rigidly enforced’(even though they had originally held out a public float of 30% or more and thus had a compact with the investing public to maintain or increase it).

‘Shareholder fatigue’, ‘ insider trading’, ‘share manipulation’, ‘reorganising capital’, ‘restructuring subsidiaries /operations’ are among the main tools employed by the CIs of entities to quietly acquire more shares at much lower prices in the earlier stages . The avarice and greed to unjustly reduce the ‘public float’ and thereby enrich the CIs is evident. These should be vigorously investigated. Perverting the course of justice, unjust enrichment, Criminal Breach of the trust placed in the Directors , etc are few of the areas under which actions should be taken to strongly deter wrong doings by CIs and the Directors, he said.

Mr Vignarajah said the Default Board has not been a deterrent; in fact it was a convenient and sometimes sought after status to depreciate and deprive the public shareholding of obtaining required information and maximum value. “Please impose a heavy fine on the directors - Rs 250,000 every month after two months – on a company in the Default Board,” he urged.

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