Equity participation can lead to better accountability of Businesses

There are large number of family enterprises in India involved in trading, transport, agriculture and even small scale manufacturing. These enterprises taken all together constitute large percentage of domestic GDP besides giving employment to millions of unskilled and semi-skilled workers.  This sector is also called as informal sector.

Some of these entities have also upgraded themselves into private limited companies with themselves becoming shareholders and directors. The main principles of Companies Act revolves around the premise of safeguarding the interest of owners, i.e. shareholders. As the management rests with the Directors. Auditors are appointed by the shareholders to oversee and report over the statement of accounts prepared by the management, i.e. Directors. But, in most of the cases, the line between Directors and Shareholders is broken by way of both belonging to same family or group. The role of the Auditor in these cases becomes a statutory requirement and not as a watchdog over the management. This has also led to a belief that role of statutory auditor does not include efficacy of management decisions. Form of reporting has taken precedence over the substance of reporting.

This has also led to drawing up the accounts to meet the requirements of various statutes like Companies Act, Income Tax Act etc. or even to meet the parameters of lenders and investors. The absence of real financial statements has also led to more business failures. This has become more important in today's contest, where many old family businesses are showing cracks due to varied interests of family members. 

Equity participation by friends, employees and family members outside those involved in day to day management will lead to asking for more transparent reporting of financial statements. This will lead to better business accountability.   

This will also help these entities to source more funds from outside sources. Even if 5% of the informal sector opens up, it will create much more competitive business environment. 

Equity for promotion of businesses

Small and medium enterprises in India donot scale up due to several factors, lack of Finance, regulatory hurdles, physical constraint of the management.
Equity can play a major role in scaling up thebusiness. Few business entities know the value of their equity. A running profitable business can command very high valuation, which means very low dilution of equity to raise the resources. Scaling up will also help the management to hire better manpower, which will improve the physical capability of entity to handle larger business. Apart from it will ensure the perpetuity to business, if second generation is unwilling to join the business. The original promoters may gradually dilute the holdings in favour of willing to continue or enjoy the dividends, if the company is well managed by professionals, as is the case with ITC, LT, Infosys etc.
Scaling up of small and medium enterprises into large ones will trigger more competition, forcing them to be more efficient.

Equity investments-need of the hour

The questions are being asked that how equity investment in general will help the new entrepreneurs. In our country, there is very low penetration of equity concept with both investors and entrepreneurs. There are large numbers of successful small business entities in India having a turnover of more than INR 50 crores, especially in eastern parts of India, which are fully controlled by the promoters. Even the large corporates and PSUs have very high stake of the promoters leading to low efficiency and accountability to the public shareholders. If one can see the performance of corporates in Stock Markets, the companies having low stake of promoters and MNCs reward much more to public shareholders than the family controlled ones.

If more money flows in stock markets and more people start investing in equities, it will slowly become easy for the larger number of entities from market. This will help many small and medium enterprises to scale up and deepen the market. Already, we are observing that small-caps and mid- caps are performing better than large-caps in long term. There are funds specifically designed for investment in small-caps, mid-caps. Most of the small-caps are picked up by fund managers early and they make big gains, when these scripts become popular with general investors. Though returns are good in these funds, but there is greater volatility due to liquidity issue.

If the existing big corporates will start seeing the threat of them being overtaken, they too will start to dilute their holdings to scale up offering more opportunities to common equity investors.

If there are more investors in the market willing to take risks and investment in small-cap and mid-cap funds rise, the days of funds specifically designed to act as angel investment will see the day.

For this to happen, general public need to understand equity. 

This is applicable for both entrepreneurs and investors.

Equity as philonthropy

In a country, where equity is sold as wealth creation and quick money making tool in general, can we assume equity as philanthropy?  Some of us have heard of Angel Investors. The word “Angel” itself signals the concept of philanthropy.   

Let us see, how it happens? A young student, an employee or your friend can have idea, which can be converted to business provided he has enough capital to start with. The idea may succeed or fail and anybody putting his money is ready to burn his capital. Investors in these start-ups are nothing but Angel to the person having an idea but unable to convert it into business. So, anybody putting money in untested territory is none other than Angel Investor. He may be your employer, your friend or relative. If the idea succeeds, the business can draw more investors by way of equity or debt.

Then, why Equity?

It can be learnt with experience that not all ideas succeed or all fail. If the angel investor puts his money as equity, he has fair chance of making big gain, if business succeeds. Private Equity Investors follow the concept by putting the money for large number of such ventures.

The people having fair knowledge of Joint Stock Company know that the equity capital is a sunk capital, which cannot be withdrawn from business except exceptional cases. Only the persons holding this equity change without any outflow or inflow in business. Thus, the business operators or directors have no obligation to return the principal or the return on this capital. He can pursue his idea freely, which is very important with experiments in developing a new business, process or product. Thus the person putting the business ends up with no further liability to pay, if it fails.

Same is not true with debt. The interest liability starts from day-one. There may be moratorium for payments of principal or interest for a period of time, but the interest accumulates and debt liability increases. In the case of delay in getting the idea click or it fail, the person putting the business ends with liability that he has to become crook or suicide.

The absence of equity culture in India discourages new entrepreneurs. This also helps crooked entrepreneurs to prepare inflated projects to get bank finance. This has resulted in depositors’ money at stake. The experience of banks proof that even lender has to bear the risk of failing businesses.

For investors, the difference in equity and debt is towards risk sharing. If business is not doing well, the lenders do not get interest in time, the employees not getting salary in time. But you do not share the super growth of business, which you gain in equity. 

If more money moves towards equity, there will be less money available for debt and the promoters will be forced to move towards equity than debt. The lower control over the company through lower equity holdings will force the managements to perform and ultimately improve the business efficiency. Detailed shareholding pattern of well-run companies like L&T, ITC, ICICI Bank, HDFC Bank, Infosys will prove that good performance is enough for managements to continue in their seats and they do not need the cushion of high shareholding to retain control.

Thus, Indians should start investing in equities not only for wealth creation, but in national interest. If 125 crore population start keeping Rs. 100  per month apart for equity, the new entrepreneurs will come up in hordes and create jobs in unbelievable numbers.

Let equity investment be treated as philanthropy for nation building. Returns are only collateral. Let us start today.

Why reasonable turnover exemption required for Indirect Taxes?

The Income Tax Act has a clause for presumptive taxation for a threshold limit of Rs. Two Crores for business. But the intention is defeated by lower limits in indirect taxes. Various Limits are as under:

VAT: Rs. 5 lacs to Rs. 10 lacs (different in different states)
Service Tax: Rs. 10 lacs
Excise Duty: Rs. 1.50 crores.

It is clear from the limits set by various indirect taxes is well below the limits for presumptive rates by income tax.

Let us see, the practical side. Limit of Rs. 10 lacs for VAT. Assuming a profit of 10%, it will be Rs. 1 lac per annum. This means it will be less than Rs. 10000/- per month. Should a man earning less than Rs. 10000 a month be subject of paying taxes. It is high time, there is public discussion on this and a reasonable limits set instead of making all small business people thief.

Media and politicians silent on poor education standards--surprising?

We all know the sorry state of education standards in India. It is also a fact that our manpower is earning precious foreign exchange by exporting their services and is able to almost meet the deficit created by most pampered manufacturing sector, who just believe in importing sub-standard technology at high rates. This is despite the fact that just nearly 1% of the population is graduate. And most of current graduates are incapable of appearing for Banking, SSC(School Service Commission) etc. No political party or media is highlighting these facts about the right career prospects.

One of the reason for sorry state of education standards is dual standards at primary and secondary level. Sometime back, Allahabad High Court ruled that children of MLAs and Govt. Executives must go to Govt. School for education. But we are yet to see implementation of the same. Media and Politicians are totally silent on the issue. When most of the executive work and outsourcing conducted in English, What is the logic of keeping a wider population away from the language in the name of national pride? Why the national pride not applicable to children of elite society? 

We talk about increasing the incomes of rural population. There is no other easier route than imparting employable education to rural children and letting them find job in urban centers.  This will automatically reduce the number of population dependent on agricultural income. With lesser denominator, the percapita income will rise and improve the lifestyle of rural folks.

Increase in lifestyle of rural folks will generate more demand of industrial goods, which again will create jobs and kick start the economy.

NEET- SINGLE ENTRANCE TEST FOR MEDICAL

Over-reaching arm of political class want to overrule the Supreme Court decision for NEET, a national level common admission test for medical studies. Surprisingly, media has become silent on the subject, once there was news of political interference. Political class wants to overrule NEET on the name of federalism. But how one can support the admission tests by private medical colleges with all the powers to have their own syllabus and examination process before awarding the degree. How these colleges be given liberty for giving degrees for medical professionals on their own? We have already seen large number of mushrooming institutions for granting degrees of B.TECH and MBA to undeserving candidates.

We must not allow the same for the medical profession as they will have license to play with public health.

Engineering education in India

India has seen mushrooming of Engineering colleges and some of these are unable to place their wards suitably and students are left to find their own jobs as was the case more than a decade ago.

Some of these institutes have their own admission tests, own syllabus and own examinations. Hence, very low quality can get admitted there and pass through as an engineer, though they do not deserve to be so. The passouts from these institutes suffer from the climax of being an engineer and send wrong signal to general public about the knowledge of engineers.

It is high time an independent body conduct a single entrance test and conduct examinations in the final year before giving the degree. Though the colleges be given autonomy for setting their syllabus and semester exams. This will help the deserving students, who need not appear for multiple entrance tests and control the quality of students passing out as engineers.

Redifing of Private and Public Sector

India has presence of both public and private sector. There is a debate about the efficiency and role of both public and private sector.

We define Public sector as one, where Govt. whether State or Union has more than 50% stake. Even the subsidiaries of Public sector companies are also called as Public sector. But the companies with holdings of multiple public sector units with none having a stake of more than 50% are not termed as public sector units. This is the reason where companies like Gujarat Narmada Valley Fertilizers Ltd.(GNFC)  is a private sector unit. 

Similarly, companies like ICICI Bank, HDFC, Axis Bank, though promoted by Govt. has got the private sector tag due to dilution of  Govt. holding in favour of public.

The existing management of the companies like ICICI Bank, L&T, ITC, and HDFC has little ownership stake and can be anyday removed by the public shareholders, if they fail to perform. 

Again, there are companies like Reliance, Tata Steel, and Ultratech, where a major shareholder group has a large shareholding, which can enable them to appoint directors of their choice. 

 
It is logical that companies like Reliance, ICICI Bank and GNFC are not tagged in a single group of Private Sector.

Instead, we should have groupings like-

Govt. Sector - Where Govt. exercises control over the appointment of key personnel.

Public Sector- Where broader public shareholders have control over the appointment of key personnel.

Private Sector- Where a major shareholder group has control over the appointment of key personnel.

Privatisation of PSUs should be to the second group than the third group. The control over management of existing Govt. sector be slowly transferred to broader public shareholders. The performance of the companies like ICICI Bank and HDFC is there for all to see with no benefit to individual group.

Infrastructure funding

Banks are reeling under severe stress due to rising NPAs. Even Supreme Court has intervened by asking for the list of defaulters with outstanding above Rs. 500 crores. There is a debate about making public the list. 

Instead of arguing over the same, let us examine the reasons. This will help in taking decisions in future. 

Most of these advances are related to infrastructure or long gestation projects. Funding pattern in these cases have been 75% debt and 25% equity and in some cases, even 80% debt and 20% equity. The debt funding in most of the cases is proportionate to the amount brought by equity. For Example, in a project of Rs. 4000 crores, the equity is Rs. 1000 crores and Debt Rs. 3000 crores. If the promoter brings equity by Rs. 100 crores, the lenders disburse debt by Rs. 300 crores. Again, the promoters bring equity by another Rs. 100 crores and lenders disburse Rs. 300 crores. It goes on. But, promoters fail to bring equity after Rs. 500 crores. What happens then? The project gets stuck up and lenders are left in dilemma, as they have already sunk in Rs. 1500 crores as per matching contribution principle. 

Time has come for high level of discussion on the subject. 

The author calls for solutions from the readers, though he will share his thoughts in subsequent  posts.

Need to do away with the policy of tax and subsidise

Union Budget for 2016 was placed on 29th February 2016 by Finance Minister, Mr. Arun Jaitley with focus on rural infrastructure. There is no dispute about the poor conditions of farmers and rural population in India. 70% of the population based in rural India are basically dependent on agriculture and contribute just 15% of the GDP. Their low percapita income is cause of low consumption base for many industrial goods. Rise in their income will lead to growth due to very well known economic law of marginal propensity to consume and push the growth engine. Our FM has targeted to double their income in five years. Apart from above, FM has also promised to implement 7th pay commission recommendations for Central Govt. employees to kickstart the demand.

All this sounds good, but the source of funding comes from increased service tax, tax on luxury goods, increased cess on coal, increased surcharge on rich, tax on PF withdrawals, tax on dividend distribution etc. etc. We have also reduced the capital expenditure on defense to make way for OROP.

Except surcharge on rich, each of the tax is going to affect the common man. Even tax on PF withdrawals is going to impact large number of salaried employees. Again, the tax on dividends above Rs. 10 lacs will discourage the promoters to declare dividends, which too will affect the minority and small shareholders. Promoters will prefer to draw more remuneration or consultancy fee instead of dividend distribution. This will make rich, more rich by more assets under their control. Indirect taxes will just pass on to the consumers and have inflationary impact.

It is high time, the public start protesting this give and take policy. Collecting money by way of indirect taxes and giving it back by subsidies entail huge establishment cost, which too is borne by the public. Govt. should just concentrate on providing affordable education to masses with job orientation. Job oriented courses in rural hinterland will reduce the percentage of population dependent on agriculture and their percapita income will rise automatically as less hands will share the same income.

 

A new socio-economic world order-II

Marxism practiced in early 20th Century by Russia, China and some East European countries is one example of distribution of wealth. But the system failed as it created state monopoly leading to inefficiency and lower growth. No one can deny the popular dictum: Human beings does not exert their best in absence of fear and greed. Why one will put extra effort and pressure on his physical and mental capability, when there is no reward for efficiency or punishment for inefficiency. You cannot ignore stick and carrot policy.

The western world managed to stop spread of Marxism in their countries by adopting welfare economy, so that the marginalized population is paid unemployment dole to maintain their basic necessities. 

This helped them to grow at a faster rate than others due to increased demand from the lower starta of the society. But alongwith the growth of western world, there was pressure on natural resources like Crude, Iron Ore and other minerals. This led to commodity boom, when both India and China were growing at fast rate. The distortion in income was much acute in countries of Africa, Middle East and Latin American countries, where the rich having control over natural resources became super-rich with little emphasis on education of masses. The poor in these countries remain marginalised and could not contribute towards the demand of industrial goods. With saturation of demand in Western World, great hope was created from the economic growth of China and India. With China focussing on Export-led growth created huge capacities for industrial goods. 

With growth of India and China tapering down, there was inadequate demand for balancing the excess capacity created. These countries too contributed to inequality in their systems in order to keep labour cheap for competing in Exports. This inequality has failed to create enough domestic demand.

The solution now lies in creating most modern educational institutions and healthcare institutions at affordable rates for masses in not only India and China, but in Africa, Latin America and middle East.

The Western world and developed economies along with rich in other countries need to contribute this for the lower bottom of the society. 

There is no point in talking about globalization, if you do not own the responsibility.

This is needed for their own survival.

The need of new socio-economic world order

   Tamso Ma Jyotirgamay

   Asato Ma Sadgamay

   Mrityor Ma Amritamgamay

   Let Ma Saraswati bestow the knowledge, wisdom, and courage to every citizen in the world to overcome   darkness, dishonesty and fear of death.

  Some very disturbing reports are appearing in economic world recently.

  According to Oxfam, an aid group based in Australia, Just 62 rich persons hold wealth near to total wealth of bottom 50% population of the world. There are also reports about severe recession engulfing the world.   

 Though the two news are not related to each other, but if analysed deeply, the inequality in income and wealth can cause recession. Huge income gap can lead to slowing of demand from bottom half of the population, which has every reason to cause recession. It is the poor, who suffer the most during recession as they cannot afford any loss in their income and reduced spending by them aggravates the situation.

This will lead to severe law and order deterioration with restive hungry mob will move to loot, snatching etc. This  is already observed by pirate syndicates operating from some African countries like Somalia. The Governments world over should start realizing the situation and take corrective measures.
 

Not just the Governments, but the rich corporates should engage in improving the lot of deprived millions in continents like Africa. Any increase in income of the bottom 20% population will increase the demand for goods and services leading to revival of demand and combat the recessionary pressure. Instead of providing free food packets, they should open affordable educational institutions, which will increase their income on sustainable basis and bring them into maintream.  Any terrorist organisation need large manpower to be brainwashed and become a terrorist or extremist. More population coming into mainstream will reduce the extremist activities too.

The accumulation of wealth in few hands has led to poor demand from the larger population. Law of marginal propensity to consume is to be understood by the Governments world over for better distribution of wealth. Rich should not go for philanthropy just to satisfy their egos, but for sustainable development of the society.


 It is high time, the economists and heads of state world over seriously put their thought in the matter to  resolve the issues for establishing new socioeconomic world order. 

While business must make profits, they must contribute a part of it to the society, which makes profit happen.