Opening Up The Market = Less Market = Curtailment Of Democratic Process?

Why is it that all new initiatives or moves by Government, regulators and even economists are biased towards big businesses and big businessmen? Are we moving towards a regime where opening up of the economy and markets leading to less markets consequent to lesser competition?

This article has been motivated by the report in ET dated Jan 25, 2008(Minority ransom in M&A deals on way out). The report per se is restricted to the amendment to the company laws aimed at curtailing the rights of minority shareholders which may not have serious implications on the democratic processes in the society. But on a wider horizon, this can be an example of the larger maladies that exist in the economy in the pretext of freer markets. Actions of this sort can raise doubts in the minds of the people regarding the implications they may have on the democratic process if it percolates to other areas too. First let us look at the report and the company law amendments mentioned there. The title of the report itself seems to be in bad taste. It gives an unfortunate impression that minority shareholders always try to put spokes on the scheme of things and try to thwart any attempts or stall any proceedings by promoters and managements. How many moves by incumbent managements and/or promoters with good intentions were thwarted by minority shareholders acting on their own interests? There might have been a few rare cases where minority shareholders have tried stalling the processes by the promoters and managements but a majority of them might have been instigated by competitors or other interested parties. Shall we amend a regulation to appease a few corporates or to punish still few troublesome minority shareholders? But, why is it that all new initiatives or moves by Government, regulators and even economists are biased towards big businesses and big businessmen? Are we moving towards a regime where opening up of the economy and markets leading to less markets consequent to lesser competition? Changes that have been happening in India over a period of last fifteen years somehow create an impression on the above lines. For example, when SEBI initially drafted laws for regulating IPOs, it stipulated that 25% of the offer had to be reserved for general public investors after all the reservations for employees, shareholders of promoting companies, Indian Mutual funds,FIIs and Indian & Multilateral development financial institutions etc The very purpose was to create a better market for securities. But such stipulations have since been diluted even though it has not achieved one of it’s aims viz spreading an equity culture and with stock valuations skyrocketing, the retail small investors will have a really difficult time to get allotment without any mandatory requirement regarding setting aside a portion of the shares to them. By and large regulations for markets have been found to be favouring companies than public.

This type of market scenario is being witnessed in many other areas too. Before liberalization, cement industry had a very large number of players, thanks to the encouragement given to the mini-cement plants .Today, the competition in the industry has been reduced from many to a few. And these few are controlling the stakes in the cement market with the prices of cement going through the roof. Cement prices in 1993-94 hovered around Rs.100-110 per bag and today the prices have increased to Rs.260-270.It has become simply unaffordable to the common man. The real estate companies, who have raised huge amounts funds from the markets due to stratospheric valuation of their companies can easily afford to pay Rs.260 or 270 for a bag. Are the market forces intact and playing? Are we proving right what Peter Drucker wrote back in 1996: “We are learning very fast that the belief that a free market is all it takes to have a functioning society –or even a functioning econmy- is a pure delusion” (The Relentless Contrarian , Wired, August 1996)

Recently Mr.Ratan Tata was interviewed by a business publication where he made a scathing remark about the attitudes of businessmen which explains the attitude of businessmen to the market forces.(He himself being a businessman, how he will exclude himself from the kind of behaviour is anybody’s guess). Mr.Tata is reported to have said, ”In Delhi, you have the President of CII talking about open markets on the one hand and on the other hand trying to ensure that there is no one who comes into the industry” while speaking on the controversy about awarding fresh GSM spectrum to various players in the telecom market.(Businessworld, January 14, 2008).When it comes to market forces vis-à-vis M&As, while M&As can theoretically lead to competitive advantages for firms by way of economies of scale, the resulting bigger players may keep the consumer at ransom.

The process of liberalization and consequent opening up of the market has apparently led to less-democratized processes in the economy. While democratic process dictates one person one vote, irrespective of the position, wealth or power one enjoys, the antithesis seems to be happening in business and economy where one rupee,one vote regime prevails. Holders of larger stakes (like promoters and management team) will be able to manipulate huge swings towards their position after the proposed company law amendment to favour value-based voting than number-based voting. Won’t the existing framework be more effective as a check & control system on the promoters and/or incumbent management? The proposed amendment might essentially entrust the decision making power and authority with a few leading to decision making highly dependent on the wisdom of a small cadre of promoter shareholders or leaders of the management team.

It is observed that people in positions of power usually abstain from the process of decision making whenever there is an issue of conflicts of interests- be it sitting on an interview panel and facing a scenario of interviewing a candidate who happens to be a relative or having other relationships or being on the panel to select the business person of the year. Why such practices don’t get extended to executive decisions involving shareholders? Why not interested promoters and management representatives abstain from voting and leave it the public shareholders(including institutional investors) to decide? One should not expect all shareholders to exercise their votes considering the low shareholder activism in India but the process is a first step to empower the public and minority shareholders. Companies can even suggest that these groups may discuss the issues with the independent directors who are supposed to protect the interests of the outside shareholders. Rather than trying to implement a step to control or curtail the minority shareholders, a process to empower them shall be attempted. Won’t that be a more democratic process to be adopted in a democratic country?