The ‘small’ individual in Indian corporate business structure!

In India Corporate Business structure, a small individual can play several parts / roles. These parts could be played – totally distinct and separate or the same individual could play separate parts at the same time. The word ‘small’ reflects the importance of the individual’s part in the entire corporate business structure. It is sad, but the human has very little importance in corporate structure.

The individual could be an employee, a supplier of goods and services, a financier (corporate unsecured deposits) and / or an investor in shares of a listed company including shares of the company he / she is employed in – assuming the company is a listed corporate on the capital markets.

We are well aware that in the developing business environment in India, employment is frankly missing the higher certainty level of the past. Issues such as cost cutting (for supposed business efficiency, digitalized & mechanized operations), redundancy due to technology, process of mergers & acquisitions (where jobs are combined and positions become untenable). Over the last 2 decades technology development has impacted regular jobs and growth of jobs requiring human endeavour /existence. Today, AI (Artificial Intelligence) is adding to loss of Jobs. The individual is fighting a losing battle on employment in his ‘employee’ avatar. Also, if the individual is deemed inefficient or non-serious or having a seeming dis-interested attitude at work, his employment is under threat.

Have no doubt this is a phenomenon of a decade or two. Corporates will realize the importance of the human element in employment and understand the huge costs of technology and it’s failures and pitfalls. Till then, the individual as an employee Role will have to ride out the wave of shrinking employment opportunities.

The individual could be a small time supplier of goods and services or be an employee in a structure where he / she is performing sub-contract work. It is obvious that the individual and / or the small organization he owns /works for is under tremendous scrutiny and pressure. In most instances, the possibility of losing that assignment is very genuine and real. A change of person in authority / position could result in arrangements being given a relook and of course being redone or terminated. The individual carries an exposure. The business cover shield could be brittle and not really protect against strong blows.

However, there is a difference between being an employee and being a supplier. As an employee you are squarely caught in the provisions of the Income Tax Act and full income tax will be deducted at source. This issue is not present to the same extent when there is a B2B (business to business) relationship. The business offers a tax shield which the employee Role does not have. National direct tax statistics show the importance of individual income tax collections.

It is as a minority shareholder of a listed entity that an individual is perhaps most dis-advantaged. Obviously, he cannot run the corporate whose shares he is holding (note that it is his / her choice to invest in that corporate). If he has invested in Equity Mutual Funds, he has some cover of the expertise of the Asset Management Company. In the case of direct shares purchase in listed corporates – the risk is entirely his / her own.

The individual minority shareholders cannot really dictate corporate policy on running the business – investing in new business opportunities, amending business policy, shutting existing businesses, the finance mix the corporate wishes to take, the tax law interpretations, the forex Risks, etc. Sure there are provisions requiring shareholders meetings and matters being put to vote after Explanatory Notes are circulated for many of these. Where the Promoters have majority stake, the minority shareholder is powerless in many of these matters.

However, there is one matter where the minority shareholders interests could be better protected and that is where there is sale of the business undertaking by the promoters (family and invested companies). Very often this intent & pricing comes as a surprise. Of course, in the case of listed entities there is a process of Open Offer to acquire a certain minimum percentage of shares after depositing the monies involved into an escrow account.

It is here that some lessons need to be learned from public sector units being privatized. They have a process of technical and financial review of the acquiring company and then the process of privatization starts with information sharing, data exchange etc, finally resulting in Financial Bids by cleared and approved entities. This sort of process needs to be introduced for sale by promoters of listed corporate entities.

The stock exchanges must be informed of the intent of the promoters to exit the listed corporate at the intended price and a committee of independent directors (not promoter directors, not executive directors) of the Board of Directors must then take over reviewing the process. The independent directors play a key Role here. To ensure that minority shareholders get the best price realization, the sale of company must preferably be like a public auction, the eligible interested purchasers identified, their technical and financial competence evaluated and cleared. After that, all minority shareholders wanting to sell under the Open Offer MUST BE accepted. Whether the corporate stays listed on the capital markets will be decided by the Capital Market Regulator and the new Promoter Group.

The above is creating a new mechanism, but there is reason to believe that it is in favour of the individual minority shareholder and much more transparent, on pricing base and to whom the company with it’s business, assets, goodwill is sold.

The individual cannot just be buffeted on all sides. As a crucial economic resource, the individual as shareholder of a listed company needs to be backed and supported. It is very likely that the above stated proposal may face strong opposition – that it restricts speed of promoter decision to sell and to whom to sell. There is merit in this argument.

However, there needs to be a balance between Promoter interest and minority shareholder interest on price realization and long term corporate existence of the entity and it is advisable that the minority shareholder wins.

END OF ARTICLE