BY TAPONEEL MUKHERJEE
As India debates the tools and mechanisms to drive the next phase of growth, attention towards mechanisms in the capital markets that can help provide wings to India’s objective is essential. While a variety of measures have been assessed, one that specifically deserves attention is the need for India to create dual-class shares. Simply stated, Indian companies in India must be able to separate ownership and control. To unlock growth opportunities, allow companies to grow faster and assist businesses to make value-creating capital structure decisions, there could not be a better time than now for India to create dual-class shares.
The ability to separate control and ownership will indeed allow growing Indian businesses across sectors to access much-needed capital to grow and not just recover from the Corona-induced pandemic, but in fact, emerge stronger than before. The ability to access capital while still controlling the business will make for a more optimal situation better suited for new entrepreneurs.
When growth capital is required for fast-growing young companies, the ability to access capital from supporting investors while ensuring that the core vision of the entrepreneur is sustained can make the difference between the winners and the losers.
Apart from growing businesses, dual-class shares have a significant role to play in helping boost the ability of established companies to sustain, grow and evolve. India has faced a significant issue of non-performing loans in the banking system for the better part of the last decade. The problem around non-performance of credit is still bothersome. One of the primary reasons for the credit issues is the reluctance of businesses to dilute equity in a bid not to give up control and thereby to take on more debt than optimal. Primarily, the decisions taken around the capital structure in the last decade or so were not the best for the companies or the lenders. Providing such businesses with dual-class shares will allow owners to retain control and choose a mix of debt and equity that is more sustainable.
It is reiterated that the ability of dual-class shares to create more sustainable capital structures and balance sheets is one that needs keen, serious consideration. More robust balance sheets for corporate India will not only mean higher growth rates for businesses with lesser litigation but also greater availability of credit with the lending institutions. Essentially, dual-class shares can help unclog the flow of credit in the economy.
Critics of dual-class shares have rightly pointed out that allowing such a share structure does provide the business owners significant control at the expense of shareholders and that sometimes interests of the shareholders can be short-changed, a situation best avoided. Shareholders’ interest must be protected. Thus regulators need to ensure that businesses that do issue dual-class shares make all the necessary disclosures. And, the issues around misuse of dual-class shares must be dealt with by effective regulations and not by non-implementation of the idea. The ability of dual-class shares to provide significant growth to Indian businesses is an area that needs urgent attention.
Additionally, effective regulations and disclosures will ensure that the financial markets will price in the necessary discount that needs to be built into the various classes of the share structure of the business. Providing businesses access to adequate capital markets tools and regulations while allowing markets to solve for the pricing issues are essential.
Now more than ever, Indian businesses need access to dual-class shares. A common view is that startups are the ones that require such a system. However, a quick look at over-leveraged balance sheets of Indian corporations is a clear indication that one primary reason why debt was preferred to equity was to prevent forsaking control. While in no way can the entire problem of credit issues be attributed to the absence of dual-class shares, but for sure, the absence of such shares must have been a contributory factor.
As Indian capital markets mature and the debt markets develop further with lessons learned from the credit issues of the past decade, allowing corporations access to a more granular capital structure will serve better the cause of boosting economic growth and prosperity.
As India looks further to establish its position on the global economic map, capital market mechanisms such as dual-class shares will go a long way towards that mission.
(The author heads Development Tracks, an advisory firm. You can contact him at [email protected] The views expressed in this article are personal and that of the author)