Equity is a phenomenon of the modern age without which we'd all be poorer. As an institutionalised learning, that much stands out.
So it's easy to picture the honchos of India's financial institutions (FIs) huddled together, clasping hands and marveling at the wonder -- of business democratisation -- that it is. Imagine the Little Guy, with just a hundred bucks or so, getting himself a share of a megacorp with an equal claim to its profits as the Big Famous Name with an equivalent share. That too, with nothing at risk except the share's value.
Easy to picture? Most certainly not, unless you're given to extended bouts of fantasy. What concerns the Little Guy is not so much the dividend, but the share's value, and its appreciation, as traded in an open market. And he soon discovers that holding a solitary share isn't as exciting as he'd supposed. There are big investors out there with truckloads of shares. Banded together, they even get to influence the company's decisions. And when the concentration of shares becomes uniquely strong, the Big Guy even gets to sell it off for a higher price-per-share than he can really hope for. As a minority of one, the Little Guy can just watch. And sigh.
That's why there exist safeguards for minority shareholders. That's why the demand for A.V. Birla group's Grasim to pay ordinary L&T shareholders the same sort of money per share (a premium over the market price) that it paid Reliance for a tenth of L&T, if Grasim wants to increase its holding in it. Grasim wants to pay a price more in line with the share's market value. This would be fine it seems, by the acquisition code, if it doesn't have management control of L&T. Does it? This has become the raging controversy of the day.
So much so, that you may have overlooked the actual absurdity in the second paragraph. The bit about the FIs, the institutions set up once upon a time by the government to help with India's -- ahem -- development. Huddle together, they often do (in a manner of speaking). But to think of them as championing the interests of the small investor would be an exercise in naivete. Or self-delusion. Or some lethal combination of the two.
At best, India's FIs pursue their own interests. At worst, bereft of their old developmental role, they pursue a set of interests that's far too opaque to examine, let alone reason out. This, really, is the big issue: the power wielded by public institutions over the private sector. Still. A decade into 'liberalisation'.
Together, state-controlled FIs (such as GIC, LIC and UTI, which owe their treasure chests to the command economy) own about 37 per cent of L&T, and could act to jeopardise Grasim's designs on L&t. Should they? No. Nor is it any good portraying Grasim as some barbaric predator. There are no 'good guys' and 'bad guys' out here, and the small investor's peeves (however valid) make a poor pretext for the FIs to clamber into this arena for a fight.
In the Free Market era, legitimate takeovers are recognised as boosters of efficiency, and private sector affairs are recognised as needing insulation from state interference. What's private is private. The FIs, remember, are relics of the Licence Raj that happen to be sitting on heaps of equity converted from debt. And the reasoning behind the disinvestment of PSUs -- that the state should withdraw from its zones of non-competence such as business -- applies equally to the FIs' holdings in private firms.
In the interests of market freedom, it's best if the FIs are divested of their large concentrated holdings. Till then, they ought to play a strictly neutral role as investors. The government's job, as enunciated by Thomas Paine, the brain behind the American Revolution, is to protect life and liberty.