Do not distort | Mint

Do minority shareholders deserve a better deal than they get from bankruptcy resolutions in India? A discussion paper put out by our market regulator, the Securities and Exchange Board of India, suggests so. They’re often left with nothing, it says, but owners other than those who were in control of a bust business (and their associates) should be given slices of the restructured entity. This assumes that only majority stake owners, who get pushed out by the process, are to blame. Yet, as this is about risk capital, each equity share must carry equal risk. This principle should not be diluted. It would complicate how run-aground firms are revived (or shuttered) for the best possible value to be extracted, causing delays that would go against a key goal of our 2016 insolvency code. It would also distort the classic incentive structure of corporate operations. What we need are effective systems of governance that afford minority owners a real voice. Regardless of how well or badly a firm is managed, all shareholders who stay invested must jointly bear the consequences. To sympathize with those with no direct control is human, but distortive mandates are best avoided.