Stock Selection: Ownership matters

When selecting stocks, a conservative investor has to look at two primary factors, namely, ownership and the nature of the business. In this piece, I will focus on ownership. Companies to avoid are those where ownership vests in the government of India; they have no focus on profit. There is no continuity: the top echelon keeps changing frequently and no one person is allowed to have a long-range vision and the tenure to carry it through. Often, top management is also subject to the personal whims and fancies (apart from political pressures) of a minister. And none of these considerations could actually be helping the company to earn more money. If one says that the role of a government company is to look beyond profits, then these companies should be de-listed. Let the government become the sole owner and do what it pleases.

Once an outside shareholder is included, the main obligation should be to create value for the shareholder which can be done only by generating more profits. This means that companies, like the public sector banks, should be free to lend where they want to. They should not be compelled to lend to any group or sector that the government directs it to. As a shareholder, my concern is that the bank is being forced to lend to high-risk businesses and not at the best possible price. I know this sounds very commercial, but investing in shares is a commercial decision and not an act of patriotism. 

Private sector companies are no saints either. Most promoters use companies as their personal fiefdoms. Minority shareholders get what is left over. The returns for promoter-shareholders are different from those of other shareholders. However, over the past few years, most promoters have realised that long-term wealth creation (higher share prices) is also important; this helps other shareholders also gain. For instance, if I own 70% in my company, I may prefer not to siphon out a couple of crores of rupees since the increased reported earnings would help to increase market capitalisation by a much greater amount. My goal would be in sync with that of other shareholders. Personally, I put my investments in Indian promoter companies under ‘speculative’ rather than investment category, simply because I cannot take anything for granted; investors have to remain alert. I never know when a promoter may sell the business, take a personal ‘non-compete’ fee and then use the money to do a strange business. For most Indian promoters, minority shareholders are nothing but a nuisance.

So, when I get into private sector companies, I know the risks, but am betting on the fact that a higher share price is the common goal. I also know that the promoter is going to take home something far higher than what some other shareholder gets, but I look at it as the price one pays for entrepreneurship. Of course, in the private sector, there are also foreign-owned companies. I am a bit more comfortable with these, since they are all focused on remitting as high dividends as possible. The flip side is the transfer pricing and royalty leakages that happen. However, by and large, most foreign companies listed on our bourses have proven to be great long-term investments and, as a universe, surely score over Indian family-owned companies, from the point of view of external shareholders.

There is another category of ownership, where no single group or person is in control of the shareholding. These are mainly run by professionals and are focused on business growth and profits such as HDFC, CRISIL, L&T, ICICI, etc. It is possible that in these companies, one person may have an overbearing presence, but they will live beyond the individual. I am more comfortable with this than the family-ownership model. It would be great if all family-owned companies ultimately transform to this model. It looks very unlikely in India, where ‘family’ is important—be it for a company or the country.



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