don’t distort

Do minority shareholders deserve a better deal than bankruptcy proposals in India? A discussion paper released by our markets regulator, the Securities and Exchange Board of India, suggests so. It says they are often left with nothing but those other than those who were in control of a busted business (and their partners) should be given slices of the reorganized entity. It assumes that only the majority shareholder, who is left out of the process, is to blame. Nevertheless, as it is about risk capital, each equity share should have equal risk. This principle should not be diluted. This would complicate how run-ground firms are revived (or closed) to extract the best possible value, causing delays that would go against a key goal of our 2016 bankruptcy code. It would also subvert the classic incentive structure of corporate operations. We need an effective system of governance that gives minority owners a real voice. Regardless of how well or badly a firm is managed, all shareholders who remain invested must bear the consequences jointly. Empathizing with those who have no direct control is humane, but it is best to avoid perverted mandates.