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No country for small investors!

This article was posted on May 24, 2009 and is filed under Stock Views

In a country where the ‘aam admi’ almost invariably gets a raw deal, Midas Touch Investors Association stands out as an exception. The Kanpur-based NGO has long championed the cause of small investors. It fought on their behalf against ‘vanishing companies’ (companies that took investors’ money and disappeared without repaying their dues) It took on the mighty Canara Bank and ensured Canstar holders got what they’d been promised.

It is not surprising, therefore, to find Midas pick up the cudgels once again on behalf of small investors in what is the most celebrated rip-off of recent times – Satyam Computers.

In a petition filed before the National Consumer Disputes Redressal Commission, New Delhi, Midas took the plea that investors were deceived by ‘wrong and misleading financial statements issued by Satyam over the years and duped into buying its shares at an artificially manipulated market price.’ Two, these statements were made with an intent to project a rosier picture of Satyam than warranted. And three, the auditors, Price Waterhouse, as well as the independent directors were negligent and failed to discharge their duties prudently and without negligence.

Based on these charges, Midas claimed Rs 5000 crore damages on behalf of three lakh individual investors holding 8.75 crores shares of Satyam. Only to have the Consumer Court promptly dismiss the petition on the grounds that the Court lacked the requisite expertise and infrastructure! The larger question of whether the case has merits was, however, left unanswered.

That’s easy, you might say. In the David vs Goliath struggle between small investors and big companies, especially those guilty of fraud, public sympathy is always with the underdog, not only in India but the world over as well.

Worldcom, for instance, paid over $6 billion in damages to investors to put an end to legal wrangling. But, even in the West, Worldcom was an exception. In many of the other corporate scandals such as Enron, Qwest Adelphia, Parmalat and so on where corporate fraud has cost investors billions of dollars, investors have had to rest content with licking their wounds.
Why? After all investors, especially small investors, are the biggest losers in any corporate fraud. But apart from the practical difficulties
of working out how individual shareholders are to be compensated (the main reason why Sebi has made no progress in compensating investors in the earlier IPO scam), there is an important difference that many well-intentioned observers lose sight of.

Equity capital is risk capital. And fraud is very much a part of overall risk. Moreover, fraud is a criminal offence. As with any such offence, the guilty must be punished. But it is one thing to say that the guilty must not be allowed to go scot free and quite another to extend the argument to say shareholders must be compensated.

On the contrary! Remember, shareholders, big and small, are owners of the company. In the Satyam case, one could even argue that as owners they failed to exercise necessary oversight over the board, including independent directors, and the auditors as a result of which many other stake holders lost out. Joint stock limited liability companies protect shareholders by ensuring their liability is limited to the extent of their shareholding. But for this protection, irate creditors, bondholders and all other stakeholders in Satyam, including its employees could actually implead shareholders to make good their losses!

To outraged small investors, still smarting under their losses in Satyam, this might seem hard to swallow but the reality is they are on a weak wicket. Several recent US Supreme Court decisions have favoured businesses in cases related to securities-fraud lawsuits by shareholders. In January 2008 the US Supreme Court (in the Stoneridge case) ruled against investors who sought compensation on very similar grounds. Investors had alleged that two suppliers of cable TV set-top boxes colluded with Charter Communications Inc. to deceive Charter’s stockholders and inflate the price of the cable TV company’s stock.

The decision is expected to impact similar class-action lawsuits by shareholders, including shareholders in Enron who are seeking more than $30 billion from Wall Street investment banks alleging they colluded with Enron to mask its financial problems.

As things stand, therefore, the odds are stacked against Midas and small investors. As a member of that tribe, as I guess are most readers of this paper, that’s not very happy news. But then, as Midas found, his touch was not without its perils!

source: Economictimes

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