Zorawar
10-01-2006, 01:14 PM
High-rise villages are sprouting on the outskirts of our cities. As one wanders around the building sites of Gurgaon, Rajarhat, Whitefields or Powai, one will be hard put to it to find a run-of-the-mill name like Patil, Sharma, Roy or Krishnan. One finds only exotic names like Metropolitan, Brigade, DLF, Peerless and Daffodil. What is it that they have and we do not? They are all companies, unlike us human beings. Governments have a monopoly in the conversion of agricultural land into real estate, and they pass on land only to privileged companies, not to common men.
This nexus between companies and governments is not peculiar to real estate transactions. Some months ago, Securities and Exchange Board of India (SEBI) discovered that some enterprising Gujaratis had made thousands of applications for shares that — thanks to SEBI’s rationing tactics — were issued at an unduly low price, and made a killing on allotment by selling them off. It targeted a housewife named Rupalben Panchal. But Karvy, the company through which all the applications were made, escaped unscathed. Obviously it could pull strings that were not available to her; it lived another day to pull another fast one.
And now, a company has bought a plot from Delhi government at an astronomical price. And why a company? Because whenever property is transferred, Delhi government charges 4 per cent of the price as transfer charges. on a property worth a crore, one has to pay the government Rs 400,000 for just making an entry in its property record. But a company does not have to sell the property it owns (provided it does nothing except own that property). When the time comes, its owner can simply sell the company; the plot will be sold together with the company without having to pay any tax. Such are the wonders of incorporation.
If they win the favour of SEBI — which is not difficult — companies can raise billions by simply advertising and inviting share applications. If their owners disappear with the money they raise, that is fine. That is precisely what the hundreds of non-banking finance companies that mushroomed in the boom of 1992-96 did. And not just they; most of the non-financial companies that took away money from shareholders in those years also disappeared without trace. The department of company affairs held an enquiry. As far as is known, it is still holding the enquiry, 10 years later. For the liability of the companies’ shareholders is limited in law; the liability of their promoters is non-existent.
If companies are such excellent vehicles for cheating people, why do governments mollycoddle them so? It is because of the belief that since shareholders’ liability is limited to what they paid for the shares and they do not have to pay a company’s debts if it goes bankrupt, rich people will be more willing to invest in companies. The more share capital companies have, the more money banks are prepared to lend them. The more money a company can raise, the more land a government is prepared to sell it. And so it goes on.
But suppose that by accident or stupidity, a company turns turtle. Then its creditors are much less likely to get their money than if they had lent to a simple, unincorporated individual. I would be much safer if I gave my money to Azim Premji to manage than to some bank or financial company. If governments had sold land to him and he had not paid for it, they could have laid claim to his entire fortune. But he too is not stupid. If he goes into land development, he will set up a company. Who would not? Who would not be irresponsible if he were given the chance?
So the discrimination in favour of companies that is built into our systems should, in my view, be removed. The only argument against entrusting money or land to individuals is that their assets may be illiquid or unrealizable. So what we need is asset management companies which would make individuals’ assets liquid. No! Not companies; I meant trusts.
This nexus between companies and governments is not peculiar to real estate transactions. Some months ago, Securities and Exchange Board of India (SEBI) discovered that some enterprising Gujaratis had made thousands of applications for shares that — thanks to SEBI’s rationing tactics — were issued at an unduly low price, and made a killing on allotment by selling them off. It targeted a housewife named Rupalben Panchal. But Karvy, the company through which all the applications were made, escaped unscathed. Obviously it could pull strings that were not available to her; it lived another day to pull another fast one.
And now, a company has bought a plot from Delhi government at an astronomical price. And why a company? Because whenever property is transferred, Delhi government charges 4 per cent of the price as transfer charges. on a property worth a crore, one has to pay the government Rs 400,000 for just making an entry in its property record. But a company does not have to sell the property it owns (provided it does nothing except own that property). When the time comes, its owner can simply sell the company; the plot will be sold together with the company without having to pay any tax. Such are the wonders of incorporation.
If they win the favour of SEBI — which is not difficult — companies can raise billions by simply advertising and inviting share applications. If their owners disappear with the money they raise, that is fine. That is precisely what the hundreds of non-banking finance companies that mushroomed in the boom of 1992-96 did. And not just they; most of the non-financial companies that took away money from shareholders in those years also disappeared without trace. The department of company affairs held an enquiry. As far as is known, it is still holding the enquiry, 10 years later. For the liability of the companies’ shareholders is limited in law; the liability of their promoters is non-existent.
If companies are such excellent vehicles for cheating people, why do governments mollycoddle them so? It is because of the belief that since shareholders’ liability is limited to what they paid for the shares and they do not have to pay a company’s debts if it goes bankrupt, rich people will be more willing to invest in companies. The more share capital companies have, the more money banks are prepared to lend them. The more money a company can raise, the more land a government is prepared to sell it. And so it goes on.
But suppose that by accident or stupidity, a company turns turtle. Then its creditors are much less likely to get their money than if they had lent to a simple, unincorporated individual. I would be much safer if I gave my money to Azim Premji to manage than to some bank or financial company. If governments had sold land to him and he had not paid for it, they could have laid claim to his entire fortune. But he too is not stupid. If he goes into land development, he will set up a company. Who would not? Who would not be irresponsible if he were given the chance?
So the discrimination in favour of companies that is built into our systems should, in my view, be removed. The only argument against entrusting money or land to individuals is that their assets may be illiquid or unrealizable. So what we need is asset management companies which would make individuals’ assets liquid. No! Not companies; I meant trusts.