Share Premium: An Ingenious Political Graft

23 09 2009

One ingenious method for raising money that has come to light in Andhra Pradesh is using share premium account. It is well known that the late CM’s son has business interests in the media sector. The media ventures are already operational and hence visible.  Fewer people are aware of newly floated  cement and steel companies  which are yet to be operational.

The media, steel and cement companies issued shares to the promoters, namely the family, at par. Then the same companies sold at huge premiums often 100-500x times the share value to other investors. On the strength of these investments the media business was valued at Rs 3500 crore in 2008.These investors were large real estate, construction and other AP based firms. These investors perhaps, invested large amounts of money and gave such valuations to shell companies or yet-to-be executed projects with the hope or explicit knowledge that the returns for the investment will come not from the projects per se but through other considerations. The considerations could be anything like concessional land, government contracts, tax concessions etc, which only a person in power can give.

There is nothing intrinsically unethical about issuing shares at a premium. Share valuations have an element of subjectivity. Many angel investors back greenhorn entrepreneurs, based on instinct. It is just incidental that the entrepreneur here had a very powerful father. Now, if the returns do not come through, they will be written off as bad investments in their books. If these investments have been made by public limited companies, as indeed many are, then it is the minority shareholder who loses.

–       G. Mohan




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