Shares held in trusts were earlier not available to company promoters for controlling companies; the public trustee, a government nominee, alone had the right to exercise voting power
Azim Premji, the promoter of Wipro, one of India’s big four IT companies, recently transferred 5 per cent of the shares of the company (from out of more than 80 per cent held by him and his family) to the Azim Premji Foundation, whose mandate is to impart and promote education. The public perception has been that he pioneered the oxymoronic spectacle of ‘closely held widely held’ companies by controlling upwards of 80 per cent of the voting power in Wipro. That the law of the land allowed him — as indeed others — to do so however did not cut much ice with the commentariat because, in a widely-held company, there must be substantial public participation.
With the government seriously mulling a proposal to mandate a minimum 25 per cent free float for continuing to enjoy listed company status, there is consternation in corporate circles, especially in companies where the promoter and his associates have the lion’s share of the stock and, by extension, of the voting power. The market value of these shares now vested with the foundation is over Rs 8,000 crore or roughly $2 billion, which could perhaps make this the single biggest act of philanthropy; other recent acts of Indian philanthropy have either benefited people abroad or were smaller.
To be sure, the size of Azim Premji’s philanthropy is only notional, in that he has not donated Rs 8,000 crore in cash. But even skeptics would concede that the foundation would have at its disposal considerable dividend income from the company, with which it can do extensive and significant work in the realm of education. Of course, Azim Premji’s is not the maiden initiative in vesting shares with trusts created for altruistic purposes. The lion’s share of the stock of Tata Sons, the investment arm of the Tata group, is held by a clutch of trusts. Shares held in trusts were earlier not available to company promoters for controlling companies; the public trustee, a government nominee, alone had the right to exercise voting power.
But the NDA government dismantled this regime, paving the way for company promoters to use shares held by trusts promoted by them for controlling companies. In the context of Wipro, its promoter or his nominee would be exercising voting rights attributable to the shares held by the Azim Premji Foundation. The bottom line therefore is that while income from assets vested in the trust would be used for charitable or altruistic purposes, voting rights springing from these assets obviously would be used for promoting the interests of the author of the trust. To put it bluntly, the trust or foundation would be the handmaiden of the authors of trusts holding shares.
Azim Premji’s gesture has incidentally sparked a debate on American and Indian philanthropy. Warren Buffett, the American billionaire, donated around $35 billion in installments — albeit with some conditions attached as to achievement of milestones — to charities, the bulk of which went to the Bill and Melinda Gates Foundation, which has been doing exemplary charitable work, especially in the realm of health. Bill Gates himself has given away considerable sums in philanthropy, and Azim Premji has been hailed as India’s Bill Gates.
The Buffett brand of philanthropy is outright, in the sense that he does not retain anything for himself, whereas Azim Premji, even after vesting these shares in the foundation, will presumably use these shares to further his interests in the company. It may therefore be possible for one to contend that this is a case of philanthropy with strings still in the hands of Azim Premji, though American philanthropy too is not entirely born of altruism. The state and federal inheritance taxes often aggregate to a frightening 45 per cent, compelling wealthy people to dispose of a sizeable part of their wealth to others during their own lifetimes.
It is for policymakers to consider whether it would be appropriate to bring back the old regime that vested voting rights in respect of shares held in trusts with the public trustee. That is because there may be several repetitions of the Premji initiative, with company promoters having to willy-nilly shed shares sooner or later in order to make the grade for listing status. It would be prima facie wrong for a philanthropist to inform a trust that the income from assets transferred to it may belong to it, but the author of the trust would exercise tight control over the trust, including over the way it votes in company meetings.
Of course, there is no guarantee that public trustees would vote dispassionately, but the old regime at least had the effect of discouraging self-perpetuating philanthropy. The income-tax law does not give tax exemption to charities in which the authors continue to have a hold or which serve their interests directly or indirectly; but there being no tax on dividend, charities whose main assets are shares may not be seriously handicapped in the absence of tax exemption.
The author is a New Delhi-based chartered accountant