Lack Of Promoter Resources Bugs Corporates, Says Pwc

India Inc has failed to achieve good corporate structure due to lack of promoters' resources and absence of conducive regulatory environment, said PricewaterhouseCoopers (PwC) in its study 'Business restructuring -- an analysis of issues and trends in India'.

It said that the thrust towards business restructuring is a recent phenomenon contrary to the popular belief that the process followed the liberalisation in 1991.

The study observed that though the increase in promoter holding has been one of the driving force to undertake restructuring, personal resource constraints have limited direct promoters' investment and possibly have given rise to cross-holdings through investments by the listed group companies.

PwC said, "These cross-holdings, which are typically low yield investments, have a negative impact on investor returns. These returns are further reduced by the multi-point dividend tax."

"A significant impact on the returns of the listed companies' investors on account of such investments could erode the companies' market capitalisation and make them susceptible to takeover by corporate raiders," the consulting firm said.

The PwC report observed that three methods are normally adopted to avoid routing promoters' investment through listed group companies -- investments through an unlisted holding company with operating business, a non-banking financial company as a holding company and an investment company which typically relies on promoters and debt for funding activity.

According to PwC, inadequate bankruptcy and foreclosure laws, limited flexibility in labour downsizing, regulations on stamp duty and capital gains taxation, restriction on carry forward of unabsorbed depreciation on business losses and dividend distribution tax are the important regulatory obstacles to achieve good corporate governance.

The consulting firm, on the basis of its study, has suggested a four-pronged action plan: acceleration of legislative changes to allow greater flexibility in downsizing, shifting location, effecting closure and consolidation of operation; implementation of tax reforms to make restructuring less expensive and to allow entrepreneurs to leverage own resources in a tax effective manner; and improve corporate governance to balance stakeholders' interests.