The True Meaning of Equity – The Indian Context

Besides the usual meaning given in financial texts, i.e. a share in all future cash flows net of debt payments. I would like to propose another definition in the Indian context.

Basically, it would go something like, whatever the incumbent management feels like giving to its equity holders. Hence, unlike debt there is no obligation on part of the management to give its shareholders anything.

This seems to be the case with numerous incumbent managements in India. Most of these companies are majority family owned and managed and have little regards for the rights of the minority investor to receive their fair share of the future cash flows. Their motto seems to be, “Ram nam japna paraya maal apna.” Loosely translated this means what is mine in mine, what is yours is also mine.

When these companies are in need of funding they will approach the public. However, having raised the cash they will conveniently forget they have minority shareholders to pay as well.

Moral of the story, before investing in equity make sure that the management will not forget all about you once it is their turn to pay up.