Common wealth

EDITORIAL

Tech kids — Rishad Premji, Akshata Murthy, Shruti Shibulal, Arihant Gajendra Kumar Patni and Uday Jain — are today crorepatis by virtue of their stakeholding in companies their parents have built. Son rise in corporate India is as routine as sunrise. Yesterday, it was young Rishad Premji in Wipro. Today, it is Sunil Bharti Mittal’s son Shravin getting positioned to take up the mantel. Wealth created by entrepreneur-parents, and often the fortunes of entire corporations, are passed on to their heirs. Society at large and the various stakeholders in whose name a corporate entrepreneur strives to create the wealth are, shall we say, short-changed in the process. In the West, particularly in the US, a rather stiff inheritance tax is one of the factors that drives corporate entrepreneurs to “give back” to society much of their wealth rather than leaving it behind for their offspring and the treasury. An inheritance tax is not more justified any country than in India, the home to the largest number of poor people and the third largest number of corporate billionaires in the world. Like in the US, France, the UK and Germany, India too had had an inheritance tax of sorts, called “estate duty”, from 1953 to 1985. But it was a small levy and applied mostly on inheritance of landed properties, real estate, gold and such other assets. Corporate inheritance escaped taxation throughout, though the case for a tax on shares inherited by the legal heirs of promoter-shareholders in companies is arguably the strongest. In such cases, along with the shares in companies, management control also gets passed on to the legal heirs. Sebi's takeover regulations defines control as, “control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.” Since there is no inheritance tax in India, there is no burden on the inheritors of the controlling stakes in companies. Even Sebi's takeover regulations exempt acquirers of shares through inheritance from making an open offer to the rest of the shareholders. Is it any one’s case that such management control will always be exercised in the best interests of the company? After all, one of the significant factors an investor looks at while investing in a company is the promoters and their track record. Any change in these can be interpreted differently by shareholders. If the takeover law takes into the account the rights of existing shareholders to exit a company by selling off their stake in a mandatory open offer, shouldn’t they have the same rights when management control changes through inheritance? Inheritance tax, where it exists, ranges between 30 per cent and 50 per cent. A tax on corporate inheritance can be within this range. This will obviously lead to differences in the way inherited corporate assets get treated vis-a-vis other assets. But companies are governed by separate laws. The spirit of those laws are trusteeship and fiduciary responsibilities. The creator of corporate wealth has greater societal responsibility than the owners ordinary private properties. The citadel of responsible capitalism cannot be built on the foundation of the fundamental rights to property alone, but would need the edifice of the fundamental duties of service to society at large.