We have heard that mergers/de-mergers in reputed group companies enhance value of shareholders' stake and release hidden wealth. Nothing can be farther from the truth. While retail shareholders' wealth does increase, though not significantly, the real beneficiaries are often the promoters, their friends and associates.
In a group, one needs to have two or more independent companies and not necessarily subsidiaries. Promoters' invest in company A up to 20% of its equity. Company A invests 20% in Company B from its resources, including bank borrowings, . Company B, with these resources and may be with further borrowings and outside equity; invests up to 20% in Company A. This can go on. Promoters control 40% equity in each of the companies A and B. While company A may be a publicly quoted company subject to the rigors of corporate governance, Company B need not be. This is one of the techniques adopted by groups to control voting rights in several companies without necessarily investing in it from their own resources.
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