Azim Premji’s philanthropy is noble but his trusts must not enjoy voting rights

Don’t look the gift horse in the mouth goes the cliché. This author doesn’t. Indeed he has tremendous respect for Wipro founder Azim Premji and his pioneering work on the education front through his Azim Premji Foundation. His latest initiative – the transfer of an 18 percent stake in Wipro held by him would translate into a dividend income of Rs 530 crore to the trusts that would be deployed for noble social work such as education. Sacrificing money of this magnitude calls for a large heart. The trusts in aggregate, taken together with his earlier donations, holds 39 percent of the equity of Wipro thus making them rub shoulders with the promoter for equal status insofar as shareholdings are concerned. [caption id=“attachment_1187561” align=“alignleft” width=“380”]  Wipro founder Azim Premji. Reuters[/caption] Premji says in his letter to the shareholders vide the annual report for 2014-15 that “over these years I have irrevocably transferred a significant part of the shareholding in Wipro, amounting to 39 percent of the shares of Wipro, to a Trust (of which ownership in 21.14 percent was transferred and for the balance the Trust is entitled to beneficial interest of dividends and sale proceeds).” The Companies Act, 1956 contained a provision that mandated that trusts holding shares in a company will be stripped of its voting rights and such rights instead would be exercised if at all by a Central government appointee called public trustee. The idea was eminently practical and sensible, the one that eschewed mischief potential. A public charitable trust enjoys tax immunity in return for doing commendable social work. It should not be allowed to be used as a cat’s paw by wily promoters when the raison d’être of its creation was altruism. But inexplicably, the regime of voting by public trustee was abolished in the year 2000 thus giving these trusts the voting right. The Companies Act, 2013 pulls punches when it requires both the actual and beneficial owners to declare their relationships to the company without stripping the trust of its voting rights. This is indeed curious. It ought to have restored status quo ante in full measure and not in half measure because no useful purpose is served by declaring solemnly that the nominal and beneficial owners are different unless such benami holdings are discouraged through stripping of voting rights. Premji tells the shareholders of Wipro that out of the 39 percent stakes held by the trust thanks to his munificence, he has made the trust the absolute owner of the underlying shares to the extent of 21 percent stake but on the balance 18 percent stake, the trust is entitled to only dividend and capital gains. In other words in respect of the second lot, he has separated the economic rights from voting rights, with the voting rights remaining with him. The truth however is even in respect of the first lot the voting right practically remains with him because the trustees of trust he has created would dare not vote in a manner that harms his interest in the company. In other words they would do his bidding. Two things need to be done by the powers-that-be: - Restore voting by public trustee where shares are held by trusts who must be answerable to the government for the way he has voted or not voted; and - Make it clear in the income-tax law that if trusts are created with strings attached, income tax exemption would not be given. The income tax law even as it is frowns on trusts that dance to the tune of their creators but it should expressly contains a provision frowning on trusts that have got shares from their creators. In other words, if the company law is not amended, the income tax law must be so that authors of such trusts forego voting rights explicitly through the trust deed by imposing such a condition on the trustees of such trusts. And if the gift deed transfers only the economic rights, it should explicitly say that the donor sacrifices the voting rights. Tatas control their group companies through Tata Sons Ltd, a family investment vehicle. Tata Sons not being a trust pays income tax. If Azim Premji Foundation directly or indirectly calls shots in Wipro it does not deserve the tax indulgence. If the law is not changed as suggested herein, trusts will be back in fashion as investment vehicles that achieve two purposes—-tax free income for the trust on capital gains ( dividend is in any case tax-free trust or others) because the company paying dividend has to pay dividend distribution tax and pro forma compliance with the SEBI mandate that non-promoter shareholding in a listed company should be at least 25%. The trust created by Premji would come under the non-promoter category though in all likelihood its strings must be in the hands of Premji directly or indirectly.