It is an undeniable reality that a company’s management acts as the gatekeeper between its profits and public shareholders. Management holds the power to determine how much of these earnings are distributed to investors. Numerous cases in the corporate world illustrate how management or promoters have diverted funds for personal gain rather than sharing them with shareholders.

Given such cases, many believe that professionally owned and managed companies offer better protection for public and minority shareholders compared to promoter-led firms. However, experience has shown that companies without a promoter-family are not entirely risk-free either. There have been numerous instances where professional managers prioritized their own interests over those of public shareholders, regardless of whether the company was promoter-owned or professionally managed.

This article aims to examine cases where professional managers, when in control, appeared to benefit at the expense of public shareholders. These examples span both promoter-led companies and those without a promoter, such as institutionally owned or professionally managed firms.

This article aims to highlight the potential risks investors may face when analyzing companies where professional managers, rather than promoter-family members, have significant control over decision-making.

Investors should recognize that the actions and companies discussed in this article may fully comply with legal requirements. However, compliance with the law does not always guarantee alignment with the best interests of minority or public shareholders. It is essential for investors to evaluate whether these actions serve their financial interests.

Instead of labeling specific companies as good or bad, investors should focus on understanding how to identify key management practices and governance issues. This includes analyzing relevant sections of annual reports and other resources. By emphasizing the broader concepts and case studies discussed, investors can incorporate these insights into their stock evaluation process, strengthening their decision-making throughout their investment journey.

How Professional Managers Disproportionately Benefit Themselves

Through our analysis of hundreds of companies, we have observed that professional managers in professionally managed firms often attempt to disproportionately benefit themselves through several key methods:

• Excessive Remuneration – This includes high salaries and employee stock options (ESOPs). In many cases, we found that executive compensation was not linked to company performance. Even when a company’s financial health declined, managerial salaries continued to rise.
• Employee Stock Options (ESOPs) and Restricted Stock Units (RSUs) – ESOPs are among the most common ways managers enrich themselves. Managers frequently award themselves RSUs at an extremely low price, sometimes as little as ₹1 per unit. This often leads them to prioritize short-term stock price stability over long-term business growth, as any decline in stock value could impact their personal financial gains. This pattern is seen in both promoter-led and professionally managed companies, with promoters in the former also benefiting regardless of business performance.
• Fraud – Numerous cases exist where professional managers have engaged in fraudulent activities to enrich themselves at the expense of shareholders.
• Related Party Transactions – Even in professionally owned and managed firms, management may engage in transactions that shift economic benefits between group companies. These transfers may serve the interests of insiders while disadvantaging public shareholders.
• Transitioning to Promoters – In extreme cases, professional managers attempt to convert a professionally managed company into a promoter-owned firm, securing greater control and long-term financial advantages.

To better understand these governance risks, let’s explore real-life cases where professional managers have acted in ways that benefited themselves at the cost of public or minority shareholders. Investors should remain vigilant, as such practices can occur in both promoter-owned and professionally managed companies.

A) Remuneration Unlinked to Company Performance

In such cases, professional managers leverage their influence over the board and key shareholders to secure ever-increasing salaries and perks, regardless of the company’s financial performance. This practice is observed in both promoter-led and professionally managed firms.

Century Textiles & Industries Ltd

Century Textiles & Industries Ltd, a part of the B.K. Birla Group, operates in paper, textiles, and real estate. Previously, the company also had a cement division, which it later sold.

Upon analysis, an investor observes several instances of poor capital allocation, including:

• Continuous project delays
• Rising project costs year after year
• High debt-funded capital expenditures yielding low returns
• Cement assets generating less than half the EBITDA per tone compared to competitors

Despite these challenges, an examination of executive compensation reveals a concerning trend. Between FY2010 and FY2016, the company’s net profit after tax (PAT) declined from ₹339 crore in FY2010 to a net loss of ₹95 crore in FY2016. However, during the same period, the remuneration of the highest-paid executive, the Whole-Time Director (WTD), increased significantly—from ₹1.61 crore (FY2010, Annual Report, Page 26) to ₹3.74 crore (FY2016, Annual Report, Page 40).

This disconnect between company performance and executive pay raises concerns about the alignment of management incentives with shareholder interests.

An investor would observe that despite the company’s deteriorating financial performance, executive remuneration increased significantly. Between FY2010 and FY2016, the Whole-Time Director’s (WTD) salary rose by 132% (from ₹1.61 crore to ₹3.74 crore), even as net profit declined from ₹339 crore (8% net margin) in FY2010 to a net loss of ₹95 crore in FY2016.

The disconnect becomes even more apparent in FY2013, when the company reported a net loss of ₹34 crore. Instead of a pay cut, the WTD’s remuneration increased by 23%, rising from ₹1.94 crore (FY2012, Annual Report, Page 29) to ₹2.39 crore (FY2013, Annual Report, Page 30).

This pattern suggests that executive pay at Century Textiles & Industries Ltd was not tied to business performance. Whether the company generated profits or incurred losses, the management’s financial interests remained protected. The WTD’s salary consistently grew at an annualized rate of approximately 15%, with an even steeper hike of 23% in a year of losses (FY2013).

Such a remuneration structure raises concerns about accountability. If management is rewarded regardless of financial outcomes, there is little incentive to drive profitability. Investors may also question why the company’s promoters allowed these pay hikes amid deteriorating performance. A deeper analysis reveals another worrying trend: between FY2011 and FY2015, the company continued to pay dividends—even though it lacked sufficient free cash flow. This practice often benefits the largest shareholders, typically the promoters.

Furthermore, during this period, Century Textiles & Industries Ltd pursued aggressive, debt-funded capital expenditure without generating adequate operational cash flows. By FY2013, the company was not only struggling to meet its investment needs but had also reported a net loss of ₹34 crore.

Between FY2011 and FY2015, Century Textiles & Industries Ltd’s investment needs consistently exceeded its operating cash flows. As a result, the company’s debt levels rose every year, escalating from ₹2,369 crore at the beginning of FY2011 to ₹6,139 crore by the end of FY2015.

Despite its mounting debt and financial strain, the company continued to declare dividends throughout this period. From FY2011 to FY2014, the dividend payout (excluding distribution tax) remained steady at ₹51 crore per year and increased to ₹56 crore in FY2015. Even in FY2013, when the company posted a net loss of ₹34 crore, it still distributed ₹51 crore in dividends.

A closer analysis reveals that Century Textiles & Industries Ltd was using all its operational cash flow—and additional borrowed funds—for capital expansion projects. With its debt burden increasing annually, the dividends effectively became payouts funded by loans rather than genuine business earnings. In other words, the company was channeling borrowed money to its shareholders instead of strengthening its balance sheet.

This situation highlights a serious governance issue: both executive remuneration and dividend distributions remained disconnected from the company’s actual financial health. Management continued to receive substantial pay hikes even when the company was making losses, while shareholders enjoyed uninterrupted dividends despite negative free cash flow.

Such a misalignment of incentives often leads to inefficient capital allocation. In the short term, neither management nor shareholders feel the consequences—executives receive higher pay, and shareholders continue receiving dividends. However, this model is unsustainable in the long run. Eventually, the company finds itself in a debt trap, unable to generate enough cash flow to service its obligations.

Century Textiles & Industries Ltd ultimately faced this reality, forcing it to sell off assets and business divisions to repay its mounting debt.

B) Employee Stock Options (ESOPs) and Restricted Stock Units (RSUs):

ESOPs and RSUs serve as significant tools through which professional managers secure substantial financial benefits. In many cases, these executives leverage their influence over the board and key shareholders to approve disproportionately large compensation packages in their favor.

Ashok Leyland Ltd:

Ashok Leyland Ltd, a flagship company of the Hinduja Group, is a leading manufacturer of commercial vehicles in India, specializing in medium and heavy commercial vehicles as well as buses. The company is professionally managed, with a member of the promoter family, the Hinduja family, serving as the non-executive Chairman.

Upon analyzing Ashok Leyland Ltd, an investor observes that the company has been exceptionally generous in compensating its professional leadership. A review of the FY2019 annual report reveals that the CEO & MD of the company received a total remuneration of approximately ₹137 crore (= ₹131.21 crore + ₹5.81 crore).

Source: FY2019 annual report, page 64

An investor observes that the largest component of the CEO & MD’s remuneration comes from stock options, amounting to approximately ₹110 crore. Within these stock options, the investor notices that the majority—7,454,000 options—have been granted at an exceptionally low exercise price of just ₹1 per option.

Granting stock options at an exercise price of ₹1 per share is one of the most generous forms of employee compensation, second only to directly awarding free shares.

Furthermore, upon reviewing the details of the stock options available to employees of Ashok Leyland Ltd, the investor finds insights into the total number of options granted and their respective exercise prices.

Source: FY2019 annual report, page 70.

From the above table, an investor observes that Ashok Leyland Ltd’s ESOP plan allocates stock options across different tranches with varying exercise prices. Out of the total 13,299,875 options granted to employees, 5,845,875 options (44%) are available at exercise prices of ₹80, ₹83.5, and ₹109. However, a significant majority—7,454,000 options (56% of all options)—are priced at an exceptionally low exercise price of just ₹1.

Furthermore, the investor notes that all these generously priced ₹1/- options are granted to a single individual—the CEO & MD—while the rest of the employees must compete for the remaining 44% of options, which are priced considerably higher.

This stark disparity highlights the exceptional treatment given to the CEO. It is, therefore, not surprising that in 2019, a significant portion of minority shareholders opposed the CEO’s remuneration proposal. When put to a vote, 14.16% of shareholders rejected the proposed compensation for the CEO for FY2019.

Source: FY2019 annual report, page 36.

While reviewing the senior management of Ashok Leyland Ltd, an investor observes that Mr. Vinod Dasari served as the CEO & MD from April 2011 to March 2019, before departing to join Royal Enfield.

C) Corporate Frauds:

The corporate world has witnessed numerous instances where professional managers engaged in fraudulent activities, ultimately causing significant losses to shareholders.

Below are a few examples where senior executives attempted to enrich themselves through fraudulent means.

Here are a couple of instances where senior professional managers engaged in fraudulent activities for personal gain:

National Peroxide Ltd:

National Peroxide Ltd, part of the Wadia Group, is India’s largest manufacturer of hydrogen peroxide (H₂O₂).

In FY2018, an investor analyzing the company discovered a financial fraud amounting to approximately ₹37 crore. The fraud was committed by employees, including senior management personnel. In response, the company terminated the involved employees and lodged criminal complaints with the police.

Source: FY2018 Annual Report, Page 116.

Later, media reports revealed that the police had arrested Mr. Suhas Lohokare (former MD) and the company’s accountant, Mr. Nipul Trivedi. According to the reports, they were accused of siphoning off funds intended for sales tax and value-added tax (VAT) payments over a span of 10 years, from 2008 to 2017 (Source: Times of India).

Following the fraud, National Peroxide Ltd recognized the need to strengthen its internal processes. In response, the company replaced its senior management team, including the Managing Director and Vice President of Finance, along with its internal auditors. Additionally, the company stated that it is reviewing key contracts, as well as customer and vendor pricing.

D) Multinational corporations (MNCs) with professional management diverting economic benefits from minority shareholders:

Institutional Ownership and the Shift of Economic Benefits Away from Minority Shareholders

Investors often perceive that companies owned by institutional shareholders and managed professionally are less prone to financial misconduct, particularly in comparison to promoter-led entities where fund siphoning is a concern. The assumption is that in such companies, no single family has overriding control, reducing the likelihood of economic benefits being diverted away from minority shareholders. However, reality is more complex.

Even institutionally-owned, professionally managed companies have, at times, transferred economic benefits from their listed entities to other group companies, adversely impacting minority shareholders. Let’s examine a few such instances.

1) Honeywell Automation India Ltd

Honeywell Automation India Ltd, a subsidiary of Honeywell Group, USA, operates in automation and control systems across industries, buildings, and automobiles. A deeper analysis of the company reveals multiple instances where resources of the listed entity appear to have been utilized for the benefit of its group companies, effectively shifting economic value away from minority shareholders.

i) Inter-Corporate Deposits to Group Companies

A review of Honeywell Automation India Ltd’s past annual reports indicates repeated instances where the company extended inter-corporate loans to other Honeywell group entities:

• FY2007 (Annual Report, Page 30): ₹32.5 crore in inter-corporate deposits
  • Honeywell Turbo Technologies (I) Pvt. Ltd: ₹18.5 crore
  • Honeywell Turbo (India) Pvt. Ltd: ₹14 crore
• FY2008 (Annual Report, Page 28): ₹509 crore in inter-corporate deposits
  • Honeywell Turbo Technologies (I) Pvt. Ltd: ₹505 crore
  • Honeywell Turbo (India) Pvt. Ltd: ₹4 crore
• FY2009 (Annual Report, Page 28): ₹55.4 crore in inter-corporate deposits
  • Honeywell Turbo Technologies (I) Pvt. Ltd: ₹45.9 crore
  • Callidus Technologies India Pvt. Ltd: ₹9.5 crore
• FY2010 (Annual Report, Page 28): ₹78.7 crore in inter-corporate deposits
  • Honeywell Turbo Technologies (I) Pvt. Ltd: ₹78.7 crore
• FY2011 (Annual Report, Page 27): ₹3.8 crore in inter-corporate deposits
  • Honeywell Controls and Automation India Pvt. Ltd: ₹3.5 crore
  • Matrikon Industrial Solutions India Pvt. Ltd: ₹0.3 crore

These transactions illustrate how funds belonging to the listed entity were redirected to group companies, effectively shifting economic benefits away from the minority shareholders of Honeywell Automation India Ltd.

ii) Global Corporate Overheads of Honeywell Group

Upon analyzing the expenses of Honeywell Automation India Ltd, investors may notice a significant portion being attributed to “corporate overhead allocations” over the years. These charges represent costs allocated by the parent company, Honeywell Group, to its Indian subsidiary.

The following table highlights the corporate overhead allocations charged to Honeywell Automation India Ltd from FY2009 to FY2020, amounting to approximately ₹873 crore:

FY2009 annual report, page 38:

An investor would notice that, without a detailed breakdown of the services included under “corporate overhead allocations,” this expense remains a black box. There is no way to determine whether these charges are justified, raising concerns about transparency.

This situation is reminiscent of transfer pricing, where companies assign values to products and services exchanged between their global entities. Transfer pricing has historically been a point of contention, as these allocations are not always based on fair market value but can be influenced by other considerations.

Companies often allocate higher expenses to profitable subsidiaries to offset losses in other group entities, thereby improving their overall financial performance. Similar tactics may be at play in determining the corporate overhead charges imposed on Honeywell Automation India Ltd.

E) When professionals transition into company promoters:

When an investor chooses an institutionally or professionally-owned and managed company over a promoter-led business, they often assume that shareholder interests will be better protected. This belief stems from the absence of a dominant promoter-family, reducing the likelihood of a single entity controlling company resources for personal gain.

However, there are instances where key executives, who wield decision-making power in professionally-managed firms, gradually take steps to consolidate control. They may acquire significant voting rights through mechanisms like preferential allotments, effectively positioning themselves as the new promoters of the company.

As a result, the company’s structure shifts over time from professionally-owned and managed to promoter-driven. This transformation undermines the investor’s original rationale for choosing a professionally-run enterprise, as it introduces the very risks they sought to avoid.

Example: Professionals Increasing Control Over Voting Rights

To better understand how professional managers can gradually increase their control over a company and transition it into a promoter-led entity, let’s examine a specific case.

1) Ion Exchange (India) Ltd

Ion Exchange (India) Ltd is an Indian company specializing in water treatment plants, wastewater processing, sewage treatment, packaged drinking water, and seawater desalination.

A detailed analysis of Ion Exchange (India) Ltd reveals a shift in its management culture over the years. The company’s history, as outlined in its FY2013 annual report, provides key insights into this transition:

• 1930s: The UK-based water treatment company, Permutit, was represented in India by another UK firm, J. Stone.
• 1952: Due to declining business, Permutit planned to exit India. However, J. Stone convinced them to retain their operations.
• Subsequent Years: G. Shankar Ranganathan, an employee of J. Stone, played a crucial role in revitalizing the business.
• 1964: Permutit established Ion Exchange (India) Ltd as its Indian subsidiary, holding a 60% foreign stake.
• 1984: When Permutit decided to exit India, Ion Exchange (India) Ltd created multiple employee welfare trusts, which acquired Permutit’s shares—converting the company into a fully Indian-owned entity.

Shift in Ownership and Leadership at Ion Exchange (India) Ltd

A closer analysis of the company’s annual reports reveals key developments regarding the ownership structure and leadership transition at Ion Exchange (India) Ltd.

The employee welfare trusts, which hold a significant stake in the company, originally acquired shares from Permutit using funds provided by Ion Exchange (India) Ltd itself in the form of loans. According to the FY2017 annual report (page 97), the company stated that these loans were intended to create a corpus for the trusts. As of FY2017, the trusts owned 2,662,914 shares of the company.

These trusts receive annual dividends of approximately ₹75-80 lakh from their shareholding and use around ₹60 lakh of this amount to repay loans to the company (FY2017 annual report, page 96).

At first glance, the company appeared to have a professional corporate structure, with its leadership transitioning from Mr. G. Shankar Ranganathan to the employee welfare trusts. This suggested a professionally managed organization without a dominant promoter family.

However, upon reviewing the current leadership, an investor may notice key changes:

• The present Chairman & Managing Director, Mr. Rajesh Sharma, is not a blood relative of the company’s earlier leader, Mr. G. Shankar Ranganathan.
• Mr. Rajesh Sharma joined Ion Exchange (India) Ltd in 1974 and rose through the ranks before taking on his current role (FY2014 annual report, page 9), indicating a professional leadership transition.

Yet, a deeper look at the company’s board composition suggests an increasing presence of family ties:

• Mr. Dinesh Sharma, Executive Director, is the brother of CMD Rajesh Sharma.
• Mr. Aankur Patni, Executive Director, serves on the board alongside his father, Mr. M.P. Patni.

Furthermore, an analysis of the company’s shareholding pattern over time reveals that the current senior management has been consistently increasing its stake in the company through various means, signaling a gradual transition towards a family-driven ownership structure.

a) FY2011: Share Allotment Through Employee Stock Options and Private Placement

In FY2011, Ion Exchange (India) Ltd disclosed in its annual report that it had allotted 950,000 shares to key management personnel (KMP) and their relatives through the exercise of employee stock options and private placement.

(Source: FY2011 Annual Report, Page 94)

FY2011 annual report, page 93:

As a result, in FY2011, the current senior leadership of the company expanded its stake by acquiring 950,000 shares through the exercise of employee stock options and private placement.

By the end of FY2011, the company reported a total of 13,098,011 shares, which included the newly issued shares allotted to key management personnel (KMP) and their relatives.

FY2011 annual report, page 74:

b) FY2014: Increase in Shareholding by Key Management of Ion Exchange (India) Ltd

In FY2014, an investor observes that the shareholding of the company’s key management increased from 40.6% at the end of FY2013 to 44.44% by the end of FY2014.

In absolute terms, the promoters’ shareholding increased by 941,334 shares in FY2014 (6,458,727 shares in FY2014 – 5,517,393 shares in FY2013).

Upon further analysis, an investor observes that the shareholding of CMD, Mr. Rajesh Sharma, and Mr. M. P. Patni, the father of Executive Director, Mr. Aankur Patni, saw an increase during FY2014.

Additionally, the FY2014 annual report does not mention any share allotment to key management personnel (KMP) through the exercise of employee stock options.

However, during FY2014, the company’s share capital saw a significant increase due to the issuance of 1,070,282 new shares as part of the amalgamation of its associate company, Ion Exchange Services Ltd (IESL).

While reviewing the FY2013 annual report, an investor notes that Ion Exchange (India) Ltd held a 41.58% stake in Ion Exchange Services Ltd (IESL), with the remaining shares owned by other stakeholders.

FY2013 annual report, page 89:

Since there was no allotment of stock options to key management personnel (KMP) in FY2014, an investor can infer two possible reasons for the 941,334-share increase in the promoters’ stake:

1. Promoters purchased 941,334 shares from the open market to increase their shareholding.
2. Promoters were significant stakeholders in Ion Exchange Services Ltd (IESL), holding the remaining 58.42% stake (100% – 41.58%). As a result, they may have received a substantial portion of the 1,070,282 new shares issued by Ion Exchange (India) Ltd during the amalgamation.

To confirm the exact details, an investor may directly contact the company for clarification regarding the counterparties in IESL who were allotted shares upon amalgamation and whether KMP were among them.

C) FY2020: Increase in Promoters’ Stake

From FY2014 to September 2019, the total number of shares held by the promoters of Ion Exchange (India) Ltd remained unchanged at 6,458,727. However, their percentage shareholding declined from 44.44% in FY2014 to 44.04% in FY2019 due to the issuance of new shares under employee stock options allocated to employees other than key management personnel (KMP).

Sept 2019 shareholding pattern as per the BSE website:

Even among the promoters, the shareholding of key management personnel (KMP) and their relatives remained unchanged until September 2019 (Source: BSE, March 2014, and September 2019):

• Rajesh Sharma: 781,218 shares
• Dinesh Sharma: 588,521 shares
• Aankur Patni: 254,668 shares
• M. P. Patni: 711,747 shares

However, in the current financial year, during October 2019 and December 2019, certain transactions took place where employee welfare trusts sold shares. A significant portion of these shares was acquired by KMP, their relatives, Independent Directors, and other major shareholders. These transactions have been reported under BSE > Disclosures > Insider Trading 2015 on the BSE website.

According to the BSE website, the 271,900 shares (175,000 + 94,000 + 2,900) were transacted as “Market Sale” / “Market Purchase”. This suggests that shares previously held by employee welfare trusts have now been acquired primarily by key management personnel (KMP) and directors of the company.

An investor analyzing these developments may observe a structural shift in Ion Exchange (India) Ltd, transitioning from an “Employee-owned, Employee-run” company to a “Promoter-owned, Promoter-run” entity. The rising stake of KMP and directors, combined with the increasing presence of family members in senior management and on the board, signals a different approach to leadership succession—one that contrasts with the past, where the baton was passed from one professional employee to another.

Additionally, an investor may note that key management personnel at Ion Exchange (India) Ltd have been receiving remuneration exceeding legal limits, further raising governance concerns.

Excess Remuneration Taken by Promoters Beyond Statutory Limits

While analyzing the financial history of Ion Exchange (India) Ltd, an investor comes across multiple instances where promoters/key management personnel (KMP) received remuneration exceeding the statutory limits set by the Companies Act. Consequently, the company had to seek special approval from the central government to regularize the excess payments made to them.

In FY2011, the Executive Directors received ₹2.50 crore above the prescribed statutory limit.
(Source: FY2011 Annual Report, Page 28):

In FY2015, the Directors received ₹0.74 crore beyond the statutory limits.

(Source: FY2015 Annual Report, Page 100):

FAQs: Understanding Professional vs. Promoter Management in Companies

1. Is professional management always shareholder-friendly?

Not necessarily. While professional managers are often perceived as more objective and shareholder-friendly, there have been cases where they prioritized their own interests over those of shareholders.

2. What are some common shareholder-unfriendly actions taken by professional managers?

Some instances include:

• Excessive Remuneration: Managers receiving high salaries and increments despite poor company performance.
• Lucrative ESOPs/RSUs: Granting themselves generous stock options even when minority shareholders opposed them.
• Fraud: Engaging in unethical practices for personal gain at the expense of shareholders.
• Related Party Transactions: Transferring economic benefits from the listed company to affiliated group entities.
• Increasing Control: Appointing close associates in key positions or using preferential allotments to strengthen their control over the company.

3. Does promoter-led management always harm shareholders?

No, not necessarily. While some promoter-controlled companies engage in governance issues, many promoters run companies in a highly shareholder-friendly manner, ensuring long-term growth and transparency.

4. How should an investor evaluate company management?

Investors should analyze management on a case-by-case basis rather than relying on broad assumptions about professional or promoter-led leadership. Key aspects to assess include:

• Remuneration policies and whether they align with company performance.
• Decision-making transparency and accountability.
• Corporate governance standards.
• Treatment of minority shareholders.
• Track record of ethical business practices.

5. Is there a universal rule for evaluating management?

No, every company’s management must be assessed individually. Both professional and promoter-led management can be shareholder-friendly or detrimental, depending on their governance practices and business ethics.

6. Where can I learn more about management analysis?

You can refer to the article “How to do Management Analysis of Companies” for a detailed guide on evaluating management effectiveness.

7. What has been your experience with professionally vs. promoter-managed companies?

We’d love to hear your insights! How do you analyze management? Do you use different parameters for professional and promoter management? Share your thoughts and experiences.