Minority Interest

While investing in stocks one of the key parameters the minority (retail) investors should check – who the promoter of the company is and how much shareholding the individual/entity holds in the company. A lot can be deduced from this single data point.

1. Quantum of stake and it’s implication
2. Compensation of the KMP
3. Composition of the board
4. Dividend policies
5. Key policies and procedures

and much more.

The trend over the past few years to invest in government companies is catching up fast and retail investors are falling over heels to invest due to several reasons such as rising stock prices, good business prospects and companies turning into giants over next several years.

Sleepwalking into the government company trap

Investing into government companies can be overt and covert. While you invest in a company with government as a promoter who is verifiable via checking the shareholding pattern; you take whatever risks associated with investing in the government company. This is overt. When you don’t even know that you are investing into a company that is associated with the government, while no means to check out if this is indeed a government company OR influenced by the government OR covertly a government managed company; you are sleepwalking into a trap. The risks escalate multi-times, without you being aware that you are invested into a game you do not know the rules about.

There are 4 types of government companies to be aware of

1. Government owned and controlled (the partnership)

Easy to identify. Promoter being the President of India. ONGC, the SBI, NTPC, HAL, IRCTC and many such ones. These were once shunned for being too slow, bureaucratic, inefficient and often losing money. The government change has made them favorites during current times due to change in the way they are operating. There has been a 360^o change in the way investors have valued them. Now that can change in the future if government where to change. The risk is open, and investors should be aware of the same.

2. Politically exposed enterprise (the ‘do-number’ kamai)

These are companies where the MD is also an MLA, MP, or tightly networked with the political machinery. Their real strength lies in proximity to power and not focusing much on product or process. As long as their political patrons sit in office, the orders keep coming for roads, buildings, PSUs and everything flows like clockwork.

For example, in 2025 a sitting Chief Minister of a large state’s wife or relative owns a civil construction company and/or a dairy business. While his party holds power, his firm’s ease of doing business is as smooth as butter and might face little or no competition with tenders, approvals etc. But when the government changes, headwinds start to appear fast. Contracts maybe cancelled, payments delayed and scrutiny increases.

These businesses are election dependent. If their party stays in power, you win. If not, you’re stuck with a shell company with monies siphoned in no time. High reward but tied to someone else’s tenure. You are riding a tiger, but at least you know it.

3. Front Companies (the ‘Thug’ friend)

“An honest enemy is much better than a deceitful friend”

These aren’t government firms. They’re not even run by elected representatives or politically exposed persons or have direct connection with politics. Just on paper though. They look, act and smell just like another private company owned by an “ordinary citizen.” However, these are the blue-eyed boys of the stock markets, winning major government tenders, part of every regulatory / compliance check-listed firms. These companies give the impression that the management is indeed smart, they appear to be at right time at the right place and making monies appears easy to them.

There’s no direct political link. You can never, ever establish the connection, even if rumour mill talk about the same since you cannot just establish the political connection. You would know that ONLY when the lid is blown off; the scam unearthed, the company siphoned off crores of rupees. These companies operate in the shadows of power as they never officially connected but are always conveniently placed.

They exist in a grey zone as they might seem legally clean but are always politically loaded. And that makes them dangerous for investors. When things go well, they look like rising stars. But if a controversy erupts or political winds shift, they’re the first to get hit never to recover.

So how do you spot them?

1. Obscure promoters / management team with little or no background in business
2. Very little / no track record and yet business grows at a rapid pace
3. Multiple layers of firms with one core and many ancillary subsidiaries; cross holdings among them
4.  Predominantly do business with government and/or first to take advantage of regulatory / policy shifts
5. Conduct the smell-test. If things appear to be too rosy; next sunrise company, darling of the market etc. ask questions relating to its revenue model.

These companies are a sure-fire way of losing money in the stock market. Easy to get into but difficult to stay away. Also require a lot of work to spot these as there is no template to do so.

4. “The Government” (he who must not be named)

These companies are power. These are easy to spot and difficult to ignore. These are participating in critical infrastructure – airports, ports, refineries, defense, and anything else that smells like strategic infrastructure. Officially, they’re 100% private promoter owned, listed and / or owned by the public and institutional shareholders. Unofficially, they operate like a wing of the government.

They also deal with hostile countries, banned entities, and sanctioned regions. Yet they keep getting funded, licensed, and protected. Why? Because behind the glove, the hand is always the government.

How do you know you’re looking at one?

The funding comes quietly from PSU banks and usually the contracts arrive without a press release. The ownership is private, but the security detail is government-issued. And when things go wrong the government steps in to secure the assets but not the investors.

As a shareholder, you don’t get protection. The government walks away by asset transfer to another entity, the promoter (who is private citizen) has already made his money. The only person who loses monies is the public (common) shareholder.

Bottom Line?

Government-Owned and Politically Exposed Companies (types 1 and 2) may not make you rich overnight, but they offer stability and predictability. The government’s backing or political proximity provides some safety net. Type 1 may or may not make you money but you will rarely lose money if you stay invested. Type 2 you might either double or none (which means you can make a lot of money or lose money).

Front Companies and “The” Government Companies (types 3 and 4) operate differently. They often have high stakes and have made fortunes, sometimes maybe overnight by riding political favors and insider access. But the catch is, while insiders and promoters’ profit, minority shareholders are almost always left with nothing when the dust settles.

If you want to invest smartly, steer clear of 3 and 4. The risks far outweigh any potential gains, and you’re more likely to be the last one holding an empty bag.

As always, Caveat Emptor!