Should promoters use personal wealth to pay employees?

IndiGo, on May 8, announced pay cuts for its employees under a ‘limited, graded leave without pay program’ for May, June and July.

Wadia and son Jeh recently wrote to employees about pay cuts and leave without pay. They also said even though were in touch with the Civil Aviation Ministry and the government for financial assistance, "so far no concrete measures have been forthcoming".

Other airlines, including SpiceJet and Vistara, too, have announced similar measures.

SpiceJet is promoted by Ajay Singh who has previously appeared on Forbes' India Rich List and Vistara is jointly promoted by Singapore Airlines and Tata Sons.

The aviation industry has been among the worst-hit by the coronavirus outbreak and the ensuing lockdown.

Executives say governments in other countries have lent support to their airlines in terms of credit lines or interest-free loans but nothing has been done, so far, in India.

Companies in other sectors, too, have asked for support and taken steps to limit the salary bill.

These include blue chip companies such as Kotak Mahindra Bank. Led by entrepreneur Uday Kotak, the bank has announced a pay cut of 10 percent for employees earning over Rs 25 lakh a year.

Top managers and board members, too, have taken a cut or foregone their salaries in several companies.

But, the question remains: should promoters use their personal wealth to ease employees’ pain?

No, not really.

For one, rich lists take into account the value of shares owned by promoters, said Shriram Subramanian, the Founder and Managing Director of proxy advisory firm InGovern Research Services. It doesn't mean these entrepreneurs have the billions in their banks accounts.

Not just that. "One also has to separate the company from the promoter. His or her primary motive is to ensure that the business is viable. When there is no cash generated, and there is no business, the promoter has to bring down costs," he said.

It was the promoter’s decision to take and shouldn't be forced, a senior aviation industry executive said.

"These are limited liability companies and this situation is not created by promoters. If they want, they can put in more money but they cannot be forced to legally, nor should there be any moral or media pressure. They can choose to simply declare bankruptcy and walk away," the executive added.

Companies can raise money through rights issue, or promoters can chip in by raising stakes in their firms. Interestingly, 500 promoters had raised stakes in their companies in the fourth quarter of the last financial year.

Can the government play a role here?

No, it doesn't seem to have any money to help companies. But can it incentive promoters to use their wealth to foot the salary bill?

Lawyer Shweta Tewari and chartered accountant Malay Dalmia in an article in Business World  argued that the government can do so. The two suggested several ways, including one where promoters can lend their companies and at the same time, earn interest on the loan. The company could open an account for the specific need and it should be audited to ensure compliance.

Perhaps some out-of-the-box measures are called for as we face a never-seen-before situation.