Question

In Japan, large banks are often large lenders and large equity investors in the same firm. What are some of the potential conflicts that you see in these dual holdings

Answer 1

Banks and financial institutions are stakeholders for a company or firm as they are one of the source of supply of debt capital to these entities . As such they have they well analysed framework for the credit appraisal in order to grand debt / line of credit to these firms .

However the problem of Dual holdings are follows

· Whenever the banks are large equity investors in the firm , they become the majority shareholders of the firm .

· As such they gain the right to vote for the decisions of the company or change the management policy as being large equity holders they have strong equity voting rights.

· The rights of the minority shareholders would be affected as the large chunk of the equity holdings are with these banks .

· They may vote in order to bring the company or the firm work in their best interest ratter than the well being of all the shareholders .

· Hence a conflict of interest arises when these banks become equity shareholders also .

· Also being big lenders , they have access to the internal and price sensitive information’s of the company , and there may be chances of insider trading which may affect the minority shareholder sin the adverse e ways

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