Managing shareholder activism

Apr 16 2014, 03:08 IST
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SummaryThe decision-making power of the board must not be strangled by corporate governance

The Ministry of Corporate Affairs and Sebi have been working to bring several regulatory changes in order to make companies more accountable to shareholders. However, the changes suggested by the regulators will have teeth only when the minority shareholders and institutional shareholders exercise their rights.

The careful modelling of corporate governance norms in the new Companies Act, 2013 (Act) and Sebi’s decisive move to amend the listing agreement for consonance with the new Act is to give adequate teeth to the minority shareholders.

Let us scrutinise some of the amendments to the corporate governance code and try and analyse the extent to which they may have an impact.

The new Act intends to put a stop on abusive related-party transactions (RPT), similar to the controversies we have seen in the past. In order to prevent diversion of company’s funds by majority shareholders, this provision bars any related-party from voting on any RPT in a general meeting. Additionally, the new rules prescribe that company promoters must seek a prior approval from the audit committee for any material RPT. These requirements seem to be on the same lines as those that exist in several other jurisdictions.

As far as Sebi is concerned, the noose may prove to be calamitous for even genuine transactions and could lead to interference in the governance of a company. In addition to the requirement that locks out related-parties from voting in such transactions, the further condition imposed, of special resolution by disinterested shareholders, effectively shifts the decision

power to minority shareholders. Typically, the related-parties are promoters, holding a majority stake in the company.

The new ‘majority of minority’ rule allows any ill-intentioned minority shareholder, holding a substantial stake, to frustrate any such RPTs, making it very difficult for the companies to pass such transactions. Rather than giving complete control to minority shareholders, the regulator could have taken a more even-handed approach. One may contend that a mere

special resolution itself restrains any misapplication by majority. Shouldn't the mandatory approval from the audit committee, headed by independent directors, be considered as sufficient safeguard?

Another likely impact might be felt on the transactions between holding companies and their subsidiaries. By stating that the RPT guidelines would not be applicable on the dealings done at arm’s length, the legislature did attempt to save genuine transactions. However, who determines the commercials—is it the board of the company or the regulator or some public interest

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