1. Editorial: Evening the scales

Editorial: Evening the scales

Small shareholders can no longer hold firm to ransom

By: | Published: December 26, 2014 12:22 AM

The latest set of amendments to the Companies Act will make life easier for companies without unduly diluting powers of small shareholders. For instance, a resolution for a related-party transaction will now need only over 50% of those voting to say yes for it to go through—a simple majority, as opposed to a three-fourths majority earlier. Giving small shareholders a greater say is important, but this needs to be tempered keeping in mind their knowledge of the industry. Take the case of Tata Motors which had asked minority shareholders to waive the excess remuneration paid to Ravi Pisharody and Satish Borwankar, executive directors and for the late Karl Slym, who was CEO—shareholders’ consent was required under the law since the company had reported inadequate profits for FY14. Sadly, the resolutions weren’t passed even though 70% of the vote favoured them—marginally short of the 75% threshold needed. Incredulous as it may seem, shareholders failed to recognise the contribution of senior industry professionals and didn’t acknowledge that the compensation was in line with that paid by other companies of the stature of Tata Motors. They also displayed poor understanding of a sector like commercial vehicles which tends to be cyclical. Moreover, they disregarded the management’s need to motivate its team, especially during a downturn; performance-based pay is all very well, but salaries cannot be tailored to match business cycles. The results were all the more surprising since Tata Motors is a shareholder-friendly firm, having distributed over 80% of its net profit as dividend to its shareholders between FY11-13 and the stock has been an out-performer.

The company has now put the resolutions to vote again, including many more details of the compensation package in the resolution, so shareholders should be more than satisfied. Meanwhile, the Companies Act 2013 links remuneration thresholds (in situations of inadequate profits) to the company’s capital, a move that will be appreciated by many companies, but it may fall short of the needs of many larger corporates who need to pay well even during a slowdown. Nevertheless, in the amendment Bill, the government has eased a couple of other provisions of the Act; for instance, each and every fraud need not now be reported to the government, only the larger ones need be reported while the audit committee is to take care of the rest. Also, it is possible for companies to get an omnibus resolution on related parties passed by the audit committee which can then be valid for a year, saving them the trouble of getting several approvals. There’s also relief in that transactions between a parent company and a wholly-owned subsidiary don’t need a nod from shareholders.

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