But, we need tighter rules because promoters with big stakes are able to push through even special resolutions
Minority shareholders seem to be finally asserting their influence. Resolutions to adopt the accounts of Vedanta Limited and to re-appoint UK Sinha, former chairman, Securities and Exchange Board of India (Sebi), to its board as non-executive independent director, met with some resistance from an unusually large contingent of public shareholders. The latter also voted against the appointment of other independent directors. Of course, given the promoters own a chunky 65% of the equity capital, even the special resolution for Sinha’s reappointment—requiring 75% of those present and voting to say yes—went through.
But this is a wake-up call for other institutional shareholders and regulators. Going by the reports put out by proxy advisory firms, there was very good reason for minority shareholders to be upset. The reports highlighted questionable financial transactions within the group companies and qualifications by the auditor. IIAS noted the independent directors had failed to protect the interests of minority shareholders, adopting a passive stance and allowing cash-flow support to the group through the company and Hindustan Zinc. It drew attention to the auditors’ remark that there was material weakness in the effectiveness of the company’s internal financial controls over financial reporting. Further, it cited the independent auditor’s report on compliance that had a qualified opinion to the effect that the company entered into a transaction for sale of investments aggregating Rs 1,400 crore with its subsidiary as part of its treasury operations, for which prior approval from the audit committee was not taken as stipulated. On these grounds, IIAS recommended Sinha not be re-elected to the board.
Proxy firm SES, too, listed a number of transactions that it believes were imprudent. It recommended Sinha not be re-appointed because he was a member of the audit committee and the accounts had been qualified. The firm also drew attention to the fact that one independent director, part of the audit committee when some of these questionable transactions had taken place, subsequently stepped down from the board in November 2020, citing family commitments. It felt this resignation had been a signal of something not being quite right with related party transactions.
Corporate governance has never been India Inc’s strong point. Despite SEBI’s regulations and the talk of ESG, the improvement expected isn’t coming soon enough. Perhaps the regulation is not stringent enough and the penalties not harsh enough, and some tightening is called for. While it may seem unfair to keep promoters, with large stakes, from voting on critical resolutions, regulators may want to consider whether some resolutions—for instance, where the accounts have been qualified by the auditors—should be voted on only by minority shareholders. Again, although not too many, some jurisdictions do provide for effective selection of independent directors by minority shareholders. These include, inter alia, Sweden, Brazil, Italy, Turkey Mexico and Chile. In some form or other, these legislations give minority shareholders the rights to elect independent directors. In some jurisdictions, shareholders must have an aggregate of 5-10% (depending on firm-size) or more of the voting share capital, to have a say in electing independent directors; in others, the stake required is not so well-defined.
The point is we need legal and regulatory provisions to check practices by companies that benefit the promoters disproportionately. Large promoter holdings aren’t unique to India—in half of the world’s listed companies, the three largest shareholders hold 50% of the capital—and we can learn from the others.