Sebi plans platform for minority shareholders

Last updated: 28 November 2011


Minority shareholders are allowed to vote through postal ballots, but rarely do so as they may not be able to take a view on the subject


In a move to protect the interest of minority shareholders and improve corporate governance in Indian firms, the Securities and Exchange Board of India (Sebi) is exploring the possibility of creating a platform for dispersed non-controlling shareholders across the country.


The capital market regulator is looking at ways to enhance the involvement of non-controlling shareholders in the decision-making processes of firms through institutionalization of the voting system, and their participation in general meetings through electronic means, said two persons with direct knowledge of the development.


At a later stage, the regulator may involve the ministry of corporate affairs before finalizing its decision.


Although the law gives all shareholders the right to take part in decision making at companies, the absence of a common platform or a medium to voice the concerns of non-controlling shareholders often leads to the passing of resolutions that go against their interest.


“Discussions are on to create special institutions that could act on behalf of a large group of non-controlling shareholders to cast their votes on company decisions after analysing the implications. To facilitate this, electronic general meetings could be held,” said one of the persons.


None of them wanted to be named as the plan is still at a discussion stage. An email sent to Sebi did not elicit any response.


Non-controlling shareholders are individuals or institutional stakeholders that are neither promoters nor have any board representation.


The move assumes significance in the backdrop of several instances in which promoters of Indian firms secured board resolutions that were opposed by minority shareholders.


Earlier this year, when German engineering firm Siemens AG increased its stake in Indian subsidiary Siemens Ltd, some minority shareholders complained the price paid by the parent company was low.


In 2008, when Satyam Computer Services announced its plan to acquire two companies owned by its promoters, Maytas Properties Ltd and Maytas Infra Ltd, minority investors, including mutual fund houses, protested the inflated valuation of the group firms.


In the same year, minority shareholders of Sterlite Industries India Ltd found a restructuring proposal floated by parent Vedanta group against their interests. Many of them sold their shares, leading to a sharp decline in the company’s stock price.


A few mutual fund houses exited their investment in Piramal Healthcare Ltd after its promoter Ajay Piramal sold a stake to US-based Abbott Laboratories for $3.7 billion in 2010. Media reports suggest mutual fund houses were concerned Piramal Healthcare’s minority shareholders would have no say in the way the cash was utilized by the promoters because of the structure of the deal.


Currently, all equity stakeholders are given ownership and voting rights to the extent of their holdings of the company (except for public sector banks).


Minority shareholders are allowed to vote through the postal ballot system, but rarely exercise their right as they may not be able to take a view on the subject.


“The shareholders are dispersed all over the country. They hardly communicate with each other. Even if they attend meetings, they do not have a unified voice,” said the second person. “So, the management and controlling shareholders are hardly under pressure to reverse their decisions.” The population of non-controlling shareholders is large and their votes could act as the most efficient tool to improve corporate governance, he added.


An institutional mechanism can offer a common platform to such shareholders, help them understand a company, make them cognizant of the importance of their voting rights and work towards improving corporate governance.


Talks are on to set up such an institution by stock exchanges, depositories, institutional investors and pension funds. Banking and financial sector experts could be a part of such an institution to help shareholders understand issues before they cast votes.


“Certain laws need to be modified to set up the institution, which will work as a non-profit organization in the form of a trust,” said the second person.


The plan is to allow such an institution to have an agreement with depositories and allow investors to select an entity of their choice to act as a proxy for all shareholders.


“The institution should also offer services like analysis of balance sheet, board resolutions, annual reports, and so on,” said the second person.


The concept of electronic participation in general meetings is being taken seriously. This will provide all categories of investors access to discussions and is expected to work better than the postal ballot system. There are at least 100 million Internet users in India.


“We welcome the move, especially since the postal ballot system has proved to be ineffective,” said Y.M. Deosthalee, chairman and managing director, L&T Finance Holdings, about the initiative. “Once we implement it, there will be takers.”


To set up such an institution, shareholders as well as companies may need to pay a nominal charge, and in the initial stages the stock exchanges could finance it from their investor protection funds.


Shareholders are typically given rights to approve financial accounts and audited balance sheets, dividends and the appointment of auditors and directors. These rights could be transferred to the proposed trust as an option if the new rules are implemented.


Electronic general meetings will improve participation by retail shareholders, said Mumbai-based chartered accountant J.M. Thakur.


“As far as an institution for non-controlling shareholders is concerned, it looks good on paper, but one has to see how things take shape. Entities like mutual funds already voice their opinion to companies and these, in turn, represent retail investors,” Thakur said.


Also, absence of means to secure adequate votes from non-controlling shareholders has been preventing Sebi from bringing in desired reforms in takeover rules and other capital market norms.


The takeover regulations advisory committee headed by the late C. Achuthan, former chief of the Securities Appellate Tribunal, was mulling the introduction of a provision in the new takeover regulations in line with international standards—an open offer would not be required if majority of the shareholders of the target company were to pass a resolution waiving it.


The draft code said the absence of such a framework makes takeover regulations difficult, with no room of doing away with an open offer even when the shareholders themselves do not desire it.


The panel, in its draft report in July 2010, mentioned that in the absence of “robust regulations on proxy solicitation…any provision for shareholder waiver for an open offer may not be in the best interests of investors at large”.


“For the final takeover regulations, recommendations on whitewash provisions had to be removed in the absence of effective tools to secure adequate votes from non-controlling shareholders,” a committee member said, requesting anonymity.


The committee also mentioned in its draft report that “Sebi is taking certain steps to promote institutional voting, and that it is also pursuing means to operationalize electronic voting”.


Anirudh Laskar & Aveek Datta



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