Minority report

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The new companies law puts the fear of small shareholders in corporate managements

Minority report
If wishes were horses, minority shareholders would ride. The wish is that of lawmakers, who amended and consolidated a plethora of corporate laws, particularly the six-decade-old Companies Act, 1956 under what will now be called the Companies Act, 2013. Among other things the ministry of company affairs wanted is to ensure that the majority does not ride roughshod over the minority. Shareholders are increasingly seeking a more active role in the companies in which they have invested their hard-earned money, and the new law gives them a framework to flex their muscles.

In a democracy, where numbers should decide an issue, why the concern for minority shareholders?

According to Akshat Sulalit, a partner with law firm Kaden Boriss, writing in the India Law Journal, the new clauses will be a gamechanger. Though, in his view, the corporate world broadly accepts majority rule in the decision-making process and management of companies, “the minority has been incapable or unwilling due to lack of time, recourse or capability — financial or otherwise. This has resulted in the minority either letting the majority dominate and suppress them or squeeze them out of the decision-making process of the company and eventually the company.”

While the move to empower minority shareholders (see box for definition) may be well intentioned, in corporate boardrooms it has given rise to some consternation. Companies, usually seen as powerful, fear abuse of power on the part of minority shareholders, suggesting an upsetting reversal of roles. So who is likely to win in the power games likely to follow?

Already, one can see signs of where the amended law will take the country. It only came into effect on April 1, but minority shareholders in ACC have already expressed concern that ACC and its sister-concern Ambuja Cements will cease to exist once the merger of the world’s two largest cement companies, Holcim and Lafarge, goes through. A complicated deal involving Holcim, Ambuja and ACC last May had raised questions about the Swiss parent’s handling of its two Indian group firms. ACC has been made a subsidiary of Ambuja Cements for a considerable payment to Holcim.

However, the disquiet in boardrooms is also understandable. For the first time, the law allows minority shareholders or depositors to come together to file US-style class action suits against directors, auditors/advisors/consultants or anybody involved with the company in any advisory capacity. Besides, minority shareholders will have the power to block any related party transactions. The amended law allows any number of minority shareholders to apply for relief to the company law board in case of oppression and mismanagement. The law also makes it mandatory for companies to allow e-voting to enable active participation from minority shareholders.

Under this clause, companies in India would be required to provide the option of electronic voting in certain cases. Even notices of meeting can be sent through electronic mode under the new company law. According to Rule 20(1) every listed company or a company having not less than 1,000 shareholders, shall provide to its members facility to exercise their right to vote at general meetings by electronic means. Rule 20(2) provides that a member may exercise his right to vote at any general meeting by electronic means and the company may pass any resolution by electronic voting system in accordance with the provisions of this rule. (See ‘Advantage, small investor’ by KPMG’s Sai Venkateshwaran on Page 12)

On top of that, the Companies Act, 2013 has granted additional powers to the company law board to help minority shareholders such as restricting transfer or allotment of shares of a company; removal of a managing director, manager or any of the directors of the company; recovery of undue gains made by any managing director, manager or director during the period of his appointment, manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims.

The role of independent directors has also been enhanced — a subject on which the Securities and Exchange Board of India (Sebi) too has been proactive. As recently as February 13, the Sebi board met in New Delhi and took important decisions to align its provisions with that of the Companies Act, 2013. The overarching objective is to improve corporate governance norms for listed companies. From October 1, Sebi ruled among other things, stock options would not be given to independent directors, nor would nominee directors be counted as independent.

In tandem, the amended Companies Act, 2013 expects independent directors to don the role of watchdogs to protect the interests of shareholders, particularly minority shareholders. Similarly, it envisages the statutory auditor in the role of a whistleblower in case of frauds. This, in hindsight, is overdue. If one harks back to the Satyam scandal of 2009, it was clear that systems were not foolproof and accounts could be falsified. Satyam Computer Services proposed to acquire stakes in Maytas Infrastructure and Maytas Properties — both firms controlled by promoter Ramalinga Raju. In today’s regimen, flags could be raised about such related party transactions. The silence at Satyam was later to have grave consequences for the company, endangering its very survival. In this context, it is significant that the new law says auditors should be the first to smell the rat and alert the board. (See ‘Auditors as whistleblowers’ by ICAI’s K Raghu, Page 13)

In an era where there is hectic activity around reconstruction or amalgamation of companies, Section 235 of the new law provides that transfer of shares or any class of shares in the transferor company to transferee company requires approval by the holders of not less than nine-tenths value of the shares whose transfer is involved and further the transferee company may give notice to any dissenting shareholder that it desires to acquire his shares. Section 235 makes it mandatory for the majority shareholders to notify the company of their intention to buy the remaining equity shares the moment the acquirer, or a person acting in concert with such acquirer, or group of persons becomes the registered holder of 90 per cent or more of the issued equity share capital of a company. It further provides that such shares are to be acquired at a price determined on the basis of valuation by a registered valuer in accordance with such rules as may be prescribed.

The Companies Act, 2013 also states that an ‘acquirer’ on becoming registered holder of 90 per cent or more of issued equity share capital shall offer minority shareholder for buying equity shares at the determined value. Under Section 236 (3) of the new law, minority shareholders have an option to make an offer to the majority shareholders to buy its shares.

Besides the above, the new law has sought to empower the minority shareholders in corporate decision making also. Section 151 of the Act requires listed companies to appoint directors elected by small shareholders, i.e. shareholders holding shares of nominal value of not more than Rs 20,000.

The new company law requires shareholder approval for related party transactions not at arm’s length or not in the ordinary course of business. Clause 49 adds new class of related parties to the definition given under the Act and includes close family members, fellow group entities, joint ventures of same third party and combinations thereof.

While the old law required companies to obtain central government approval for certain related-party transactions, under the 2013 Act, all related party transactions require prior approval of the audit committee. Further, the requirements now empower minority shareholders to a significant level, requiring minority shareholders to accord prior approval vide a special resolution, related party transactions that are material or not in the ordinary course of business or not at arm’s length.

The 2013 Act, together with the recently amended Clause 49 of the Listing Agreement, has taken the concept of shareholder democracy to a different level, wherein majority shareholders are also being made to act in a fiduciary capacity rather than act in their own interests in shareholder meetings. However many experts feel this provision could lead to the minority shareholders abusing their power.

“There are some aspects that could be challenging. For instance, there now cannot be any guarantees or loans given to subsidiaries by the parent company. This will be a big blow and can amount to interested party transaction,” said Adinarayana, VP — legal and corporate affairs with Natco Pharma.

This clause has others worried too. NH Bhansali, chief executive officer (finance, strategy and business development) of the BSE-listed Emami, said, “While the intentions of new rules are good, its design would create hardships and unwanted harassment to the companies in few areas. For instance, transactions with 100 per cent subsidiaries also become related party and tests of arm’s length and transactions in ordinary course of business also apply to them. This would make day-to-day transactions difficult.”

According to Jamil Khatri, global head of accounting advisory services at KPMG, “In case of related party transactions, the first line of defence would be the audit committee. In case the audit committee cannot make an assertion that the transaction is at an arm’s length and ordinary course, the deal goes to the shareholder for approval where related parties cannot vote on the transaction. Of the shareholders that are not related parties, 75 per cent of the shareholders would have to approve for the deal to go through,” says Khatri.

As for class action suits, they clearly have the corporate world worried. Under the amended law, any 100 shareholders, even if they have only one share each, can come together and make an application to the National Company Tribunal that is being set up. Shareholders representing 10 per cent equity of the company can make an application seeking to restrain the company from taking action that is detrimental to their interests. Sanjay Budhia, managing director, Patton Group of Industries, comments, “While class action suits would ensure protection of minority interest, it is a tough balancing act and unless enough checks and balances are built, there is a likelihood of misuse of this provision.”

Moreover, according to Shriram Subramanian, managing director of Ingovern, a proxy advisory and corporate governance research firm, “Class action suits can be initiated by shareholders/ depositors who are aggrieved against the company directors/auditors/advisors/consultants or anybody involved with the company in any advisory capacity.”

All told, there are 10 lakh active companies in India. Naturally, the new law has created a buzz across the spectrum, as small investors discover their own power and companies face the challenge of compliance without hurting their own interests. The ‘minority report’ will be quite a subject of discussion in coming months. Who will have the last word?

(With inputs from Ritwik Mukherjee in Kolkata, Trushna Udgirkar in Hyderabad and Vikas Srivastav in Mumbai)


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