The capital market regulator’s move to ensure that shareholders with a tangible stake in the outcome of special resolutions are barred from voting on them has been cautiously welcomed.
However, some say the finer details need proper drafting to prevent a company’s fate from being decided by minority shareholders.
The Securities and Exchange Board of India (Sebi) on Monday said it would recommend to the Ministry of Company Affairs (MoCA) to “suitably amend Clause 166 of the Companies Bill, 2009, (the Bill is still awaiting passage) to disallow interested shareholders from voting on the special resolution of the prescribed related party transaction”.
The regulator feels this will protect small and diversified shareholders in listed companies from abusive related-party transactions. Sebi’s view stems from lessons drawn from the Satyam Computer scam.
“There are various issues that will have to be addressed before Sebi’s proposal can be brought on to the statute books,” says Akil Hirani, managing partner, Majmudar & Co. “First, the law will have to provide for a definition of ‘interested shareholders’ and set the time-frame within which a conflict of interest will be determined. Further, the law will have to allow a company to seek relevant information from shareholders, the failure of which can trigger stringent penalties against the shareholders.” He added the efficacy and utility of the measure would depend on the fine-print.
Downside limits
Abhishek Khare of Khare Legal Chambers says while there is an argument that the proposal, if accepted, will leave the future of the company in the hands of minority shareholders, the latter include large institutions that are fully capable of taking business decisions. “It (minority holders) also constitutes well-informed institutions (like banks, fund management companies, investment firms), with the potential to manage billions and an excellent track record in corporate management. (Just saying) the future of company should not be vested in the hands of people who do not know the day to day functioning is wrong,” he said.
He felt the proposal could impact the pace of merger and acquisitions (M&As), especially in a scenario where two companies belonging to the same promoter group were involved.
“If Sebi’s proposal is approved, there could be chances that, under a conflict situation, M&As can get more difficult because these will depend on the direction taken by the minority shareholders, as the interested shareholders will be barred from voting during such a situation,” says Khare.
However, some corporate lawyers said minority shareholders were not known to block an action beneficial to the company and so such resolutions should pass smoothly.
“It is unlikely that the shareholders will veto something which will be good for the company,” says Tejesh Chitlangi, senior associate, Finsec Law Advisors. “It (the change) will ensure that M&As are done in a fair manner and not by hurting the interest of the minority shareholders. It will definitely negate structures of the likes of Satyam-Maytas, which is good.”
While there are diverse opinions on the probable impact of the proposed regulation on M&As, lawyers are unanimous in saying it will surely add more strength to the vast family of minority shareholders who, more often than not, end up as mere spectators in the board room.
“If such a proposal is accepted, it will definitely strengthen the institution of minority shareholders. In India, though legally available, enforcement of minority protection rights has not been a success and, hence, such rights are not effective. Similar rules have been adopted by other Asian countries and could prove to be a good measure,” says Chitlangi. The move is logical and required in today’s conflicted world, he adds.
