Most shareholders in Indian companies tend to interpret their rights in terms of dividends, bonuses, rights and the gains that accrue from capital appreciation. Their notion of the right to information is, at best, hazy and mostly limited to an opaque annual report and the odd stock exchange filing on significant developments. Likewise, their role in takeover battles tends to be limited to which side has the better offer price, irrespective of the impact on corporate governance or the long-term interests of the company. In that context, the Securities and Exchange Board of India’s proposal to make it mandatory for boards of target companies to guide shareholders in the event of competing offers is a significant leap forward in terms of strengthening shareholder rights. The proposal, made by a committee headed by C Achuthan, a former presiding officer of the Securities Appellate Tribunal, has been made against the rise in competitive bids, the latest being the open offers of Inox Leisure and Reliance MediaWorks (RMW) for a controlling stake in the Fame Cinemas chain of multiplexes. Indeed, this battle is a case in point of the dilemma that Fame’s shareholders face. It arose after Anil Dhirubhai Ambani Group-controlled RMW objected to a block sale between Fame’s promoters, the Shroff family, and Gujarat Fluoro Chemicals-owned Inox Leisure. A week after the deal was struck, RMW’s managing director wrote to the Shroffs complaining that they had rejected a deal with it at double the price Inox paid. RMW, which owns India’s largest multiplex chain BIG Cinemas, followed this up with an offer that was double Inox’s and bought shares from the open market to boost its shareholding. There the matter stands, unless Inox makes a higher offer before the open offer in April, which it is widely expected to do. All this does not leave minority shareholders any the wiser on which buyer to choose. They certainly don’t know what Fame’s management thinks of its new majority shareholder or whether it would prefer RMW as an owner to Inox. Given this, it is not surprising that minority shareholders are likely to sell to the highest bidder, a propensity that brings scant benefit to the acquirer other than raising acquisition costs as a result of competing spiralling offers.
Contrast this with the practice in the West, where shareholder activism exists at quite another level and managements are legally bound to consider competing open offers objectively and offer shareholders their opinion. The recent Kraft bid for Cadbury, for example, was initially rejected by the management because the target company’s shareholders objected to it. The bid was accepted only after these objections were addressed. In the US and the UK, it is standard practice for competing companies to meet large shareholders and make their case. Of course, the fact that shareholders gain access to more information need not mean that they’ll make the right choice. But in India, where few small shareholders have the sophistication to make informed choices as Cadbury’s shareholders did, a proposal for compulsory transparency should be applauded as genuine reform that will go a long way towards the empowerment of shareholders and greater democratisation of equity markets.
