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In 2011, Mahindra Satyam agreed to pay $125 million (Rs 580 crore) in an out-of-court settlement to end a bunch of class action suits -a combined petition by a large group of investors - filed in the US. The suits were filed after Satyam Computer investors lost substantial money. This followed former chairman Ramalinga Raju admitting to "cooking" the company's books. Eventually, the company was acquired by Tech Mahindra.
Similarly, the group also made a settlement with Aberdeen for losses incurred by its investors. In India, Satyam Computer's home country, mutual fund and retail investors lost crores but were paid nothing.
The new Companies Act plans to rectify this. But retail investos can only have a voice, if they come together. This shouldn't be difficult; most of us are members of groups on social networking sites. These could be groups involving extended families, colleagues, classmates, or people who share our interests. Thanks to the Companies Act, 2013, individual or minority shareholders will find it easier to effect a change in decisions taken by a company's management, but only if they can organise themselves into groups.
A few important provisions came into force from April.
Shriram Subramanian, founder of InGovern Research Services, says by themselves, these measures might not prompt retail investors to play more active roles. However, there is at least a provision now for aggrieved shareholders; earlier, this wasn't the case.
Sai Venkateshwaran, partner and head (accounting advisory services), KPMG India, says shareholders are increasingly becoming aware. As there is an enabling provision, shareholder might organise themselves into forums. "We are already seeing investor activism. Investors might use social media to come together and form groups," he says.
Class action suit
One of the provisions is the concept of class action suits, which can be initiated by shareholders against the company/directors/auditors/advisors/consultants or anybody involved with the company in any advisory capacity.
A class action is a lawsuit filed by several individuals who come together as a group. It has been widely used in the US. Under the new Companies Act 2013, 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," says Venkateshwaran.
| HOW MINORITY SHAREHOLDERS WILL BENEFIT |
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The reasons behind shareholders taking the class action suit route might be to prevent the passing of a resolution if the company hasn't informed all shareholders or if it has suppressed facts. Shareholders can also seek financial compensation in case a decision taken by the company has led to wealth erosion and benefited the promoter or promoter-related entities or resulted in a loss to minority shareholders This will ensure directors and the company management will be more careful.
In countries such as the US, where class action suits are very common, typically, a law firm or an institutional investor takes the lead. "A class action suit means you, as a shareholder, are filing the case on behalf of other investors. It is similar to public interest litigation," says Subramanian.
There are plenty of cases in the courts, of companies fighting to buy out minority shareholders. Among these is Cadbury India Ltd, which delisted in 2003. The delisting price was Rs 500 per share. Over the years, Cadbury has raised its buy-back price to Rs 1,900. Court-appointed valuer Ernst & Young came up with a value of Rs 2,014 per share, rejected by shareholders who wanted Rs 2,500 then. Today, minority shareholders are asking for Rs 3,000 per share. The case for capital reduction has dragged on in the Mumbai HC, as the company and minority shareholders have been unable to agree on the buy-back price.
For instance, a case filed by minority shareholders, against Cadbury India's delisting is pending in Mumbai High Court. The company was delisted in 2003 and the minority shareholders went to court as they wanted a higher valuation for the shares. The shareholders, who jointly had less than two per cent stake in the company, had filed cases in their individual capacities. But if they could use the class action route, it would helped them to mobilise more support.
Related-party transactions
Another provision in the Act says any material related-party transaction has to be put to vote by minority shareholders alone and most of them have to agree to this for it to be passed. A special resolution is required for the transaction to be approved. This includes any transaction not at arm's length or not in the ordinary course of business. These could include transactions, such as the sale or purchase of property or material, or the appointment of agents or vendors.
The recent case of car maker Maruti Suzuki proposing to use its surplus cash to set up and manage a manufacturing plant for parent Suzuki, as well as buy cars from Suzuki, falls in the scope of related-party transactions. The proposal is on hold due to opposition from shareholders. In the case of Maruti, institutional shareholders such as mutual funds had opposed the move. With implementation of the Companies Act, minority shareholders, too, can exercise their rights when the resolution comes up for vote. However, if they don't exercise this right, or if the transaction goes through with the requisite majority, the company's action doesn't violate the law. Nonetheless, the shareholders can pursue a class action suit, which will be judged on its merits.
E-voting
Now, e-voting is mandatory for listed firms and those with at least 1,000 shareholders. This may enhance the participation of minority shareholders, especially institutional investors. Companies will have to offer a platform so that shareholders can log on, see the resolution proposed and vote.
"While this is an enabling factor for minority shareholders to exercise their power, the question is will they will start doing so? It requires a change of mindset. People should be aware of their rights," Venkateshwaran says.
Appointment of a small shareholder as a director
There is a provision that 1,000 small shareholders can come together and propose a director represents their interests. A small shareholder is someone who holds shares worth less than Rs 20,000. While this is not mandatory, companies might choose to appoint a shareholder director. The Companies Act also says if shareholders nominate a director and if the company refuses, it will have to explain the reasons behind the refusal. This will make it difficult for companies to refuse such a move. "Also, there are a lot of disclosures and transparency in the Companies Act, 2013. Therefore, even if companies fall foul of norms, the disclosures will reflect this. This will, in turn, be reflected on the corporate governance of companies and their valuation could be affected," Venkateshwaran says.
