As a part of securing the money value, every individual intends to invest the money in hand into something that would yield interest and provide security in future. One such investment that pops up in people’s minds is owning shares in companies. Shares are at high risk and the unpredictable fluctuations. However, in India, through globalization and privatization, the impact it has made in number of companies coming up is unimaginable. Huge masses collected into one, own about 10% of the entire shares of the company, and in dominance are the majority shareholders. Considering the fact that 51% of shares are owned by the owner to establish the ownership. We will be looking at various aspects of dominance, the protection and a comparison made worldwide.
CORPORATE GOVERNANCE IN INDIA:
To understand in depth about how corporate and companies are handled, we primarily must have a basic understanding about the corporate governance in India and what revolves around it. Predominantly, the corporate governance in India consists of Ministry of Corporate Affairs (MCA), and Securities and Exchange Board of India (SEBI). One is statutory body and the other is the executory. SEBI’s functions are more like, stabilizing fluctuations and displaying stocks and securities on a public domain. A high reliance is placed upon SEBI’s ranking and that is how listed and unlisted companies are evaluated. Enactments such as Companies Act, 2013; Competition Act, 2002 and Foreign Exchange management Act, 1999 have implemented a set of actions into the corporate world and the removal of opacity in between the receiver and the displayer. More and more transparency and awareness have come up regarding the investments in shares. These Acts also include provisions in order to protect the rights of the minority shareholders.
Ministry of Corporate Affairs: In a report of the experts in Company Law, and the committee set up to look into the matter, have reported that the main issue being the dominance of the majority shareholders which cannot be stopped for obvious reasons like, holding the lion’s share itself. But what we need to ensure is that the power of these majority shareholders are to be kept in specific bounds and law that could regulate their ownership behavior. As of now, the minority shareholders have the right to approach the court or tribunal to sort out the issues, the specifications being that the company must have share capital not less than 100 members holding not less than one-tenth of the entire shares of the company. This move is considered to be collective and can only be done with the consent and compliance of other members in that category. In this case the shareholders can go against the company’s mismanagement and file a suit at the NCLT/CLB.
Provisions of Companies Act, 2013: under section 236 (1), it says, that a majority shareholder, who has acquired 90% of shares can further push the company and ask the minority shareholders to sell off their shares and the company may or may not approve of this decision, a request shall be sent through notification. This clearly isn’t very supportive of the minority shareholders or their acquisition over the shares and ownership in that company.
DOMINANCE OVER MINORITY SHAREHOLDERS:
Corporate governance in India is not deep rooted as in the cases of countries like USA, UK etcetera. They have moved far ahead of times in establishing and running companies. The problem being that the management is flexible and smoothly functioning that there is no disparity between the shareholders. Mainly, in India the problem is not about the conflict between shareholders and management but the conflict is between the dominant shareholders who are in majority and the minority shareholders. The minority shareholders are often oppressed and are not given a chance to be a part of the ownership of the company. The company or the board are in no way liable or experienced enough to solve the conflict between majority and minority. So, we may take a look at it in different perspectives where there are categories of companies and their functioning, corporate governance all of that differs. It again is impossible for the board to stop from these abuses and the inevitable happenings when it comes to threat of losing the shares of the minority shareholders. Three broad classifications would be, Public Sector units (PSU’s); Multi-national Companies (MNC’s) and finally Indian Private companies.
Public Sector Units: It basically means that the government holds the major share and the public might as well show interest in buying few shares that are remaining and called for. Precisely, 51% of the share capital in invested by the government and the rest of 49% shall be taken over by public who are interested in investing. Few examples of such public sector units are National Thermal Power Corporation (NTPC), Oil and Natural Gas Corporation (ONGCL), Steel authority of India limited (SAIL), Bharat Heavy Electricals limited (BHEL) etcetera and so many other state owned companies. Here, in this case the dominance is proved to be played by the government itself and the rest of it is in the hands of big business men who would get more than half of the remaining share and the little bit is owned by the minority shareholders. Government does not have specified rules that direct the dominance, but they manage the income and hold the shareholders from selling of their little share.
Multi-National Companies (MNC’s): India has been having a lot of multi-national companies ever since East India Company had come into the territory. The policies of the government about the foreign investment taxation, current, 5% and the globalization have paved way for lot of MNCs to come into India. One particular case where shares were issued to the parent at less than one-tenth the market price, they calculated that the net gain to the foreign parent after compensating for the loss that it suffered in the 70s (together with interest thereon at market rates of interest) amounted to over $200 million. This and other similar share issues by MNCs were made with the explicit consent of the shareholders in general meeting. The parent companies with their dominant shareholding were able to get the resolutions passed with impressive majorities. In fact, when the government introduced regulations to prevent such preferential issues, the MNCs protested against what they called an assault on “shareholder democracy”.
Private Indian Companies: TATAs and Birlas have been ruling over the private industry for the longest time now and we can see an immense growth in the number of Indian Businessmen. Tax reforms coupled with economic liberalization have tilted the balance away from black money transactions. This is partly because tax rates are now lower, and partly because increasing scale economies make it more difficult to operate with the informal organizational structures and financial arrangements that black money entails. It is to be hoped that tax reforms, deregulation and competition would gradually reduce the role of black money to the point where it is confined to isolated cases of corruption.
PROVISIONS UNDER COMPANIES ACT, 2013:
When Companies Act, 1956 was still prevalent there was no broad analysis on how minority shareholders need to be protected and given rights that they deserve. But now after the major amendment od the Companies Act, 2013 under Chapter XVI—prevention of oppression and mismanagement was brought it. In brief it includes, the right of the minority shareholder to approach the tribunal (NCLT), powers of tribunal, consequences of termination or modification of certain agreements, and the procedures.
Approaching the Tribunal against oppression: under section 241, an aggrieved shareholder can apply to the tribunal for relief in cases of oppression etc. anywhere the shareholder feels that there has been prejudice in the manner of conducting anything in relation to the affairs of the company. Or in the case where the resolution passed by the board committee that is not in consideration of the interests of any creditors, debenture holders or any class of shareholders which is likely to hinder their interest and they feel that it is highly prejudicial they can proceed to the tribunal (u/s. 241(2)). Few specifications like, companies that have share capital owned by about 100 members or 1/10th of total number of members whichever is less shall be eligible to apply, in case where there is less than one-fifth of the total number of its members the tribunal will decide to waive off or as per its discretion.
What are the verdicts that the Tribunal can give?—firstly the tribunal evaluates the application and sees if there is an actual prejudice to the public interest or in a manner prejudicial to the interests of the company and if at all winding up would be fair or unfair in the interest of the applicants etcetera. without prejudice to the above mentioned, it has the powers to regulate the conduct of affairs of company in future, may provide for purchase of shares or interests of any members of the company by other members thereof or by the company and may lay restrictions on the transfer or allotment of the shares of the company and lot more. More like lifting of corporate veil and intermeddling with the affairs of the company and making sure that the rights are resumed.
Consequences of termination or modification of certain agreements: a company decides most of its functions and happenings through MoA, AoA and MoU and besides these it also considers the special resolutions that are passed in between whenever the board thinks fit. As mentioned u/s. 242(2) any termination shall be made of the agreements signed by the company but such orders shall not give rise to anybody to claim against the company. Claim whatever it might be compensation for loss of office or anything else with regard to the agreement. And especially for managing directors who are caught under the termination agreements, shall be appointed as directors anywhere for five years, provided the tribunal gives a leave.
EQUAL TREATMENT OF MINORITY SHAREHOLDERS:
Even though, minority shareholders hold hardly any amount of shares, the board always considers itself and the welfare of the majority shareholders. When a decision is being taken, the board must keep in mind that those decisions affect the rights of minority shareholders as well. SEBI suggests the shareholder grievance redressal, at a very slow pace than required. Irregularities in procedures like, share registration and transfer exist, which hinders the minority shareholders to get their proper redressal of grievance. World Bank suggests that minority shareholders may file derivative and class action suits against dominant shareholder or management under certain cases. Also, the above mentioned remedies provided by the Act, suggesting court proceedings and judgments is not a very healthy way of achieving the ulterior goal, because of the hindrance that it causes in safeguarding shareholder rights, which is the main motive.
AVOIDING LENGTHY COURT PROCEEDINGS:
Courts in India, are already overburdened with a lot of cases and now slowly are adopting to separation of powers and installation of Tribunals to take care of specialized matters. Also, the courts have massive number of cases pending already, with the case adjudication extending up to even 10-20 years. I would suggest they opt out an alternate method, either through mediation and conciliation to settle down, rather than dragging it to the court and for years. A “Shareholder Grievance Committee” shall be established by the listed company, wherein non-executive director shall be the Chairman of the committee to redress the grievance of shareholders and investors. Yet, the efficacy of the establishment of the committee is questionable because of possible allegiance of non-executive director with management. So far, such committee has not proven excellence, and is quite unsuccessful.
TRUE TRANSPARENCY IN MATTERS AFFECTING COMPANY:
The managing directors, Board and the management needs to play fair in terms of disclosing matters and decisions affecting the interests of the company and there should be no opacity. Control kept within the related party, and having related party transactions, will adversely affect the minority shareholders’ interests and the non-disclosure of the decisions. Promoters through related party transactions make use of the assets owned by the company, mainly for personal benefits and this causes harm to both the company and the stakeholder, if this keeps going undercover. Nevertheless, to avoid such malpractices within the ambits of the corporation, sections 297, 299 and 300 of the Companies Act, 2013 have listed down the regulations with regard to related party transactions.
ACCOUNTABILITY OF THE BOARD:
The board needs to take charge in reviewing decisions taken by it and analyzing them in nexus with the effect it might cause on the minority shareholders. There should be no wrong intention and has to be genuine, and critical in examining. The independent directors are not to get mixed with the opinions of the promoters or dominant shareholders and hold an independent opinion.
CORPORATE GOVERNANCE WORLDWIDE:
World-wide there has been strong establishments and inter trade that is flourishing for ages now and in the era of industrialization especially. The connect of companies is run through globally and every company under their state laws give in inputs for corporate governance and better functioning. It is important to emphasize that the role of the institutions in disciplining the dominant shareholder envisaged here - essentially of voting with their wallets - is very different from the shareholder activism that is being projected as a solution to the corporate governance problems in the US and the UK. On the contrary, voting with the wallet is quite the opposite of shareholder activism. There has been a tendency to focus on the same issues and proffer the same solutions. For example, the corporate governance code proposed by the Confederation of Indian Industry is modelled on the lines of the Cadbury Committee (Cadbury, 1992) in the United Kingdom.
The management becomes self-perpetuating and the composition of the Board itself is largely influenced by the likes and dislikes of the Chief Executive Officer (CEO). Corporate governance reforms in the US and UK have focused on making the Board independent of the CEO. The central problem in Indian corporate governance is not a conflict between management and owners as in the US and the UK, but a conflict between the dominant shareholders and the minority shareholders. The Board cannot even in theory resolve this conflict. One can in principle visualize an effective Board which can discipline the management. In the US, the different state laws, almost all states recognize minority shareholder rights.
FOSS V. HERBOTTLE—this is a very popular case under this topic, wherein two minority shareholders apply to the court for their rights in a company that they own shares in. The company is known as “Victoria Park Company” which had acquired approximately less than 200 acre of land near Manchester for erecting aesthetic houses with gardens and greeneries. Two of the claimants alleged that the property acquired was wasted and misapplied and misappropriated. On the defendant side were five directors of this company who had become insolvent. Since, these shareholders were of minority ratio, they will have to face loss along with the company even though their portion was less and non-profitable. The court also rejected the pleas of the claimants stating breach of duty by the directors was a wrong done to the company for which the company alone could sue. Basically, it was biased towards the company and said only the company might have the right to sue the shareholders no vice versa.
The judgment to this case had brought in immense developments and rule of majority faced further developments, predominantly not being welcomed and exceptions laid down to the rule also consisted of ultra vires, going beyond the boundaries of law.
The Indian statute has developed in the case of minority shareholders and is encouraging even small amounts of earnings to be invested so that at the time of recession and inflation, the economy does not sink in completely. It is a great amendment and there are other improvements such as, widening it to the PSUs without any biases. Otherwise, the legislation is pretty strong and convincing to the general public. Except for the few suggestions laid down in the above paragraphs of the article.
Section 241(1), Companies Act, 2013
Jayanth Rama Varma, Corporate Governance in India; Disciplining the dominant shareholder, IIMB Management Review.
Sir Adrian Cadbury, Chairman, Report on the Financial Aspects of Governance 1992
Roy Banerjee, Minority Shareholder Rights and why they matter, KPPBLAW
Hermant More, Foss v. Herbottle: Rule of Majority, The Fact Factor
Clause 49 of the Listing Agreement (Section VI (C))
World Bank, Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment: India, World Bank IMF, Washington, DC, USA, 2004
Barua S K & Varma J R (1993a), The Great Indian Scam: Story of the Missing Rs 4000 crore, Vision Books, Delhi, p. 160.
VIT School of Law, Chennai