best practices for dealing with non controlling shareholders an institutional investor perspective
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Best Practices for dealing with Non-Controlling Shareholders An Institutional Investor Perspective. Presentation by M.K. Chouhan Chairman, Mahendra & Young Knowledge Foundation Vice Chairman, Global Advisory Board - Asian Centre for Corporate Governance email : [email protected]

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best practices for dealing with non controlling shareholders an institutional investor perspective

Best Practices for dealing with Non-Controlling ShareholdersAn Institutional Investor Perspective

Presentation by

M.K. ChouhanChairman, Mahendra & Young Knowledge Foundation

Vice Chairman, Global Advisory Board - Asian Centre for Corporate Governance

email : [email protected]

Policy Dialogue jointly organised by MCA & OECD

presentation will cover
Presentation will cover
  • Main issues in dealing with Non-controlling shareholders
  • Adequacy of Indian Corporate Governance Legislative & Regulatory framework.
  • Some expectations / suggestions from FIIs
  • Best practice from India – Case of HDFC
main issues in dealing with non controlling shareholders
Main issues in dealing with Non-controlling Shareholders
  • Equal voting rights (one share – one vote)
  • Spirit with which the controlling shareholder exercise their voting right (Benefit of all share holders v/s own agenda ?)
  • The disclosure protocol for related party transactions
  • Poison Pills
adequacy of indian legislative regulatory framework
Adequacy of Indian Legislative & Regulatory framework
  • Legal framework based on common law
  • Companies Act 1956 as amended
  • Administered by Department of Company Affairs
  • Enforce by Company Law Board (CLB)
  • Listed Companies regulated by SEBI
  • Latest Clause 49 listing agreement
  • Corporate Governance rating by two agencies ICRA & CRISIL
adequacy of indian legislative regulatory framework ves
Adequacy of Indian Legislative & Regulatory framework (+ves)
  • Sections 397 and 398 of the Companies Act (Prevention of Oppression and Mismanagement) are adequate provisions to prevent any substantive abuse.
  • Poison pills are banned by law. The SEBI Takeover Code has been successfully tested in over 25 hostile bids.
  • SEBI’s initiative of a unique client code for each investor
adequacy of indian legislative regulatory framework areas of improvement
Adequacy of Indian Legislative & Regulatory framework (Areas of improvement)
  • Enforcement and implementation of laws and regulations remain important challenges.
  • Certainty of punishment is more important than severity of it
  • The provision Section 372A; dealing with the selling or leasing of major assets should be further refined to avoid any abuse.
  • The legal framework and stock exchange rules should provide for full disclosure of shareholder agreements.
  • Consider strengthening regulators’ enforcement power to offset backlog and delays of court procedures.
  • Successfully prosecute one insider trading case to enhance perception of market integrity.
indian legislative regulatory framework contd
Indian Legislative & Regulatory framework contd…

The current institutional framework places the oversight of listed companies

  • Partly with the Department of Company Affairs (DCA),
  • Partly with the Securities and Exchange Bard of India (SEBI)
  • Partly with the Stock exchanges.
  • This fragmented structure gives rise to regulatory arbitrage and weakens enforcement.

Source : REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSC). World Bank survey of India\'s corporate governance institutions and practices

some expectations suggestions by fiis
Some expectations /suggestions by FIIs
  • Related party transactions over a certain size should be approved - preferably in advance, in general meeting by a majority of the minority shareholders (Practical ?).
  • Controlling shareholder should be, disenfranchised for this vote.(Practical ?).
some expectations suggestions by fiis contd
Some expectations /suggestions by FIIscontd…..
  • Audit committee comprising of majority of Independent Directors, should play a role in assessing where the materiality level should be pitched .
  • Materiality bar for related party disclosures must be set at a sensible level (neither too high, nor too low )
best practice hdfc housing development finance corporation
Best Practice – HDFCHousing Development Finance Corporation
  • 78 per cent of HDFC’s shareholding is held through FII / FDI.
  • Keeps investors informed on a regular & on-going basis.
  • Senior management spends substantial time In engaging with investors /FIIs.
  • One-on-one meetings with investors rather than having large gatherings with several investors.
  • Developing long-term relationships with investors through more focused and meaningful discussions.
conclusion make boards truly independent
ConclusionMake boards truly independent
  • Regulatory or legal remedies can at best mitigate, can not eliminate abuse of power against Non-controlling shareholders.

The first line of defense for investors and a key mechanism for ensuring that an issuer’s disclosure statements are accurate is the company’s board of directors

Sherman Boone – Asst Director office of the International Affairs,

SEC, Washington DC

At ACCG conference Mumbai Dec 21st 06

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