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 FIIs contd…..

  • 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 – HDFC Housing 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
Conclusion Make 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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