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 : mkchouhan@mahendrayoung.com
Policy Dialogue jointly organised by MCA & OECD

Asian Centre for Corporate Governance

 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

Asian Centre for Corporate Governance

 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

Asian Centre for Corporate Governance

 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

Asian Centre for Corporate Governance

 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

Asian Centre for Corporate Governance

 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.
Asian Centre for Corporate Governance
 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

Asian Centre for Corporate Governance

 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 ?).

Asian Centre for Corporate Governance

 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 )

Asian Centre for Corporate Governance

 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.

Asian Centre for Corporate Governance

 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

Asian Centre for Corporate Governance

THANK YOU