The Hindu Business Line : The three legs of corporatedom

FOR decades the triple issues of ownership, control and management have been bugging corporates. Questions have been raised but no adequate response has been found as to whether management can be segregated from ownership, be it a professional or family management.

Functionally, each of the three legs of corporates, ownership, management and control are interrelated and are in fact interdependent. Isolation of any one from the other can only lead to chaos. Suffice it to say that the management can only be a chela of ownership. Control stems from ownership.

Let us analyse each of the three rudiments to fully assimilate the significance of each of them and the consequent role that can be played by them. For any meaningful discussion it should be backed by a legal force or authority (where possible) or corporate precedent.

Ownership

Ownership is a quintessence of the maximum (majority) number of shares held by a person or persons or other entities in combination, popularly called "promoters". Under the Indian model each equity share commands a vote at any general meeting on all resolutions and proposals brought before it for consideration.

Resultantly, any one who holds together with others or who can command sufficient voting strength at any general meeting would be able to pilot any proposal.

The law, after gaining experience from the functioning of the corporates, prescribed key regulations to protect the interests of minority shareholders by laying down that certain transactions of far-reaching impact shall only have effect if approved by the shareholders by means of special resolution.

This will require three-fourths majority votes of members present and voting against simple majority for an ordinary resolution. Summing up, it can be safely said without any fear of contradiction that ownership (which includes persons acting in concert) is the fulcrum around which control and management revolves.

However, strangely, there is no definition of it under any statute or regulation, including the much-touted SEBI Takeover Regulation, where emphasis is on "control" without reference to ownership.

Promoters

The group of persons holding control of voting power exercisable at the general meeting of a company are loosely called promoters, though, in fact, the person/ persons who incorporated the company may be historical. Some attempt has been made to define the term promoters. The Companies Amendment Bill 2004, which is to be tabled in Parliament soon, defines the term promoter.

Clause 2(67) of the Draft Amendment Bill 2004 seeks to define the term "promoter to mean a person or persons who have control over the affairs of the company directly or indirectly, whether as a shareholder, director or otherwise and includes any person or persons named as promoters in any offer document of securities but does not include any person or persons named in the offer document by reason of his acting in the professional capacity."

The SEBI (Disclosure & Investor Protection) Guidelines 2000 defines the term promoter to include: the person or persons who are in overall control of the company; the person or persons who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public; and the person or persons named in the prospectus as promoter(s).

However, in a family-run business where a owner dies without leaving behind a will, the law of succession operates. If the heirs of the deceased are large, all the members inherit the assets of deceased, which will include the shares. To the extent of his own holdings, the issue would become clear. This shareholdings in satellite companies will also devolve in the same manner. Direct and indirect holdings will disclose the extent of control. For the purpose of this exercise, it is assumed that the promoter is the owner.

Management

The company is managed either by the board of directors or the managing director or a whole-time director or a manager as the case may be. Except the director named in the Articles as permanent directors, all the directors, which include independent directors, are appointed by the shareholders at some time or the other Directors among themselves elect a chairman to preside over a meeting or to hold the chairmanship for a specified period of time. The chairman of the board shall always preside at any general meeting. Normally, he has no executive powers. Appointment of managerial personnel and payment of remuneration is regulated under the Companies Act and the Listing Agreement.

The lending institutions may nominate directors on the board who are not liable to retire by rotation. Under Section 256 of the Companies Act, two-thirds of the total number of directors are persons whose office is liable for determination by retirement by rotation and one-third of such number retire at each annual general meeting and are eligible for reappointment. The person who commands the right to carry the proposal through at a general meeting proposes the appointment of a director and such incumbent gets elected.

Control

The SEBI Takeover code deals with the definition of control exhaustively and has revised the said definition from time to time backed by developmental behaviour. The present definition of the term control is contained in SEBI (Substantial Acquisition and Takeover) Regulation. In a family-managed business, every member has to be accepted at face value, regardless of his ability, motivation and ambition. Each should enjoy the success of the business. Hindu undivided family has to be treated as a simple well-knit unit and the business should be carried on in the same spirit. Else, the dictum "United we stand, divided we fall " will come into operation.

(The author is a Pune-based company secretary.)