Some reasons why the new Companies Bill will make small investors smile.
When the prices of Satyam Computer’s American Depository Receipts crashed after its promoter admitted to cooking the books, the company’s overseas investors were quick to file a class action suit.
In 2012, three years after the scandal broke out, they received a settlement of $125 million. But Indian investors in the same Satyam stock have had to grin and bear as their shares crashed in value from Rs 182 to Rs 40.
When the companies they invest in fail or fall prey to bad governance, Indian investors have little option but to sell their shares at whatever prices they trade at. But the new Companies Bill has several provisions that may strengthen the hands of the small investor. This Bill, approved by the Lok Sabha in December, will soon be tabled in the Rajya Sabha.
Here are the key provisions.
Class action suit
With increasing instances of corporate fraud, the new Companies Bill has laid down provisions for class action suits. Class action is a law suit brought by one or more individuals on behalf of a large group of people who have the same complaint. As per the new provisions, shareholders can file a suit on a fraudulent act by the company and claim for damages on the loss suffered.
Under clause 37 of the new Bill, a suit can be filed under grounds of misrepresentation or omission of facts in the company’s offer document. A suit can also petition against the business being conducted in a manner that is detrimental to the interests of shareholders (clause 245). However, the Bill requires at least 100 members for a class action. The good news is that when the petitioners have a favourable judgement, the company will have to reimburse the cost of arbitration.
The Companies Bill has also empowered the Serious Fraud Investigation Office by giving it the power to arrest the guilty (in case of certain offences) and asking the courts to treat the report of this office as a report by a police officer for framing of charges. This may help in bringing some quick relief to aggrieved investors.
There have been a number of instances of companies using the proceeds of a public issue for purposes not disclosed at the time of the offer. Two companies — Bharatiya Global Infomedia and RDB Rasayans — were banned by the Securities and Exchange Board of India (SEBI) in 2011 from further accessing the capital market. This followed the former — an IT solutions provider — using the IPO money to settle an outstanding loan and the latter transferring it to a group company that was in financial distress.
There have also been instances of companies taking the legal route to changing the objects of the prospectus. Pradip Overseas, a home linen maker who raised Rs 100 crore from the market in 2010 to set up an SEZ, in six months shelved the plan and diverted the funds to an existing unit after passing a special resolution.
To alter the objects in the prospectus (offer document), a company currently needs to pass a special resolution and get it approved by three-fourth of members (who are present for the meeting). However, given that promoters control well over half the voting rights in most Indian companies, such resolutions become a sham.
The Ministry of Corporate Affairs has, however, now introduced a new provision in the Companies Bill (clause 27) that protects the interest of minority shareholders in cases similar to the ones above. It states that if a company has unutilised money from the initial public offer and is changing the objects for which the money was raised, it has to provide an exit opportunity to the dissenting shareholders. It further states that such an exit should be offered at a price that will be specified by SEBI. This clause will help the shareholders move out of the stock at a reasonable price. This protection may be important, given the tendency of Indian promoters to price their IPOs at stiff valuations, with many of them plunging below offer price soon after listing.
The new Companies Bill mandates that minority investors should have representation in the board. Currently, appointing a director to represent the small investors is left to the discretion of a company. The Bill also states that listed companies should have at least one-third of the total number of directors as independent directors. An independent director is a person who is not related to the promoters or other members of the company. While having independent directors on the Board hasn’t proved to be a sure-shot method to deter companies from malpractices, increasing instances of institutional activism and the rise of proxy advisory firms may force greater accountability from independent directors.
In a recent instance, when ACC and Ambuja Cements proposed increasing royalty payments to their parent company, Holcim, before the board, the independent directors of both the companies objected to it on the grounds that it is against the interest of minority shareholders. This ultimately forced Holcim to agree to a lower hike in royalty than what was initially proposed.
To make shareholder meetings more meaningful, the new Companies Bill states that any shareholder meeting should have at least 30 members personally present (in case of companies with more than 5,000 members). If the quorum is not present, the company is supposed to adjourn the meeting.
protection for whistle blower
An independent director of the company or any employee who brings a company’s malpractices to light will be protected from unfair treatment. The new Companies Bill requires all listed companies to also establish a mechanism wherein employees can report their apprehension about the conduct of the business, its accounting methods or any other aspects, directly to the chairperson of the audit committee. The companies have to provide details of the above system in their Web site.
The Companies Act 1956 is silent on insider trading. Currently, all the regulatory requirements on insider trading are contained only in SEBI’s Prohibition of Insider Trading regulations. But with the new Companies Bill becoming a law, rules prohibiting insider trading will feature in the Companies Act itself, making it necessary for the compliance officers to actively monitor acts of insider trading in their companies.
What is more, the new Bill prohibits insiders of a company from trading directly or indirectly in shares both in the cash and futures market. The latter was excluded from the purview of SEBI’s earlier insider trading regulations. Any person who violates the clause will be punished with a cash fine or imprisonment or both.