S Murlidharan

Companies Bill could boost corporate democracy

S. Murlidharan | Updated on March 20, 2013

Uncomfortable questions may become the order of the day.

Directors pushing their agendas may not have their way any longer. The Companies Bill 2012 seeks to bring about a paradigm change in the way the boardroom operates.



In the meetings of public companies’ boards, the quorum present on each item on the agenda must be a disinterested one (quorum). Only the disinterested directors can speak on a matter, and only they can vote on resolutions put up before the board meetings.

It is expected that an interested director would step out of the board meeting when a matter he is interested in is about to be discussed and put up for vote; his domineering albeit quiet presence could influence the decision one way or the other.

AN EQUALISING MOVE

These are salutary principles contained in the extant Companies Act, 1956. But Parliament has all along forgotten that, important as board meetings are, no less important are general meetings where vital matters are put up for shareholders’ consent, in addition to the board approval.

So, while for an interested director the board room is out of bounds, he has free access to general meetings. He can vote on any resolution, no matter whether he is interested in it or not. The Companies Bill, 2012 (the Bill), seeks to put an end to this invidious distinction between board and general meetings.

Therefore, in the new scheme of things, if a director’s son is to be appointed in the company or a director’s firm is to supply materials to the company, such a director can neither influence the outcome of the ultimate decision at the board meeting nor in the general meetings.

Such matters, to be sure, are required to be approved by the general meeting, but it has always been a walk through the park for the interested directors for two reasons — only an ordinary resolution is required and, more importantly, an interested director — say, one who holds 75 per cent of the voting power — can vote at the general meeting.

That he cannot vote at board meetings has never given him sleepless nights because the board of directors has always remained a close-knit club, functioning in a spirit of mutual back-scratching.

The Bill seeks to bring about a paradigm change as far as general meetings are concerned, insofar as matters involve related-party transactions.

Such matters would require not a mere ordinary resolution but a special resolution — or, three-fourth majority, which could be a tall order in the new scheme of things post-June 2013, when listed public companies are required to ensure at least 25 per cent equity participation by the public.

It is just as well that the Bill gives the veto power on matters of such seminal importance to the public shareholders. Bereft of voting power, interested directors with even 60 per cent stake will have to court and woo and, above all, convince the public shareholders. So far, so good.

Indeed, the move is a shot in the arm for corporate democracy. But eternal vigilance is the price one has to pay for any democracy, political or corporate.

Legendary apathy

In India, public shareholders, with their minuscule stakes, display a monumental apathy as far as the management of company affairs is concerned. In the good old days, they were humoured and wooed with goodies and freebies.

Some of them even left the meeting after a sumptuous high tea. But with the government delivering a body-blow to this practice, companies are no longer able to reach the shareholders’ hearts through their stomachs.

While shareholder participation was sought as a matter of prestige or for publicity, managements with devious proposals up their sleeves would silently thank the Gods when they saw a poor turnout.

If the Bill is signed into law, such managements would, in fact, pray for poor turnout with greater intensity; after all, it is easier to rustle up the support of dedicated members, like committed cadres of political parties, than vigilant shareholders who refuse to play ball.

These ‘dedicated’ members invariably turn up at the meetings. Therefore, a lot rides on shaking up the public shareholders, who must be made to realise the importance of the new power in their hands. To be sure, electronic voting through the Net, in addition to postal voting, will go a long way to improve voting, but there is still no guarantee that these, by themselves, will overcome shareholder apathy.

One hopes institutional voters, such as mutual funds and FIIs, display greater awareness than they have done so far and exercise their voting rights properly.

Incidentally, the impending move would also have the effect of considerably neutralising the potency of shareholders’ agreements, de rigueur in foreign collaboration agreements.

The foreign partner enters into an agreement with the Indian promoter, with the latter giving the former unbridled powers in running the affairs of the company they have jointly promoted, including veto power at board meetings. Such foreign companies can no longer be complacent on this as neither they nor the Indian partner can henceforth vote at the general meetings despite holding a sizeable number of shares.

The foreign director cannot vote because of his direct interest. The Indian director, representing the Indian promoter, is out to facilitate the goals of the foreign director, thanks to his commitment under the shareholders’ agreement. Hopefully, mindless royalties to the foreign partner will become a thing of past.

(The author is a New Delhi-based chartered accountant.)

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Published on March 20, 2013
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