Corporate disclosure no cover for wrongdoing

The Children Investment Fund UK that holds about 2 per cent stake in Coal India Ltd has been exercised over its investments going sour, thanks to the government's meddling in the company. This is especially with regard to CIL's fuel supply commitments to thermal power companies.

It has gone to the extent of contemplating going to court over the issue of burdensome covenants thrust upon Coal India. The market regulator, SEBI, has gone on record saying that shareholders' hyperactivism has no place in company law and administration. Its refrain, of a piece with the stand taken by dubious company promoters, is that, as long as disclosures are made shareholders have no business to assert themselves, much less play an intrusive role. Take it or leave it, is the message emanating from SEBI. Vote with your feet if you want to, is the subtext of this message.

SHAREHOLDER POWER

In the Anglo-Saxon model of company governance, non-promoter shareholders have indeed been condemned to playing a fringe and passive role. Many a corporate mogul, including some in India, have had the gumption to thumb their noses at them and ask them to collect their rewards from the market. They have been told in unmistakable terms that they simply did not have the power to rock the boat, and demand economic rewards from the company, if it was for some reason unwilling to give them.

In the event, while a lender can enforce his security either with or without the help of the court, non-promoter shareholders, no matter how much they have forked out to the company, have been at the tender mercies of the dominant shareholders. The only exception is when a foreign collaborator, despite his lesser stakes vis-à-vis the Indian promoter, asserts himself through a shareholders' agreement, or otherwise. The state of the art technology brought by him is the tool that prevailed over the Indian promoters.

But the advent of mutual funds brought about a seminal change in the nose-in-the-air attitude of the promoters. There have been instances, both in the US and in India, of mutual funds nursing their investments assiduously, keeping the wayward promoters on leash. What emboldened them to look the company managements in their eyes was not sizeable equity stakes, but research capabilities and deep pockets. They did not resign themselves to a passive role even where all that needed to be disclosed was disclosed.

HIDING BEHIND DISCLOSURE

It is wrong to believe that disclosure absolves one of all the guilt. To be sure, in the US, plea bargaining, a facet of mea culpa , is used as a bargaining chip to lessen penalties and punishments, when one is caught with hands in the till. But that does not mean one can get away with murder by making a clean breast of one's crime. Many in India believe that a company need not fear anything as long as it has disclosed everything as per the applicable norms, including the accounting standards.

This smug belief has engendered a view that one need not be unduly worried about the subtle niceties of scrupulously avoiding conflict of interest, so long as the company through its financial statements faithfully discloses all the instances of its directors and other managerial personnel doing business with the company. The truth, however, is a director interested in a contract is barred from the board meeting in which the matter is going to be disclosed.

He cannot speak and vote on the issue in which he is interested. This solemn edict of the law is followed more in the breach, on the facile ground that the company has in any case made all the disclosures under the accounting standard on related party transactions.

It is thus wrong to silence the voice of the Children's Investment Fund on the ground that when it made the investments in Coal India it ought to have read the offer documents — that as a government company, shareholders are exposed to the danger of the company's policies being subjugated to the thinking of the government of the day.

Indian courts have often rescued minority shareholders from the depredations of the rapacious majority. But in all these cases the companies involved were in the private sector. Coal India would be a test case to find out what the courts think about oppression of small shareholders where the dominant shareholder is the government.

Meanwhile, there could be a bit of masochism involved in voting with one's feet or selling out. The US investors in Satyam computer's ADRs did vote with their feet but their system allowed them to recoup the ensuing losses through a class suit from the company.

Till we put in place a similar system in our country, it would be idle to expect one to sell out if only to teach the company a lesson. In any case a large scale exodus is not something a company can be proud of. In fact, it could be counter-productive in the long run.

The author is a New Delhi-based chartered accountant)

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