Portfolio

Flex your muscle

Parvatha Vardhini C | Updated on November 22, 2014

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Minority shareholders now have greater legal muscle to question royalty increases



If you’re gnashing your teeth at the games companies play with royalty payments, calm down. Minority shareholders have greater power to question matters related to royalty increases in the new Companies Act, 2013. Here’s how:

More dependable directors

Minority investors can now convincingly lean on independent directors to further their cause.

The new Act states that listed companies should have at least one-third of the total number of directors as independent directors and lays down strict rules on their qualifications, tenure and re-appointment. This is unlike earlier times where best practices relating to independent directors were part of ‘Voluntary Guidelines’ on corporate governance issued by the Ministry of Corporate Affairs in 2009 and many companies were found flouting them.

This move will help resolve more cases like the ACC/Ambuja-Holcim royalty issue.

Sometime back, when ACC and Ambuja Cements proposed increasing royalty payments to parent Holcim before the board, the independent directors of both the companies objected to it on the grounds that it was against the interest of minority shareholders.

This forced Holcim to agree to a lower hike in royalty than what was initially proposed.

Besides, small shareholders (defined as those holding shares of nominal value of not more than ₹20,000) may also appoint one director to the board.

Tighter noose

Since promoters are related parties, changes in provisions dealing with related party transactions also help minority investors in questioning royalty increases. For one, Sec 188 says that if certain related party transactions are not at arm’s length and ‘not in the ordinary course of business’, they need to come to the board for approval. Further, after the recent clarification issued by the Ministry of Corporate Affairs, if these transactions cross a threshold monetary limit, they need approval through a special resolution of the remaining shareholders, who are not related parties.

These two provisions serve as a filter for promoters walking away unquestioned with royalty increases.

Matters related to royalty cannot be considered those in the ordinary course of business and hence, remain outside the ambit of these provisions at all times, say company law experts we spoke to. Whether they need board/shareholder approval will be decided on a case to case basis, they add.

In any case, if the transaction limit is breached, it could serve as a warning for further scrutiny by minority shareholders.

Easy voting

Now that your vote on royalty and related matters could really count, the Act also makes it convenient for you to vote on proposed resolutions from the comfort of your home. Since June this year, e-voting has been made compulsory for all listed companies and for those with at least 1,000 shareholders.

Unlike postal ballots, which involve paperwork and require posting well in advance, e-voting can be done until the last minute before the voting window closes; e-votes don’t face the risk of getting lost in transit either.

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Published on September 21, 2014
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