Corporate Governance in India: The Rise of the Minority Shareholder
It was heartening to see in a recent edition of the Economic Times that the Securities and Exchange Board of India (SEBI) would likely discuss an overhaul of its corporate governance code at a board meeting the next day.
Although it is too early to know whether the SEBI board ultimately discussed the code at the meeting, it is clear based on SEBI’s Consultative Paper on Review of Corporate Governance Norms in India that there is a discernible shift towards empowering shareholders to take management to task on corporate affairs.
This is consistent with what is happening throughout Asia. As documented in our 2010 report Shareholder Rights in Asia, we too have noticed the trend of growing shareholder activism. Unlike in the past, when the response was to sell shares in companies that exhibited poor corporate governance behavior, shareholders are now more willing to engage with the company boards and managers to safeguard their investments.
But what are these rights?
The Principles of Corporate Governance published by the Organization for Economic Co-operation and Development (OECD) in 2004, defines shareholders as having the basic rights to:
- secure methods of ownership registration and transfer of shares
- obtain relevant and material information on the company on a timely and regular basis
- participate and vote in general shareholder meetings
- elect and remove members of the board
- share in the profits of the company
In addition to incorporating the above, SEBI’s consultative paper engenders greater shareholder activism, including mandating e-voting for all resolutions of a listed company to promote greater participation; having stricter rules on related-party transactions; strengthening private-sector enforcements through improved investor education and better participation at general meetings; and regulatory support for class actions suits.
Additionally, due to the importance that institutional investors play in engaging with public companies, the recommendations now require these organizations to exercise greater fiduciary responsibility and stewardship on their investments. These include:
- having a clear policy on voting and its rationale
- dealing with conflicts of interest
- having a policy on monitoring investee companies
- cooperating with other investors to engage with the company where appropriate
- knowing when to have an active intervention on company matters
- addressing disclosure concerns by regular reporting on engagement with companies
In India, the need for good corporate governance is not a new concept. In fact, 10 years ago at the Global Corporate Governance Forum in Paris, G. N. Bajpai, then-chairman of SEBI, stated in his address that corporate governance is the conduct by companies (as the main economic agent of the country) to “produce synergies for all other agents in the economy.”
His view extends the concept that running a corporation well is crucial for the economic prosperity of the country, such that both “the state and market have to co-exist and complement each other’s effort.” Where failures in corporate governance occur (particularly by the larger firms), there will be economic repercussions for the entire country. And when this impacts the lives of people in the country, state intervention becomes necessary. In Bajpai’s view, running a company well is not only good for its owners, but also for the country. And the foundation of good corporate governance “must be an unwavering commitment to integrity” and “an undying commitment to serve the investor.”
With these changes coming, it looks like India is forging ahead in its quest to improve the governance practices of public companies and, if done correctly, could lead to what Bajpai calls the “triumvirate of Indian values”: satyam (ethical business practices), shivam (serving society), and sundaram (morality in behavior).
Let’s all stand up and applaud the impending rise of minority shareholders in India!
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