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Best Practices for dealing with Non-Controlling Shareholders

An Institutional Investor Perspective

Best Practices for dealing with Non-Controlling Shareholders

An Institutional Investor Perspective

Presentation by M.K. Chouhan

Chairman, M ahendra & Young K nowledge Foundation

Vice Chairman, Global Advisory Board - Asian Centre for Corporate Governanceemail : mkchouhan@mahendrayoung.com

Policy Dialogue jointly organised by MCA & OECD

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Presentation will cover Presentation will cover

M ain issues in dealing with Non-controlling shareholders

Adequacy of Indian Corporate Governance Legislative & Regulatory framework .

S ome expectations / suggestions from FIIs

Best practice from India Case of HDFC

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M ain issues in dealing withNon-controlling Shareholders M ain issues in dealing withNon-controlling Shareholders

Equal voting rights (one share one vote)

Spirit with which the controlling shareholder exercisetheir voting right (Benefit of all share holders v/s ownagenda ?)

The disclosure protocol for related party transactions

Poison Pills

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A dequacy of Indian Legislative &Regulatory framework

A dequacy of Indian Legislative &Regulatory framework

L egal framework based on common law

Companies Act 1956 as amended

Administered by Department of Company AffairsEnforce by Company L aw Board (C L B)L isted Companies regulated by SEBI

L atest Clause 49 listing agreementCorporate Governance rating by two agencies ICRA& CRISI L

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A dequacy of Indian Legislative &Regulatory framework (+ves)

A dequacy of Indian Legislative &Regulatory framework (+ves)

Sections 397 and 398 of the Companies Act(Prevention of Oppression and Mismanagement) areadequate provisions to prevent any substantive abuse.

Poison pills are banned by law. The SEBI Takeover Code has been successfully tested in over 25 hostile

bids.

SEBIs initiative of a unique client code for eachinvestor

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A dequacy of Indian Legislative &Regulatory framework

( A reas of improvement)

A dequacy of Indian Legislative &Regulatory framework

( A reas of improvement)

Enforcement and implementation of laws and regulationsremain important challenges.

Certainty of punishment is more important than severity of it

The provision Section 372A; dealing with the selling or leasing of major assets should be further refined to avoid anyabuse.The legal framework and stock exchange rules should providefor full disclosure of shareholder agreements.Consider strengthening regulators enforcement power tooffset backlog and delays of court procedures.Successfully prosecute one insider trading case to enhance

perception of market integrity.

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Indian Legislative & Regulatory framework contdIndian Legislative & Regulatory framework contd

The current institutional framework places the oversight of listed companies

Partly with the Department of Company Affairs (DCA),

Partly with the Securities and Exchange Bard of India (SEBI)Partly with the Stock exchanges.

This fragmented structure gives rise to regulatory arbitrageand weakens enforcement.

Source : REPORT ON THE OBSERVANCE OF STANDARDS ANDCODES (ROSC). World Bank survey of India's corporate governanceinstitutions and practices

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Some expectations /suggestions by FIIsSome expectations /suggestions by FIIs

Related party transactions over a certain size should be approved - preferably in advance, in generalmeeting by a majority of the minority shareholders

(Practical ?).Controlling shareholder should be, disenfranchisedfor this vote. (Practical ?).

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Some expectations /suggestions by FIIscontd..

Some expectations /suggestions by FIIscontd..

Audit committee comprising of majority of Independent Directors, should play a role in assessingwhere the materiality level should be pitched .

Materiality bar for related party disclosures must beset at a sensible level (neither too high, nor too low )

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B est Practice HDFC Housing Development Finance Corporation

B est Practice HDFC Housing Development Finance Corporation

78 per cent of HDFCs shareholding is held through FII /FDI.

Keeps investors informed on a regular & on-going basis.

Senior management spends substantial time In engagingwith investors /FIIs.

One-on-one meetings with investors rather than havinglarge gatherings with several investors.

Developing long-term relationships with investorsthrough more focused and meaningful discussions.

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Conclusion M ake boards truly independent

Conclusion M ake boards truly independent

Regulatory or legal remedies can at best mitigate, can noteliminate abuse of power against Non-controllingshareholders.

T he first line of defense for investors and a keymechanism for ensuring that an issuers disclosure

statements are accurate is the companys board of directors

Sherman Boone Asst Director office of the International Affairs,SEC, Washington DC

At ACCG conference Mumbai Dec 21 st 06

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THANK YOU