Best Practices for dealing with
Non-Controlling Shareholders
An Institutional Investor
Perspective
Presentation by
M.K. Chouhan
Chairman, Mahendra & Young Knowledge Foundation
Vice Chairman, Global Advisory Board - Asian Centre for Corporate Governance
email : mkchouhan@mahendrayoung.com
Policy Dialogue jointly organised by MCA & OECD
Asian Centre for Corporate Governance
Presentation will cover

Main issues in dealing with Non-controlling
shareholders

Adequacy of Indian Corporate Governance
Legislative & Regulatory framework.

Some expectations / suggestions from FIIs

Best practice from India – Case of HDFC
Asian Centre for Corporate Governance
Main issues in dealing with
Non-controlling Shareholders

Equal voting rights (one share – one vote)

Spirit with which the controlling shareholder exercise
their voting right (Benefit of all share holders v/s own
agenda ?)

The disclosure protocol for related party transactions

Poison Pills
Asian Centre for Corporate Governance
Adequacy of Indian Legislative &
Regulatory framework

Legal framework based on common law

Companies Act 1956 as amended

Administered by Department of Company Affairs

Enforce by Company Law Board (CLB)

Listed Companies regulated by SEBI

Latest Clause 49 listing agreement

Corporate Governance rating by two agencies ICRA
& CRISIL
Asian Centre for Corporate Governance
Adequacy of Indian Legislative &
Regulatory framework (+ves)

Sections 397 and 398 of the Companies Act
(Prevention of Oppression and Mismanagement) are
adequate 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.

SEBI’s initiative of a unique client code for each
investor
Asian Centre for Corporate Governance
Adequacy of Indian Legislative &
Regulatory framework
(Areas of improvement)

Enforcement and implementation of laws and regulations
remain 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 any
abuse.
The legal framework and stock exchange rules should provide
for full disclosure of shareholder agreements.
Consider strengthening regulators’ enforcement power to
offset backlog and delays of court procedures.
Successfully prosecute one insider trading case to enhance
perception of market integrity.




Asian Centre for Corporate Governance
Indian 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 arbitrage
and weakens enforcement.
Source : REPORT ON THE OBSERVANCE OF STANDARDS AND
CODES (ROSC). World Bank survey of India's corporate governance
institutions and practices
Asian Centre for Corporate Governance
Some expectations /suggestions by FIIs

Related party transactions over a certain size should
be approved - preferably in advance, in general
meeting by a majority of the minority shareholders
(Practical ?).

Controlling shareholder should be, disenfranchised
for this vote. (Practical ?).
Asian Centre for Corporate Governance
Some expectations /suggestions by FIIs
contd…..

Audit committee comprising of majority of
Independent Directors, should play a role in assessing
where the materiality level should be pitched .

Materiality bar for related party disclosures must be
set at a sensible level (neither too high, nor too low )
Asian Centre for Corporate Governance
Best Practice – HDFC
Housing Development Finance Corporation

78 per cent of HDFC’s shareholding is held through FII /
FDI.

Keeps investors informed on a regular & on-going basis.

Senior management spends substantial time In engaging
with investors /FIIs.

One-on-one meetings with investors rather than having
large gatherings with several investors.

Developing long-term relationships with
investors
through more focused and meaningful discussions.
Asian Centre for Corporate Governance
Conclusion
Make boards truly independent

Regulatory or legal remedies can at best mitigate, can not
eliminate abuse of power against Non-controlling
shareholders.
The first line of defense for investors and a key
mechanism for ensuring that an issuer’s disclosure
statements are accurate is the company’s board of
directors
Sherman Boone – Asst Director office of the International Affairs,
SEC, Washington DC
At ACCG conference Mumbai Dec 21st 06
Asian Centre for Corporate Governance
THANK YOU