Minority shareholders fight back

Thu, 20 Mar Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

Indian companies are not known for their good corporate governance practices. Indian investors have been let down time and again by promoters indulging in fraudulent practices. In the past, there was little that minority shareholders could do about it. Conflict of interests between them and the management were common. The management called all the shots and many a time took decisions against the interest of minority shareholders. Even regulatory bodies were not strong enough to tackle this problem.

However, times are changing. According to a special report in the Mint, shareholder activism is on the rise in India. Minority shareholders, both individual and institutional, have realized that they cannot leave the fate of their investments in the hands of the management, in the hope that they will act independently and in the best interests of all. The report states that even though the companies act has provisions which relate to the composition of the board of directors as well as the independence of the management, in practice these are not followed. The promoters (majority shareholders) can and do try, to influence the management, thereby compromising the rights of minority shareholders.

Take the recent example of Maruti Suzuki. The company has announced that its proposal to source cars from a plant built by a 100% subsidiary of Suzuki Motor Co will be put to a vote by minority shareholders. This has come about only after intense scrutiny of the firm's original proposal from several quarters, including the Securities and Exchange Board of India (SEBI). The management confirmed that they had never anticipated such skepticism from investors. The company has left it to the shareholders to decide the fate of the proposal, which is a step in the right direction. Yet there remain many cases of managements going ahead with controversial proposals despite opposition. The Ambuja cement - ACC deal and the Sesa Sterlite merger are cases in point.

Despite the concerns, it is now clear that majority shareholders will find it increasingly difficult to push through their agenda by acting in a manner that compromises the interests of minority shareholders. Indian companies are slowly adopting better corporate governance practices. While there is still a long way to go before retail investors can regain their confidence in the system, managements of several companies have taken small steps in this regard. Better corporate governance will lead to increased transparency and higher retail participation in the company's shareholding.