Minority shareholder representation: Empower investor associations first  

August 20, 2000

Indian industry won a significant victory last week when it scuttled a proposed amendment to the Companies Bill, 1999 which would have empowered minority shareholders. The amendment would have given small shareholders mandatory representation on the board of companies above a certain size, in order to protect minority interests.

Given the dismal record of investor protection in India, the Union Cabinet agonised over the issue for two meetings before dropping it. What is more surprising is that the corporate sector's view finds a loud echo in two leading business newspapers. One called the proposal a 'batty idea' while another believes that small investors are not such underdogs anyway.

The demand for minority representation came from investor associations, and although I am closely associated with two consumer/investor associations, I too believe we are not ready for minority shareholder representation yet. But my reasons are different from those trotted out by the corporate sector.

The corporate view, echoed by business papers is that 'minority representatives will use their position to blackmail management and corner special favours for themselves.' They also claim that 'companies are becoming more transparent' under pressure from large institutional investors and not minority shareholders.

The first claim is party true and the second simply false. Minority shareholder representatives will be effective only if they too are accountable to investors. This will happen if they are from investor associations.

In fact, I am amazed at the corporate sector's opposition to minority representation (don't forget that they were equally vehement about rejecting postal ballots which would have empowered individual shareholders) because they know how to neutralise their role by simply planting their chosen stooges on the board.

In fact, any hack who has spent several years in business journalism covering annual general meetings will tell you all about those small shareholders who occupy their first few rows. After a few meetings, we knew them all by name; we also knew exactly which of them used the AGMs as a platform to practice their public speaking, and those who were totally focussed on the chai, samosas and gift coupons and finally the bunch which was divided into the pro-management speakers, the true investors and the regular trouble makers.

Innumerable companies confess to pre-AGM deals of gifts and junkets to sweeten shareholders who threaten to disrupt meetings with uncomfortable questions; and arrangements to have them make laudatory speeches about the chairman. One company even organised for shareholders to ask the management to cancel the declared dividend and plough it back into running the company.

It would have been easy enough for companies to pick up such investors as directors since holding shares in the company is the only qualification required. But they are probably more irritated at having to give away a prized directorships to non-entities, especially when directors fees have become so lucrative.

The argument that institutional investors will bring about increased corporate transparency is also deceptive. Institutional investors, including foreign ones, are basically traders. Over the last five years, instead of demanding universal transparency, they have formed a convenient equation with corporate management whereby they are privy to extra information, separate briefings at fancy holiday resorts and exclusive plant visits. Their superior access to information allows them to move in and out of scrips far more successfully than minority shareholders who are usually the last in the information chain.

In my view, small shareholder representation is necessary, but only if investor representatives have a track record of fighting for investors rights and are part of an accredited investor association. Such minority shareholder representatives will then be accountable to their investor associations and companies would have less scope to influence them or be blackmailed by them.

This is neither practical nor workable right now because there are not enough investor associations capable of representing minority shareholders on all major companies. There are several small associations headed by extremely committed individuals, but very few of them have the resources to fight the government or the corporate sector, or even lobby for investor issues.

To my knowledge, only the Consumer Education and Research Centre of Ahmedabad (where I am a trustee) has the funds and a dedicated staff to handle individual investor complaints as well as to fight litigation. The Midas Touch Investor Association of Kanpur, which has filed a few important cases (one about the companies which vanished with investors's funds and another in connection with Canbank Mutual Funds's assured returns), but until recently it has been a one-man show.

The Tamil Nadu Investors Association of Chennai is a committed group, but its prime mover, Mr Naranayan is the first to admit that paucity of funds is a serious handicap. The Lokmanya Seva Sangh of Mumbai is a serious investor organisation, but again, due to lack of funds, it has limited its activities to discussions, lecture meetings and occasional representations to the government and the regulators.

There is yet another Ahmedabad-based investor association which is accredited by the Securities and Exchange Board of India and active on behalf of investors. Finally, there is the Investor Grievances Forum headed by Bharatiya Janata Party MP Kirit Somaiya. The last body has the capacity to raise funds, but it is never quite clear what Mr Somaiya stands for and the persistence with which he is willing to see issues to their logical conclusion.

In fact, SEBI found that less than a dozen associations meet its accreditation criteria. Investor associations alone can truly represent minority shareholders, and there are plenty of issues which they can raise to protect their interests. For a country the size of India, a rapidly growing investor population needs at least a hundred strong investor groups before they are granted the responsibility of standing up for other retail investors. The associations will need funds and support to understand investor issues as well as the pressures and constraints under which the corporate sector operates.

Mr T S Krishnamurthy, the former secretary at the department of company affairs who proposed the amendment to permit minority shareholder representation on corporate boards, also had a plan to strengthen investor associations. During his tenure the DCA set up an investor protection fund, carved out of unclaimed dividends which have so far been retained by companies.

The fund was to support activities such as an investor education project, research, and legal assistance to genuine litigants and capacity building of investor associations. The first committee, set up by the government and notified by the official gazette, has a tenure of two years. It is almost a year since the committee was set up, but it has clearly moved off the DCA's priority list. Even the rules for administration of the fund have yet to be finalised. Part of the problem is that the DCA's entire top bureaucracy, including the minister in charge, has changed.

This creates a Catch-22 situation which only benefits the corporate sector. Unless there are a lot more informed, active and well funded investor associations, they cannot represent small shareholders adequately. And until there is an effort by the government to establish and support such associations, they will never come into existence. This will allow the corporate sector to object to shareholder representation on the fanciful charge that they will merely resort to blackmail and obstruction.