Protecting Minority Shareholders

The innovations proposed by the Working Group in respect of buyback of shares and issue of non-voting shares are more radical than they seemed from initial reports. Companies would be allowed to issue equity shares with differential rights to dividends, voting rights or both. Equally, they would be allowed to buy back a certain proportion of shares of existing shareholders, shares from the open market, odd lots, or blocks of shares in negotiated deals. Thus the philosophy underlying the new bill is very different from that of the Companies Act. Whereas the Act conceptualised a company as a democracy of shareholders and sought to annihilate the controller in the form of managing agent, the bill implicitly recognises the controller in more familiar terms, the promoter of a company, and gives him considerable powers to establish and restore his control over the company.

 

In this the bill is clearly more in tune with Indian realities; promoters do think, rightly or wrongly, of companies as their companies. But it must be asked how this recognition of an implicit right of control meshes with the new corporate climate, in which takeovers, mergers and acquisitions are becoming daily occurrences; battles for the support of shareholders are clearly good for corporate performance. Sebi has been seized with the implications of the developing market in companies, and has promulgated rules on takeovers. These are primarily concerned with the rights of minority shareholders in takeovers. It has not protected them fully, since a potential aggressor is required to make an offer for only 20 per cent of the shares, whereas to be entirely fair to minority shareholders the offer should be unconditional. But the Working Group has been even less mindful of the interests of minority shareholders. Where a controlling group owns over 95 per cent of the shares, it can buy off the rest of the shares

at a price to be fixed by the Company Law Tribunal; equally, the minority shareholders in such a case can force the majority to buy them out. But this provision gives the majority the easy remedy of keeping its holding below 95 per cent. It seems that in this area, the Working Group has not thought through the implications of the philosophy it has chosen to adopt. It is to be hoped that this lacuna will be removed before the bill is passed by Parliament.