Empowered Shareholders activism decide fate of Related Party Transactions

Shareholders are the owners of the corporations. Shareholders have the right to access and examine the corporate records and information concerning the governance and financial performance of the corporate. With the changing time, shareholders are increasing their active engagement in the corporations. Participation of the shareholders has increased with the e-voting implication under the Companies Act, 2013 (Act), it has made easier to raise their opinions on the critical corporate matters.

In a recent blow, there have been instances where the shareholders have got down on the resolutions put before them. The majority being resolutions empowering the Board and appointments in the same, related Party transactions (RPT’s), amendments in the Articles and or Memorandum of the company.

As on the date, 66 resolutions have been defeated by the shareholders since January, 2014.

What made it possible?
Primary reasons

Law protecting the Minority and powers of Shareholders
Participation by the Private Equity Investors (PE), Institutional Investors (II) Mutual and Pension Funds Investors.
Secondary reasons

E-voting Facility
Educated and well informed shareholders
Protection of Minority and Powers of the shareholders
SEBI guidelines, and in some instances, Act does not allow promoters or controlling shareholders to vote on transactions in which they have an interest, these transactions include all RPTs. The major resolutions defeated attribute to RPTs. Section 188 of the Act read with Rule 15 of the Companies (Meeting of board and Powers) Rules, 2014 mandates that a company must obtain prior approval of majority of the minority shareholders for the purpose of entering into any stipulated RPTs. The said requirement has increased major participation and transparency in the decision making in the corporates. Any person and or director if interested in the said RPT cannot vote to approve such resolution.

Also, as per Section 27 of the Act, in case of any variation in terms of Contract or Objects in Prospectus, dissenting shareholders shall be given an exit route by promoters or controlling shareholders at such exit price, and in such manner and conditions as may be specified by SEBI by making regulations in this behalf.

Another major resolutions defeated by the shareholders includes the Appointment of Directors including Independent directors. As per section 149 of the Act, Independent directors are the directors who are in no way related to the Directors, promotors, holding, subsidiary or associate company of the corporate. Constitution of the Board is in the hands of the members, to appoint individuals who actively participate in the good governance and play a vital role in risk management. The members can approve the appointment only if it satisfied that the person so being appointed is capable to carry out its duties sincerely and acts fiduciary with the stakeholders. Overall, the independent directors shall work towards promoting confidence of minority shareholders. Hence to appoint a person or not shall be in the hands of the members. Thus, the members are opined to defeat the said transactions if they are not satisfied with the decision of the Board of Directors on the said matter.

Participation by the Other Investors
With the encouragement of investing in the Indian Companies by the Foreign Direct Investors, Institutional Investors, the interest of the stakeholders is increasing in the company and its operations.  PE are the investors that directly invest in private companies, or that engage in buyouts of the public companies, resulting in the delisting of the public equity. Institutional investors and retail investors provide the capital for private equity, and the capital can be utilized to funding new technology, make acquisitions, expand working capital, and to boost up the Balance sheet positions. Institutional investors are also taking small but effective step to uphold corporate governance standards in Indian Companies.

Mutual funds have been demonstrating increased interest in AGMs, and their participation in the resolution voting process signals a growing debate between management and investors on corporate governance issues. The average of six percent of “against” votes cast by mutual funds in 2014 dropped to four percent in 2015, together with a sharp fall in “abstain” votes from 25 percent in 2014 to only 12 percent in 2016. Data indicates that in fact mutual funds are not shying away from exercising their franchise. Mutual fund executives insist that they have begun playing an active role in improving corporate governance of their investing companies. Increased participation by mutual funds in the resolution voting process is a positive step in the corporate governance roadmap. It has added weight to the voice of investors and will improve overall stakeholder engagement and the quality of communication.

Corporate governance resolutions have in fact become very common, especially those related to matters of executive remuneration and audit. The maximum number of resolutions over three years have been passed regarding the appointment of directors, aggregating to 43 percent of the total number of resolutions in 2014, 28 percent in 2015 and 26 percent in 2016. However, resolutions related to director and executive remuneration and compensation constituted as much as 10 percent, 11 percent and 12 percent of resolutions in 2014, 2015 and 2016 respectively. However, Resolutions related to financial matters, such as those on the declaration of dividends and the reduction of share capital, are those facing the least degree of opposition by mutual funds casting their votes.

E-Voting
As per the provisions of Section 108 of the Act read with Rule 20 of The Companies (Management and Administration) Rules, 2014, every company which has its shares listed on the Recognised Stock Exchange and every company having not less than 1000 members shall provide its members facility to exercise their right to vote on proposed resolutions by electronic means.

Members can exercise their power through remote e-voting or postal ballot or poll. E-voting helps the shareholders to raise their opinion on the matters and disapprove the said motion. It helps to maintain their decision-making power in the corporate. Also, the scrutinisers so appointed are not in anyway employed in the company and participate only for ascertaining the requisite majority.  This makes the process of e-voting fair and transparent.

Also, the shareholders may participate in the general meeting even after exercising his right to vote through remote e-voting but shall not be allowed to vote again. Proxies are allowed to vote on poll.

SEBI has mandated that all listed companies must enable e-voting on all resolutions through the depositories.

Further, with the advent of E-Voting, not only has it become easier to vote, but the way votes are counted has also changed to the actual number of shares voted, rather than the show of hands where One vote per Hand prevailed. Thus, the vote of larger shareholders now counts, irrespective of their ability or inability to attend the meetings.

Educated and Well-Informed Shareholders
The critical link between decision-making and accountability, is engagement between shareholders and the company board that is informed, meaningful and effective. Effective participation by shareholders in the companies in which they invest is an important means through which corporate governance standards can be improved and shareholders can improve the value of their ownership. The main object of the Companies Act, 2013 is active participation and timely educating them regarding the corporate welfare. Also, the shareholders keeping a continuous eye even through remotest of the location with the development in the technologies.  There have been collective steps by the Regulators and the Directors by availing holistic knowledge assets by encompassing educational publications and benchmarking research, immersive workshops, webcasts and other training programs, and peer networking groups

Conclusion
Companies and investors should consider whether their current approaches to shareholder engagement and participation can be improved within the existing regulatory framework.  Empowered by Sec 188 and the rules together with Effective engagement and participation by shareholders will lead to improved corporate governance standards and in the process create larger shareholders Value. It can be said that the shareholders are the center of the corporate universe, managers and boards must orbit around them.