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Best Practices for dealing with Non-Controlling Shareholders An Institutional Investor Perspective

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

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Best Practices for dealing with Non-Controlling Shareholders An Institutional Investor Perspective

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  1. Best Practices for dealing with Non-Controlling ShareholdersAn Institutional Investor Perspective Presentation by M.K. ChouhanChairman, 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

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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.

  7. 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

  8. 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 ?).

  9. Some expectations /suggestions by FIIscontd….. • 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 )

  10. Best Practice – HDFCHousing 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.

  11. ConclusionMake 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

  12. THANK YOU

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