Known by the

company we keep
The companies bill — aimed at improving corporate
governance and transparency — could have done more
to prise open promoters’ control of their businesses
In the meanwhile, class ass action
action
SHOBHANA SUBRAMANIAN suits
suits havehave been been introduced
introd
int roduce uced d so that
that a
set of sha shareholders
shareh rehold
oldersers or depdepositors
deposi
positortorss can
now approach
approa
app
pproach ch the tribunal,
tribun
tri bunal,al, to bring
bringg
to its attention,
attent
att ion,, anyy malpractices
ention malpra
mal practictices
ces
they
they may have have spotted.
spotte
spo tted.d. How
H quickly
or effectively the tribunals will deal
with such grievances is another mat-
ter altogether,
g but this should help help
increase
increa
inc rease se investor
invest
inv estoror activism
activi
act sm — very
ivism very lit-
lit-
tle of whichwhich has bee been n seen
seen so far in
CORPORAT
CORPORATE
CORPOR RATE legi llegislation
egisla
g slatio
tionn in IndIndiaia this
this country.
countr
cou ntry. y. Indian
I promoters are a
has,, byy and lar
has large,
gge, favfavoured
favour
oureded com
compa- pa-
p thick-skinned lot but perhaps the tri-
nies,
nie s, but eveeven n the
then businessmen
n bus
busine
inessm
ssmen en in bunals will make life difficult for
thiss country
thi countr
cou ntryy rarely
rarelyy pass pass up
p p an oppor-
opp
ppor- them if they have erred. And with
tunity
tun ity to slip
slip through
throug
thr ough h a loophole.
loopho
loo phole. le. In-
I electronic voting being ushered in,
dustrialists are getting away by sell- perhaps fewer small shareholders
ing big chunks of their businesses and institutional shareholders will
without the small shareholder gget- vote with their feet. What’s also new
tingg so much as a look-in. Slu Slumpmp p in the companies p bill is the concept
concep
con ceptt
sales,
sal es, as these
these transactions
transa
tra nsactictions
ons are called,
called
cal led,, of indindependent
indepe epende ndent nt directors,
direct
dir ors,, about
ectors
have allowed promoters to control whom much has been said in the af-
large amounts of cash leaving minor- termath of the Satyam scam. While
ity shareholders without any imme- it would be wrong to say that they
diate gains. Also, promoters can buy have not contributed to better cor-
back up to 5 per cent of a company’s porate
p governance
g practices,
p the
equity capital, in a year, through general
genera
ggen erall perception
percep
per
p ceptio
ption n is that
that they
they don’t
don’t
what’s called a creeping acquisition; seem
seem to be doi doingngg eno
enoughugh
g and are not
that’s clearly unfair because they’re really
real
re lyy “independent”.
ally “ind
“indep epen
pende dentnt”.
”. At lea
leastst a thi
thirdrd
insiders and are privy to what’s hap- of the directors
direct
dir ectorsors on a board board now
pening in the company, whereas needs
needs to be ind independent,
indepe
ependendent,nt, a meaning-
other shareholders are not. But ful presence that should help im-
where p
where promot
pro moters
promoters ers hav havee rea
really
llyy ben
bene- e- prove boardroom culture. But mak-
fited
fit ed is fromfrom the absence absenc
abs encee of strong
strong ing their jobs too onerous might
bankru
ban kruptc
bankruptcy ptcyy laws.
laws. Whether
W it was the result in a shortage of competent di-
Essar Group or the Arvind Group, rectors. Also, one would have
few companies have ever been told thought the authorities want the best
to shut shop p and it has always always y been
been out of directors; so allowing allowi
all owing ngg
banks
ban ks who have have taken taken the haircuts,
haircu
hai rcuts,
ts, people
peop
p ple to be on as many many as 20 boards boards
contin
con tinuin
continuing uingg to lend lend to inefficient
ineffi
ine fficie
cient
nt rather
rather than than 15 at present, presen
pre sent,t, is some-
some-
busine
bus inesse
businesses. sses.s.. Promoters
Promo
Pr omoter terss mayy make
make a what
what surprising.
surpri
sur prisinsing.
g.
killin
kil lingg on other
killing other businesses
busine
bus inesse
ssess in the Meanwhile, companies compan
com panies
p ies will
will be
group,
ggro up, but the banks banks don’t don’t see anyy of happier
happie
happp pierr with
with the simplersimple
sim plerr norms
p norms for
this.
thi s. Indeed, in the absence absenc
abs encee of a mergers
merger
mer gerss and amalgamations;
amalga
ama lgamat
mationions; s; Indian
recomp
rec ompens
recompense pensee clause,
clause
cla use,, banks
banks are not companies can merge with foreign
entitl
ent itled
entitled ed to anyy upsides
upside
upsp idess when
when a busi-busi- companies and vice versa, two or
nesss is turned
nes turned around.
around
aro und.. small companies can be more easily
That’s why the new companies merged as can a subsidiary with a
bill is a bit of a disappointment. holdingg company p y and its subsidiary. y
While there’s been an attempt to But the fact fact that
that a shareholder,
shareh
sha rehold
older,er, with
with
tighten the rules and plug some gaps, less
less tha
than n a 10 p per cent
cent sta ke in a firm
stake firm
it could perhaps have done more to or someone
someon
som eonee who has lent lent less
less than
than 5
facilitate bankruptcies. p There
The re is, of per
p cen centt of the deb debt, t, can no lon longergger
course
cou rse,, the proposed
course, propos
pro
p posed
p ed National
Nation
Nat ionalal Com-
Com- raise
raise objections
object
obj ionss to a transaction
jection transa
tra nsacti on goes
ction ggoes
panyy La
pan
p Lawaw Tr Tribu
ibunal
Tribunal nal and a National
Nation
Nat ionalal against
g instt the interests
agains
aga intere
int sts of minority
erests minori
min oritytyy
Compan
Com
Company panyy Law
p Laaw Appellate
Appell
App ppellateate Tribunal,
Tribu
Tr ibunal
nal,, shareholders.
shareh
sha rehold oldersers.. It’s true that people do
which are going
which ggoingg to be taking takingg up p cor-
cor- make a nuisance of themselves but
porate
por ate debt
debt restructuring
restru
res tructucturin
ringg cases,
cases, but the tribunals should be able to take
one wonders whether the banks will care of that. Again, the window al-
get justice. Hopefully the tribunals lowing minority shareholders to be
will sort out the cases quickly — a squeezed out, a Western concept,
time frame of three months has been seems a tad unfair because no mat-
suggested but what we need is a ter how fair the value offered for the
Chapter 11 or a Chapter 7 kind of stock, shareholders have the right to
legislation so that when a firm’s net hold on to their investments. The bill
worth has been completely eroded also says companies can no longer do
and the debt is too huge to service, more than one buyback of shares in a
the restructuring results in the com- year. Since buybacks do support the
pany’s owners being left with noth- share price and boost earnings, and
ing. Instead, the creditors simply since no one can really force a share-
take over. holder to sell shares, the move is
Today, y banks
banks are not able able to re- somewhat hard to understand. Per-
cover
cov er too mucmuch h byy aucauctio
tionin
ningg pro
auctioning proper
per--
proper- haps the idea is to encourage com-
tiess through
tie throug
thr ough h SARFAESI
SARF
SAARF FAES
AESII ((Securitisa- panies to leave enough of a floating
tion and Reconstruction of Financial stock in the market so that stocks
Assets and Enforcement of Securityy don’t become too illiquid. q
Interest)) Act. And onc oncee the
theyy havhavee The bill bill seeks
seeks to improve provee corpo-
improv
imp corp po-
lentt lar
len large
gge sum
sumss it’ it’ss the ban
banks
ks who are rate
rate ggovgovernance
governernanc ancee and tra transparency;
transp
nspare
parency ncy;y;
in bigger
bigggger trouble
troubl
tro ublee thanthan the promoter
promot
pro
p moterer so auditors
audito
aud itorsrs nee
need d to be cha changed
change
nged
g d eve
every ryy
who sim
who simply
ply thr
throws
ows up his han hands. ds. The five
five years
yyears and companiescompan
com panies
p ies need
need to
corporate debt restructuring (CDR) provide
provid
pro
p videe sepseparate
separa
parate audited
te aud
audite ited accounts
d acc
accounounts ts off
packages are turning out to be exer- each
each sub subsidiary.
subsid sidiar
iary.y. At the end of the
cises in which banks are throwing day though, companies must want to
good money after bad. In fact, banks do things the right way for their cred-
should put their foot down when it itors, employees and shareholders.
comes to restructuring, insisting the It should be a way of life.
business be sold.The point is that in
India promoters have never had to The writer is resident editor,
give up control of their businesses ‘The Financial Express’, Mumbai
and we need the legislation and shobhana.subramanian@
mechanism to help change this. expressindia.com