Should minority shareholders have a greater say in the running of companies? In Western countries, the vast majority of firms are professionally run by a board appointed by shareholders.
In India, most firms are owned and run by families. By law, they have to approach all shareholders before they take important corporate decisions. In practice, their stakes are usually high enough to get all key resolutions passed. While shareholder apathy is one reason, it is perhaps too much to expect lay shareholders to grasp the nuances of key corporate decisions.
That’s where mutual funds (MFs) and financial institutions were expected to step in, and hold firms accountable. Their disinterest has made market regulator Securities and Exchange Board of India (Sebi) to force them to reveal how they vote on important corporate decisions.
Institutions have the collective influence and knowledge that individuals lack. Very often corporate decisions appear questionable. For example, a partition of assets among the promoter families may be masked as a business restructuring process. Some promoters issue warrants to themselves when share prices are low, perhaps knowing share prices will be higher a year down the line. While they make a tidy sum by converting the warrants at a later date, the dilution leaves other shareholders disadvantaged.
In the past few years, there have been many cases where listed firms, especially small and midsize ones, have merged unlisted companies belonging to the promoter group with themselves. This is not illegal, but little information is publicly available in the scheme documents to evaluate the merger. The only option is to trudge to the registered office of the company to inspect the documents, not an investor-friendly option.
These actions require shareholder approval, which all firms obtain, either by calling meetings or using postal ballots. When shareholder participation in these events is poor, the will of the majority shareholder prevails. It is here institutions are expected to act. But their track record is not inspiring. They typically refrain from antagonizing company managements, fearing loss of access to privileged information. Disagreement is expressed quietly, by selling their stake in the company.
That explains Sebi’s intervention. Mutual funds will now have to disclose their voting policy and disclose their vote in all crucial meetings. This is an excellent and revolutionary step, one that will force mutual funds to be proactive and also give fund investors and shareholders invaluable information.
But its execution is critical for shareholders to benefit. Standardized formats and reporting deadlines should be adhered to. Moreover, a mountain of data will become available, as there are 2,900 traded companies on the Bombay Stock Exchange and 38 mutual funds. It would be worthwhile to create an online database, where this information is stored for investors. It would be instructive to know how all mutual funds voted.
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