On the face of it, corporate governance and protection of minority shareholders have a very high priority in India. Every now and then, either the ministry of corporate affairs or capital market regulator Securities and Exchange Board of India (Sebi) issue new corporate governance rules.

But rules mean little when exceptions are made ever so often. For all the tinkering with corporate governance rules, the dice is still loaded in favour of majority shareholders.

Look no further than the government, which has time and again disregarded the interests of minority investors. Exhibit A: State-owned Oil and Natural Gas Corp. Ltd’s (ONGC’s) purchase of the government’s stake in Hindustan Petroleum Corp. Ltd (HPCL) early this year.

Minority shareholders were a mere afterthought, and were asked to vote on the related party transaction about two months after the transaction. And while the government sold its stake at a 12% premium to the prevailing price, there was no benefit for HPCL’s other shareholders, as ONGC received an exemption from making an open offer.

Later, when the government announced the merger of the weak Dena Bank with Bank of Baroda, the latter’s shares fell 16% in the next trading session.

Shares of state-owned oil and marketing companies are still to recover from the blow of being asked to sacrifice a part of their marketing margins in October .

Now, the government has approved the sale of its stake in Rural Electrification Corp. Ltd (REC) to another state-run firm, Power Finance Corp. Ltd (PFC). News reports suggest PFC may pay a high 35% premium to purchase the shares, which immediately implies value erosion for the company and its minority shareholders.

Besides, the transaction will take PFC from a net cash position to a net debt position. Unsurprisingly, its shares fell 8% last week. There’s talk of an open offer exemption again, which means REC’s minority investors may have to merely witness the majority shareholder walk away alone with a hefty premium.

All this, while the government’s own agencies regularly hold forth on protection of minority interests in related party transactions. “A minority shareholder in a state-owned company is also a minority shareholder; his interests must be protected," says a former executive director of Sebi. But this basic tenet seems to have been lost in translation.

To be sure, listed state-owned companies trade at a discount to their peers in the private sector, in recognition of such risks. Still, not all hope is lost. An exchange-traded fund made up of state-owned companies was recently oversubscribed, implying that there is still appetite for these stocks, notwithstanding the risks they carry.

At any rate, the disregard of minority investors in the above-mentioned stocks sends the wrong signals.

The takeaway for majority shareholders in the private sector can be that this is par for the course. Minority investors may start thinking exceptions are the norm.

But as Sherlock Holmes famously said, “An exception disproves the rule."

The government would do well to treat the PFC-REC deal as any other M&A (mergers and acquisitions) deal. If minority shareholders are asked to vote on the deal and its pricing ahead of the transaction, it will go a long way in strengthening corporate governance in the country, as opposed to an endless refining of rules to protect investors.

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