M.K. Chouhan Chairman, Mahendra & Young Knowledge Foundation 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 Policy Dialogue jointly organised by MCA & OECD

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

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

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

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

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.

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

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 ?).

Some expectations /suggestions by FIIs contd….. 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 )

Best Practice – HDFC Housing 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.

Conclusion Make 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

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