Monday, May 11, 2009

Corporate Governance and Protection of Minority Shareholders

Corporate law and corporate governance norms are devised to address certain agency problems (as they are known in economic terms). In countries where there is diffused shareholding (such as the U.S. and the U.K.), the agency problem that is prevalent is one between managers (the agent) and shareholders (the principal). Diffused shareholding gives rise to the collective action problem where each person’s shareholding is so small that it is too costly for such shareholder to monitor the company’s activities closely (such as by exercising voting rights, determining the composition of the board, etc.). However, in most other economies (India including), there is concentrated shareholding even in listed companies. Hence, the agency problem prevalent here is one between the controlling shareholders or promoters (the agent) and the minority shareholders (the principal).

As we have argued previously (here and here), there is a mismatch in Indian corporate governance norms. While the agency problem in India relates to the majority-minority shareholder conflict, most of the governance norms (embodied in Clause 49 of the listing agreement) have been adopted from the U.K. (Cadbury Committee Report) and the U.S. (Sarbanes-Oxley Act). This results in insufficient protection to minority shareholders.

In this background, Ravi Purohit has a post on Ajay Shah’s Blog that analyses various instances relating to Indian companies based on press reports where minority shareholders’ interests may not have been fully protected. It primarily relates to the lack of adequate information to minority shareholders in order to enable them to make investments decisions in such companies. This study provides some anecdotal evidentiary support to the above proposition.

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