One of our pet peeves on this Blog has been the fact that the corporate governance regime in India does not adequately address the requirements of companies that have controlling shareholders (or promoters), which dominate the landscape in India. I have also advanced this argument in a couple of academic papers (here and here). While there does not seem to be much momentum in India to address these issues, some recent developments in the UK may be noteworthy.
The Financial Services Authority (FSA) in the UK has put out a consultation paper to increase the effectiveness of the listing regime that contains corporate governance norms. Specifically, it seeks to rein in controlling shareholders. The following is an extract from the Press Release issued by the FSA:
The FSA proposes to further strengthen the Listing Regime by adopting greater corporate governance requirements for companies with a dominant shareholder. The FSA will increase the tools available to independent shareholders to influence the governance of the companies in which they have invested. These proposals include:
- introducing the concept of a ‘controlling shareholder’;
- requiring an agreement is put in place to regulate the relationship between such a shareholder and the listed company;
- and ensuring that this agreement is complied with on an ongoing basis. This will ensure that the company is managed independently from that shareholder.
The FSA also recognises the important role that the independent directors play in these circumstances. Therefore it will also insist on a majority of independent directors on the board where a controlling shareholder exists and introduce a new dual voting procedure to allow independent shareholders to have more say in their appointment.
The only effort in India that seems to be along similar lines is SEBI’s recommendation to the Ministry of Corporate Affairs last year that interested shareholders must not be allowed to vote on related party transactions. However, this recommendation appears to have been gathering dust, and its fate is yet unknown. In any event, this recommendation does not find a place in the new version of the Companies Bill, as Professor Balasubramanian laments in a comment to an earlier post.
To be sure, the approach of altogether emasculating controlling shareholders has its fair share of detractors, as some commentators advocate caution. The M&A Law Prof Blog highlights some of the difficulties:
The idea here appears to be to take the "control" out of controlling shareholders and put more power to elect directors in the hands of minority/non-controlling shareholders. That's a pretty big move. By isolating controlling shareholders from the boards of the companies that presumably own, that would change the nature of a control position. I know the phone hacking scandal was bad, but this seems like an over-reaction. So, going forward if you own more than 50% of the stock of a UK listed firm, you'll have scarcely more influence over the direction of the firm than a minority shareholder? I wonder whether, following implementation of these listing standards, control premiums will go down for UK listed companies. Worth following as this develops.