Empowering shareholders

In her second article in this series, Prachi Manekar writes on some of the significant changes in the new Companies Act that has overhauled corporate governance regime to strengthen investor protection.

Infrastructure companies operate through a complex web of group companies. In the past, some of them have entered into questionable transactions like entering into land deals with promoter entities, furnishing large collaterals and corporate guarantees to associates, executing multi-crore rupee contracts with related parties. Under the old Companies Act, shareholders had limited information and rights to challenge such transactions. However, the new Companies Act, 2013 ('new Act') has overhauled corporate governance regime to strengthen investor protection. Some of the significant changes brought in by the new Act are discussed below.

Additional powers
Powers erstwhile enjoyed by the Central government: Under the new Act, many powers which were previously enjoyed by the Central Government have been given to the shareholders.

Thus, shareholders will now take decisions whether to permit related party transactions. Ample flexibility is given to shareholders to determine managerial remuneration and decisions pertaining to allowing the related parties in offices or places of profit in the company.

Powers erstwhile enjoyed by board: Based on past experience, it was felt that shareholders should have more rights and powers in certain aspects of the company administration. Thus, under new Act, certain restrictions are placed on the powers of the board and the shareholders have been vested with more powers. Thus, now the shareholders can pre-empt acceptance of deposits from members. The company needs shareholder approval for using IPO proceeds for other purposes or for varying terms of any material contracts that are specified in prospectus.

Disclosures
The number and extent of disclosures have been enhanced under the new Act. For instance, more details of senior management and independent directors are required to be disclosed; contracts with them are to be open for inspection; disclosures have to be posted on company's website; financials of associated and joint venture companies also need to be consolidated in consolidated financial statements; separate audited accounts of each subsidiary are to be made available on the company's website. Thus, shareholders are entrusted with more information about the company. Even for various corporate actions, many additional disclosures are required to be made to ensure that shareholders make an informed choice.

Effective participation
In the past, the concept of shareholder democracy remained only on paper as most shareholders were not able to spare time and money to attend the general meetings. The concept of postal ballot was introduced in the old Act to enable greater participation of shareholders in the decision making process of the company. This concept has been retained and extended by the new Act. The Act has further proposed introduction of e-voting and e-governance. It has increased the quorum for general meetings.

Additional rights
Many additional rights have been granted to shareholders. They now can place a limit on the number of directorships that can be held by directors. Further, they can agree on application of auditor partner rotation. Now, the undertaking of the company cannot be sold or disposed of without a special resolution. If the assets or money has misappropriated, the shareholder can take actions for restitution of assets of the company from directors and such other persons.

Additional remedies
The new Act provides additional remedies to the members for the wrongs done by the company. This change has to a great extent been triggered by Satyam scam. In case of Satyam, class actions were filed by foreign and Indian investors. While the class action abroad was settled by paying a lofty amount, the class action in India (claim of around Rs 5,000 crore) was dismissed by the Apex Court inter alia on the ground that class action remedy was not available under the erstwhile Companies Act.

The new Act has introduced the concept of class action in India. The investors holding shares above a threshold limit (10 per cent of the total share capital) can avail this remedy and seek compensation not only from the company, but also from directors and professions. All the persons associated with the company who are involved in wrongful or illegal actions can be held personally liable to compensate the investors for the losses caused to them.

The introduction of these provisions mean that inter alia:

a)Investors can restrain companies from violating provision of the company's memorandum or articles despite the nature of violations.
b)Investor can invalidate resolutions where they can show that material facts were suppression. Thus, even important resolution like approval of mergers or sale of undertaking can be challenged.
c)Investor can restrain companies from doing an act which is contrary to the provisions of this Act or any other law.
d)If the investor feels that he has incurred losses on account of wrongdoing by the company, the new Act allows the aggrieved investors to claim damages or compensation against various people. They can also demand any other suitable action.

Many other remedies like power to seek removal of auditor, seek reopening of accounts are also available.

Exit opportunity
The Act protects investors from misuse of their funds by providing a reasonable exit opportunity to the investor. Following are the instances where investors get a right to exit the company: 

• Alteration in object clause in MOA before utilisation of amount raised by the public offer.
• Variation in contracts given in prospectus and object of the public issue specified in prospectus.
• In compromise and arrangement, if the tribunal so directs.
• ?These provisions safeguard the interest of investors, especially small and retail investors.

Strong corporate governance framework
The new Act intends to safeguard the interest of not only listed companies but also unlisted companies. Thus, many provisions for corporate governance which are a part of Equity Listing Agreement, are now incorporated in the Companies Act, 2013. Some of these norms like those regarding independent directors and disclosures are now sought to be extended even to unlisted companies and other companies. Additional liabilities are cast upon the company management and auditors to ensure that companies function smoothly.

Many provisions which proved effective in the Sarbanes – Oxley Act of the US are borrowed into the new Act. The regulatory authorities are strengthened.

For unlisted infrastructure companies, many additional norms will be applicable even if their debt or other securities are listed on any Indian stock exchanges. Many disclosure and corporate governance provisions are applicable even to all infrastructure companies whose share capital or turnover exceeds the prescribed limits. These changes coupled with increasing shareholder awareness and activism will throw new challenges for infrastructure companies. Some of them might have to reassess past practices and realign corporate structures in light of these changes.

Many provisions for corporate governance which are a part of Equity Listing Agreement, are now incorporated in the Companies Act, 2013.