Opinion Known by the company we keep

Today,banks are not able to recover too much by auctioning properties through SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act. And once they have lent large sums it’s the banks who are in bigger trouble than the promoter who simply throws up his hands. The corporate debt restructuring (CDR) packages are turning out to be exercises in which banks are throwing good money after bad. In fact,banks should put their foot down when it comes to restructuring,insisting the business be sold.The point is that in India promoters have never had to give up control of their businesses and we need the legislation and mechanism to help change this.

In the meanwhile,class action suits have been introduced so that a set of shareholders or depositors can now approach the tribunal,to bring to its attention,any malpractices they may have spotted. How quickly or effectively the tribunals will deal with such grievances is another matter altogether,but this should help increase investor activism — very little of which has been seen so far in this country. Indian promoters are a thick-skinned lot but perhaps the tribunals will make life difficult for them if they have erred. And with electronic voting being ushered in,perhaps fewer small shareholders and institutional shareholders will vote with their feet. What’s also new in the companies bill is the concept of independent directors,about whom much has been said in the aftermath of the Satyam scam. While it would be wrong to say that they have not contributed to better corporate governance practices,the general perception is that they don’t seem to be doing enough and are not really “independent”. At least a third of the directors on a board now needs to be independent,a meaningful presence that should help improve boardroom culture. But making their jobs too onerous might result in a shortage of competent directors. Also,one would have thought the authorities want the best out of directors; so allowing people to be on as many as 20 boards rather than 15 at present,is somewhat surprising.

Meanwhile,companies will be happier with the simpler norms for mergers and amalgamations; Indian companies can merge with foreign companies and vice versa,two or small companies can be more easily merged as can a subsidiary with a holding company and its subsidiary. But the fact that a shareholder,with less than a 10 per cent stake in a firm or someone who has lent less than 5 per cent of the debt,can no longer raise objections to a transaction goes against the interests of minority shareholders. It’s true that people do make a nuisance of themselves but the tribunals should be able to take care of that. Again,the window allowing minority shareholders to be squeezed out,a Western concept,seems a tad unfair because no matter how fair the value offered for the stock,shareholders have the right to hold on to their investments. The bill also says companies can no longer do more than one buyback of shares in a year. Since buybacks do support the share price and boost earnings,and since no one can really force a shareholder to sell shares,the move is somewhat hard to understand. Perhaps the idea is to encourage companies to leave enough of a floating stock in the market so that stocks don’t become too illiquid.

The bill seeks to improve corporate governance and transparency; so auditors need to be changed every five years and companies need to provide separate audited accounts of each subsidiary. At the end of the day though,companies must want to do things the right way for their creditors,employees and shareholders. It should be a way of life.

The writer is resident editor,‘The Financial Express’,Mumbai shobhana.subramanian@expressindia.com