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Short-changing small shareholders

K. Srinivasan

THE Companies (Second Amendment) Bill, 1999, introduced in the Lok Sabha on December 23, 1999, has been modified to ensure its general acceptance. Opportunity has also been taken to incorporate some suggestions made by the Working Group set up by the Gov ernment in 1997 all of which enrich the vocabulary whether or not they actually contribute to the growth of the corporate sector. thus, the Act appears tougher than it actually is.

Separate constituency of small shareholders for election of a director exclusively to look after their interests

The proposal for mandatory representation of the small shareholders has been dropped on prejudices which are neither fair nor based on common sense or experience -- risks of leakage of sensitive information, suspicion of obstructive tactics in the conduc t of day-to-day affairs, etc. Similar fears of employees' representation on the board of directors have proved illusory.

The provision in the Act has been diluted by obvious misconceptions which will not stand the scrutiny of logic. The representative of the small shareholders will not have any special powers beyond what any other non-executive director of the company wiel ds. His voting strength will be limited on the board, like that of any other individual director whose personal shareholding has no significance in his participation in the board's deliberations or even in meetings of the general body of shareholders.

On the other hand, small shareholder grievances (complaints about dividend payment, share transfer, etc.) may receive quicker redress, if he is briefed properly by those who have elected him and he is prompt in getting action taken by the company. Whatev er the reason might have been for denying a statutory right to separate representation for small shareholders, adequate thought does not appear to have been given to the drafting of the permissive provision in Section 252.

What is the point in allowing only a company with a paid-up capital of Rs 5 crore and one thousand or more small shareholders to consider such representation on a voluntary basis for the shareholders? Can any company -- even a relatively small one -- be prevented from making such innovations/experiments in corporate governance, if it is so inclined?

Offer of securities in demat form

Section 68 requires only the `initial offer of securities' to be in dematerialised form in `certain cases'. There is every reason to insist on further issue of equity capital also to be in dematerialised form. This may obviate causes for complaint of ref usal to register the shares in the name of the acquirer. If there is a fear that it may tempt hostile raiders to subscribe to and hold shares of a company without the knowledge of the promoters or management of the company, it may be pointed out that des pite all the built-in safeguards at present, those with their eyes on a target company are able to mop up substantial chunks of shares from the floating stock in the market while the promoters are blissfully unaware of

it.

A public company cannot be treated as the zamindari or the heritable, vested interest of the promoters. If public interests are to prevail over that of those who believe that they have a divine right to exploit a company even in the 21st Century, the leg islation has to be consistent and thorough. It should go the whole hog and ensure that all issues, initial as well as subsequent, are offered in the dematerialised form in the cases of all `public listed companies', except where offer is limited to the e xisting shareholders and any of them would like the shares to be allotted to them in their names and registered accordingly. In other words, `demat' should be the order of the day and allotment to and registration in the name of a shareholder should be o n special request.

Interim dividends

A decision on dividends is essentially a management function. In company law, it is the board of directors which initiates action for distribution of a company's disposable surplus as dividends. The shareholders in general body may ask for more dividends but it is doubtful whether they can pare down a proposal. A resolution curtailing the enthusiasm of the board is unlikely, because the proposal has been made by those in control of the company's ownership and any such self-denial move is contrary to hum an nature.

While there are reasonable safeguards against wilful delay in the disbursement of dividend which is declared in the ordinary course in a meeting of the general body of shareholders, there is no way by which `interim dividends' declared by the board of di rectors, in its own discretion and authority, can be followed up and enforced. The existing law is that an interim dividend, that is, which is proposed to be distributed by the board of directors in its wisdom, before the annual general meeting of the sh areholders is convened, does not assume the

character of a `dividend' till it is actually paid. Once payment is made to anyone shareholder in pursuance of the board's resolution declaring the `interim' offer, all the other shareholders are automatically entitled to their share of the company's pro fits apportioned by the board for distribution as `interim dividend. They acquire a right to the `dividend' only when the offer of the board is translated into action.

There has been litigation on a company's inaction after an interim dividend has been declared. The scope for such litigation is minimised in the amendments to Section 205 which, for all practical purposes, vest `interim dividends' with the same legal sta tus as dividends `approved' (with Hobson's choice) by the company in general body. What is declared as interim dividend will have to be kept in a distinct bank account within a prescribed period and disbursed subject to the same conditions/penalties, etc ., as dividends declared by the general body.

The language of sub-section (1A) of Section 205 may be clumsy when `dividend including interim dividend' is required to be deposited in a distinctive bank account and sub-section (1B) mentions only `payment of interim divided'. The legislative intention is, however, clear. Since interim dividend precedes dividend sanctioned in an annual general meeting, it should be cleared first before any enhanced amount of dividend subsequently decided by the board and approved by the company in general body is paid. It is also implicit in the new provisions that interim dividends will also get sanctified by a formal ex post facto clearance by the general body at the next opportunity.

Vigilance through audits by co secretaries in practice

Section 383A has come as manna for company secretaries who have been subject to the pressures and shrinking of opportunities consequent to the steady increase in their population. Even a company which is not obliged to employ a whole-time secretary under that Section will now have to file a certificate from a company secretary in whole-time practice on its compliance with all the provisions of the Act if it has a paid-up share capital of Rs 10 lakh or more.

The importance of a company secretary's role has not diminished, despite SEBI's letter dated February 18, 2000, making it mandatory for companies, whose shares are being traded compulsorily only in dematerialised form to provide for transfer and demateri alisation of securities simultaneously since this process is subject to audit by a company secretary in practice.

It would appear that there is a snag in the prevalent procedure. No certificate is required from companies in regard to shares directly received by them for dematerialisation and not as transfer-cum-demat. SEBI would be well-advised to direct the stock e xchanges to amend Clause 47(c) of the Standard Listing Agreement to ensure that companies whose shares are to be traded in dematerialised form alone, furnish a comprehensive certificate from a company secretary in practice to stock exchanges.

The certificate should confirm that all the provisions of the Depositories Act, 1996; the SEBI (Depositories and Participants) Regulations, 1996 and the bye-laws and business rules framed by depositories and also the relevant clauses under agreements sig ned with depositories have been observed. The certificate should take due notice of the position in respect of shares that are directly sent to companies by acquirers of shares for dematerialisation and not for transfer-cum-demat.

Other issues a waiting examination

The Department of Company Affairs has covered extensive ground in the Amendment Act. Some of the other provisions included in the Act relating to public deposits, debentures, etc., reflect the amount of trouble which it has taken. They go far in creatin g investor confidence, but some of them do not go far enough.

There are also fresh legislative proposals in the offing, for instance, Justice Eradi's recommendations on corporate insolvency. The next Amendment Bill may not, however, be the last one. There is already a hint of yet another tranche in the series in th e recent press reports of the submission of one more high profile committee constituted by the Department of Company Affairs to apply its mind to corporate excellence issues. The summary of the report as briefly published in the press creates the impres sion that some of its suggestions may not be realistic or even equitable.

(By arrangement with Corporate Law Adviser, New Delhi.)