Retail investors, IGFs bank on cumulative voting rights for bigger say in firms

MUMBAI: Retail investors and investor grievance forums are banking on cumulative voting rights under the new Companies Act to have a greater say in the way firms are run. Some feel, however, that such activism could also create trouble for companies in which minority shareholders have a substantial stake.
Under the new Companies Act, Section 163 allows Indian companies to adopt cumulative voting practices, but this isn't mandatory. Under the provision, minority shareholders can have a greater say in electing directors to the board besides other voting rights.

“Looking at the regulatory changes positively , small shareholders who own shares of face value less than Rs 20,000 in a listed company can nominate a representative to the board as per Section 151 of the Companies Act, 2013,“ said Navneet Munot, chief investment officer at SBI Mutual Fund and also a director of the Indian Association of Investment Professionals (IAIP).

“Such a nomination can be made by a minimum of 1,000 small shareholders or an aggregate of one-tenth of the total number of small shareholders, whichever is lower.“

Among other things, the shareholder can exercise the rights to appoint a proxy , send questions to the management in advance, ask for a poll and inspect company doc uments with cumulative voting rights. On the other hand, the participation of retail shareholders in meetings is still negligible and it's too early to mark any change in the mindset.

The new laws empower small investors with even related party transactions (RPTs) having to be voted on and interested parties refraining from voting, said Ravi Singhania, managing partner of law firm Rajani, Singhania & Partners and director on the board of rating agency Crisil Ltd.

“Also, companies will have to disclose details on director compensation, including Esops (employee stock option plans), performance evaluation metrics, directors' training, and the board's code of conduct where small investors can raise concerns if they have any ,“ he said.

The last few years have seen minority investors becoming more aware of their rights, said Rakesh Nangia, managing partner of New Delhi-based corporate and tax advisory firm Nangia & Co.

“The trend is changing due to the growing initiatives of the capital market regulator Sebi ( Securities and Exchange Board of India) and the corporate affairs ministry,“ he said.

“The stringent regulations governing listed entities have resulted in more transparency in the disclosure of corporate actions and have helped in educating and creating more awareness among the retail investors about their rights.“

Under the new law, audit committees of listed entities will have to review and give their views on the financial statements of unlisted subsidiaries.

Many listed companies are worried that cumulative voting may be misused, said Chandubhai Mehta, managing partner of corporate law firm Dhruve Liladhar & Co., adding that some of them have sought legal advice on this.

“Companies want us to advise them on setting up stakeholder relation committees to answer grievances of minority shareholders, but without creating a situation where the mechanism can be used to create nuisance to the board,“ Mehta said.