Sound move, Sebi

Monday’s proposal by the Sebi board to recommend scrapping of voting rights of interested shareholders in case of conflict of interest will protect small investors . Poor corporate governance has been the bane of the Indian corporate sector, with its complex holding structure, characterised by a multitude of subsidiary and related companies all within the same promoter group. This gives the latter undue clout vis-a-vis other shareholders , enabling them to ride roughshod on key issues that might not be in the larger interests of the company. While the aborted amalgamation of Maytas Properties and Maytas Infra by Satyam Computers may have become cause célèbre after Ramalinga Raju’s confession regarding the fraud in Satyam, the reality is, conflicts of interest and dominance of promoter groups are both commonplace occurrences in India. Unlike in advanced economies where institutional investors act as a bulwark against unscrupulous promoters and hence are able to protect the interests of small investors, institutional investors in India often seem overawed by powerful promoters. In such a scenario, restrictions on the voting power of interested parties are not merely desirable but warranted in order to safeguard the interests of other shareholders.

True, Sebi’s role can only be recommendatory as this is an issue that comes within the domain of the ministry of corporate affairs. But its views will, no doubt, carry weight, especially since poor corporate governance is equally a concern with the ministry. Indeed, it might even consider incorporating Sebi’s suggestion in the new Companies Bill that is now being finalised. Of course, there will be some sticking points such as the definitions of ‘interested parties’ , ‘conflict of interest’ and so on. But these are not insurmountable. What is far more important is increased transparency and higher standards of corporate governance; especially now that mergers and amalgamations are increasingly becoming the order of the day.