Minority shareholders must grin and bear it when promoters wash dirty laundry in public
- Minority shareholders can do little to protect their investments in case of boardroom and family battles of promoters, say experts.
- Shareholders should take a call to sell or stay invested based on how the company is performing.
- Any legal recourse by minority shareholders can lead to further dilution of stock value, warn lawyers.
AdvertisementThe Raymond family drama has taken its toll on minority shareholders of the company because this category of investors is the most vulnerable. The stock has fallen by over 17% ever since Gautam Singhania’s wife Nawaz Modi publicly accused him of assault. His letter to the board assuring smooth functioning of Raymond, has done little to calm the storm.
This is not the only case where minority shareholders, who hold less than 50% of the stock, are affected by feuds between board and family members. There are two other ongoing cases of family members sparring over control of companies — pharma company Hikal and Finolex Cables.
In these cases, there is very little that shareholders can do, say experts. They’re left between the choice of offloading stock as it’s falling or holding it for an indefinite period. In these cases, should shareholders sell or stay?
“There is no easy way to answer this,” says Deepak Jasani, head of retail research at HDFC Securities. “It all depends on if the company is continuing to do well. They have to decide based on if the dispute can have a quick resolution or will be prolonged,” he adds.
Delhi-based corporate lawyer Anuroop Omkar, founding partner of law firm AK & Partners says that minority shareholders are very low in the pecking order when it comes to their ability to act. “Even in an insolvency, they’re below secured creditors,” he says.
There is a provision in the Company Act 2013 called ‘Oppression and mismanagement in a company’ which protects minority rights. Mismanagement can be defined as conducting company affairs in a prejudicial, dishonest or inept manner.
“But this can’t be invoked in the Raymond case, as it’s a personal battle,” he adds.
Top corporate battles that affected shareholder value
|Family dispute between Mukesh Ambani & Anil Ambani
|Culminated into a split of the company & a court battle over natural gas sales later
|Dispute between promoter Narayana Murthy & Vishal Sikka, the CEO over functioning of the company
|Sikka quit the company
|Family members Sungandha Hiremath and Baba Kalyani battle over Hikal
|The case over family arrangement made in 1994 is being heard in Bombay High Court
|Cousins Prakash and Deepak Chhabria battle over control of Finolex
|The case is with courts and National Company Law Appellate Tribunal (NCLAT)
Between stock & a hard place
There is no third option for shareholders, even if they lose faith in the promoters’ ability to conduct business. They can only wait and watch, experts say.
“Minority shareholders will have to rely on the Board and independent directors to act on their behalf,” Shriram Subramanian, founder & MD of proxy advisory firm InGovern tells Business Insider India.
In Raymond’s case, the board of directors can investigate based on allegations made by Modi that company funds have been misused. “The Board has to ringfence the company from utilization of funds by Gautam Singhania for any personal legal matters,” adds Subramanian.
Institutional advisory firm IiAS also wrote an open letter seeking independent investigation by the board, asking them to send promoters on leave till investigation is complete.
“Independent directors have a fiduciary responsibility towards minority investors, employees and a larger set of the company’s stakeholders. Therefore, you will need to dispassionately separate ownership from management,” IiAS’ letter says.
Legal recourse: A double-edged sword
There is, however, a way for minority shareholders to edge into the board, with the help of courts. “If there is a case of harassment or erratic behaviour, many entities related to the company like vendors, employees can file a class-action lawsuit wherein shareholders can join in too. But it doesn’t happen too often in India,” says Omakar.
AdvertisementOnly Foreign Institutional Investors (FII) who have over 1% stake in the company or a high-networth individual (HNI) who can afford to take up such long-standing fights.
Subramanian believes that fighting for rights comes at a cost for minority shareholders. Also, the rights need to be exercised with responsibility. Minority shareholders, depending on their shareholding, can exert their rights to bring about change in the company, including change of directors, appointment of new directors, etc.
Legal recourse can also work against the long-term interests of shareholders too. “There can be a major share price drop if a legal battle is taken up,” says Omkar.
That can go against the interests of shareholders who want to protect the value of their investments. Until then, stock experts advise shareholders to read up on the corporate governance track record of companies and take a call on whether they want to hold on or sell out from a company engaged in a battle of its own.
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