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Wednesday, 19 October 2011 00:00
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AGM veto on funds transfer needs some refining

 

Given how, in so many high-profile cases, corporate scandals have been perpetuated by way of funds transfers from companies to subsidiaries, the corporate affairs ministry’s plan to make shareholders approval mandatory is a good idea. As pointed out by FE on Monday, both Unitech and Videocon are in trouble today for investments made by them in wholly-owned subsidiaries that got into the wholly unrelated telecom space—indeed, for decisions taken by the board, shareholders of the parent company have also had to suffer.

While the intent of the proposed legislative change is a good one, consultations with investor groups as well as corporates are vital to finetune the proposal. Section 372 of the Companies Act, for instance, allows companies to lend up to 60% of their net worth with just a board approval—anything above this needs ratification by shareholders, unless the lending is being done to a wholly-owned subsidiary. Companies tend to get around this by getting blanket approvals—your company plans to invest R10,000 crore in the communications space, for instance—from shareholders, but leaving enough wiggle room on the structuring of the final investment/loan, even allowing investment in firms where the firm’s promoters hold a personal stake in the subsidiary. Forcing companies to get specific approvals on loans is a good idea since shareholders will now know whether promoters are unduly benefiting from the investment, but any corporate will tell you that getting pre-approvals for each investment can delay investments. While promoters should be mandated to give shareholders a short management brief on major loans being sought to be made, shareholder interest would be served by more third-party analysis of such loans, which means credit-rating firms should publicly comment on such proposals—the newly-formed Institutional Investor Advisory Services analyses precisely such resolutions put before company AGMs, but only for large institutional clients.

Finally, whatever the government does by way of increasing transparency, the eventual responsibility for checking fraud lies with the government, and the record here, whether of the Serious Frauds Office or the corporate affairs ministry or the CBI, is less than satisfactory.

 

 

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