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Vol.
2 :: No. 11 |
Stock Market
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Stock Market |
| It is a general concept developed in Nepal
that the minority shareholders must have their representation in the Board of Directors of
public companies that offer shares to the public. Since such compulsion is not needed by
any law of this land, I don’t understand why each public company has such provision
in its Articles of Association. We may refer the provisions in different relevant acts with this regard. |
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| Companies Act, 2053 vide its section 71 (3) has given a right to "organized institutions" (such as public companies, corporations etc.) that if they hold some shares in another company, they can appoint directors in that company in proportion to their shareholding in that company. They can appoint alternate directors also. Sec 59 (2) of the same Act says that those "organized institutions", which have right to nominate directors, have no right to participate in voting for election of other directors. Sec 58 of this Act is very clear about proportionate voting in the ratio of each share held. Shareholders are divided in two parts: one, institutions and second, individuals and "unorganized sectors" like private companies, firms etc. But there is no demarcation line in the law between the individuals and "unorganized sectors" as majority and minority. | |
Sec 5 (2) of the Commercial Bank Act, 2031, states that the directors in the company shall be appointed by general meeting which may be Annual General Meeting (AGM) or Extraordinary General Meeting (EGM). But Sec 5 (4 Ka) has given a right to HMG to nominate two directors in any bank even if HMG has less than 50% shareholdeing or no shareholding in that bank. The provisions of Companies Act with regard to voting rights are repeated in this Act also.
Sec 9 (4) of Finance Companies Act, 2042 also speaks in the same tune as that of Companies Act, stating that the organized sector has power to nominate directors or alternate directors in proportion to their shareholding.
I, therefore, conclude that the concept of majority and minority shareholders, promoter group and public group, is developed out of the blue as it is provided for in none of the relevant laws. Perhaps this concept is developed by the office of the Register of Companies or by the Security Board. Whatever may be the origin of this concept, the question that arises is: If it is in implementation, then why is it not implemented in case of Everest Insurance?
My intention is not only to discuss the relevant provisions of the Acts, but also to find out the advantages and disadvantages of such segregation of shareholders and giving a group some specific privileges. What is the precedence in Nepal? In India such right is not given to any group of shareholders. Though the matter is under consideration of the lawmakers, the big industrial houses are against such provision. Let us understand the harms of such a system:
a. Any competitor may enter the Board: Directors have every right to access to the activities of the organization. He is the part of all the decision making process and that is why he has most of the information with regard to management, working style, sales and purchase strategies etc. If the director has interests also in a competing company, she/he can utilize the information in her/his own interest. Nepal Lever Ltd. has faced this problem and the matter is under consideration of the court. In another example, the managing director of a finance company is also a director in a bank.
b. Inside Information: According to the existing rules, a sharebroker, if he is the member of the Board of Directors of a company, cannot deal in the shares of that organization in the Stock Exchange. Still the brokers want to be directors. The most plausible reason for this is simple: they want to get inside information and to cash in on the information. Not only sharebrokers, but also many shareholders and dealers in securities are interested to enter into the Board of any public company directly or indirectly.
c. Quality Directors may not be available: The Companies Act and other relevant Acts don’t requires any academic qualification or experience for such directorship. That is why, any person who can muster support of sufficient number of other shareholders can be a director in a company. Those directors cannot provide good corporate governance as other outside directors with good qualifications may.
Let me explain the need for minority representation in board and what the history says.
The minority representation is needed to safeguard the interest of minority shareholder. These interests may be as follows:
a. Share transfer with rapidity, say, within 30 days.
b. Distribution of dividend and bonus within normal and short period.
c. Any decision or happening in the organization, which can affect the share price, should reach general public before the opening of the next day’s trading.
d. The procedures of the share transaction like signature verification, split of shares, should be made easy.
Fortunately, most of the banks, finance companies, insurance companies and other public sector organizations have minority representation, but unfortunately there is no safety of interest of minority shareholders. When approached, the only answer from those directors who represent minority shareholders is, "What to do? We are in minority". The transfer of shares is not being effected till six months, dividend and bonus shares are not being distributed in time. Even the organizations are not worried to enlist, in time, the bonus shares in Stock Exchange so that the investors could deal in these additional shares.
The general concept developed, nowadays, is that these minority representatives are ineffective because they are either helpless (minority) or are more concerned with their own personal interests than with the interests of other minority shareholders. The latter of the two reasons is more plausible. As is happening in Nepal, the inside information becomes public information only after most of the benefits from the information are acquired by the relatives and friends of the directors. This makes the entire mechanism a failure. The analysts have no time to analyse the information, and those privileged directors swipe away the benefits before the expert analysis is over.
The spirit of the system as a whole is appreciable as it intends to safeguard the interests of minority shareholders. But the Articles of Association of the organization, which give such right of minority representation, should also spell down the goals and ethics of such directors. And shareholders should have right to withdraw such directors in case they prove to be incapable.
Minority shareholders have right to appoint auditors and fix their remuneration, but majority shareholders who have holding in the management and in the capital of the organization have no such right. This is also a peculiar tool given to the minority shareholders, who have neither interest nor strength to appoint reputed auditors. Thus some clever shareholder or a group of such persons prevail over others nominate to the statutory auditors. The same shareholders or groups claim to be professionals and shout at AGMs blaming the management that proper accounting standards are not being adopted by the company.
The entire system is damaging to the corporate sector and capital markets. I think the law should be such that the Directors may select three names of the statutory auditors and also may fix the maximum remuneration payable to them, and the AGM should have the final authority to select any one of the three and fix the remuneration within the range given by the Board.
I, therefore, suggest to the law-makers and regulators to give a serious thought about the situation to avoid further damages to the Corporate Farming in Nepal.
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