Thursday, April 15, 2010


In the backdrop of reported financial indiscipline, inappropriate financial reporting and non-compliance of accounting standards and corporate governance norms by companies and banks in which public is substantially interested, it is important for the government and the regulator to examine special initiative needed for shareholders' democracy and investors' protection. The new Companies Bill is under consideration of the standing Parliamentary Committee and an open
debate is important on some of the following issues:


The corporate governance and high quality financial reporting warrants Auditors' independence as a basic necessity. The current system of appointment of auditors by shareholders is fallacious. The management and the promoters who are in charge of day to day affairs, and all the other corporate decisions, generally have a majority voting power. They are also entitled to vote on appointment, retirement, removal and remuneration of Auditors. This creates a system risk. In a large number
of cases, it is possible that the auditors' independence may be impacted by an apprehension of removal and / or retirement in case of uncomfortable queries and reporting not suited to the management's position. In certain other cases the remuneration or additional fee offered by those who are in-charge of governance may result into a compromise. Even if it is happening in few cases, the investors and other stakeholders suffer. The society, the government and the regulator need to
provide a solution. It may be worth considering especially for companies wherein public is substantially interested:

  • To dis entitle those who are in-charge of governance to exercise vote at the shareholders' meeting, directly or indirectly, for auditors' retirement/removal, in terms of basic principles that they are interested party.
  • Ministry of Corporate Affairs needs to ensure that between 2% to 5% of large corporate are picked up for sample scrutiny by independent set of auditors for a detailed Audit.

OPPRESSION AND MIS-MANAGE-MENT (Section 397/398 Petition)

The current requirement of minimum 10% shareholding in terms of voting right and /
or number is too high, thus giving a free hand to the promoters and the management 
to oppress the minority, undertake siphoning of funds and misuse the entire system of corporate
democracy to their advantage.


Currently there is no system by virtue of which an ordinary shareholder and / or other investors into the company can raise issues or make complaints or seek damages and / or recoup losses from management and / or promoters, even if the shareholders are able to bring out serious allegations of misrepresentation in prospectus, non-observance of corporate governance principles and improper financial reporting besides siphoning of funds or misuse of funds. It is suggested that the government may consider the following suggestions in this regard at least for companies where public is substantially interested -

  • The Companies Act and / or SEBI should empower Right to Information to shareholders on the lines of Right to Information Act, wherein the shareholders can seek information on various company matters. Adequate safeguards can be kept to ensure confidentiality of business secrets and retard misuse of Right to Information. 
  • Similar to Consumer Courts, it is important to set up Investors' Protection Court at the district level, state level and at the central level to examine the cases of misrepresentation in prospectus, siphoning of funds, misuse of funds, improper financial reporting and similar other allegations by individual shareholder / investors.
  • Similarly a large number of areas where corporate democracy for individual shareholder and investor may get strengthened be identified.
SEBI as well as Ministry of Corporate Affairs are hereby called upon to come up to the expectation of society and take a lead. The argument that no such system exists internationally is fallacious and is
misleading. We have seen large scale failure of financial system in US as well as in Europe in last
several years, which clearly indicate that the corporate democracy principles and investors' protection
mechanism is not properly structured even internationally.

An open debate is needed and we request the readers to send in their comments to


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