PSU shareholders, awake!
A recent government decision asking public sector behemoth Coal India Ltd (CIL) to commit long-term fuel supplies to power companies has triggered a volley of protests from minority shareholders. HT explains the nuances of shareholders' rights and the legislative state of play.business Updated: Apr 10, 2012 22:01 IST
What is the whole issue with CIL?
Several independent directors on the CIL's board and at least one minority shareholder were against the company's decision to commit assured coal supply to fuel-starved power companies through long-term fuel supply agreements (FSA).
Why were the minority shareholders opposed to it?
London-based fund The Children's Investment Fund Management (UK) Llp, or TCI, which owns 1.01% stake in CIL has charged the company with selling coal at a price that's up to 70% below the market price, hurting shareholders' interests.
Why did CIL commit assured coal supplies to power companies?
CIL bowed to pressure from the government and rolled back a price increase after power producers argued with the government that domestic coal supply shortages were crippling planned commissioning of plants
When did the assurance come about?
Last week, the government issued a Presidential directive to CIL asking it to sign FSAs with power producers assuring them a minimum of 80% of the delivery committed following a meeting between the Prime Minister's Office (PMO) and power firms' top honchos including Ratan Tata, Anil Ambani and Gautam Adani. But the directive left it to the board of CIL to set the terms and conditions and the penalty clause to safeguard the interests of the company.
What is a Presidential directive?
The President of India can exercise her executive powers under Article 53 of the Constitution, but the directive should not violate the Right to Equality as enshrined in Article 14 of the Constitution.
How common are such directives?
Presidential directives are not uncommon. The government enjoys overarching authority in the functioning of public sector undertakings (PSUs). In PSUs, which are created by statutes or Acts of Parliament, as in the case of CIL, the powers to exercise Presidential directives are factored in the Act or the statute itself.
So, what's the problem with the directive on CIL?
Experts say normally such directives are broad in nature that define the contours of policy or act as guidelines for the PSU to follow. In the case of CIL, minority shareholders allege, the directive will have a direct bearing on the commercial obligations of the company, and therefore, amounts to interfering in the firm's day-to-day operations.
Are there any similar instances of minority shareholders opposing Board moves?
Yes, there are many such instances. In February, financial institutions (FIs) reportedly opposed the proposal of a multinational paint company for the amalgamation of three of its arms with itself. FIs raised questions about the valuation, merger ratio, royalty payment and the proposed increase of the parent company's stake.
Who is categorised as a 'small investor' in India?
Under current norms, a person who holds shares worth R1 lakh or less in a company is categorised as a small investor.
What's being proposed to grant more rights to small and minority shareholders?
The Companies Bill, which is likely to be voted into law this year, is aimed at overhauling corporate governance norms and granting shareholders with greater powers to defend their rights, marking an end to nearly three years of debate and discussions to legislate a framework of checks and balances, transparency and accountability.
The Bill is armed with a stringent set of rules and norms that would arm even small investors to fight for their rights collectively through "class action suits."
The proposed legislation, will make the Serious Fraud Investigation Office (SFIO), an agency mandated to investigate corporate scam, a statutory institution, with the authority to even arrest the guilty in corporate crimes.
It will make it compulsory for companies to rotate auditors and impose a ceiling on the tenure for which a particular person can serve as an independent director on a company's board.