Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www-business-standard-com-nalsar.knimbus.com or the Business Standard newspaper
Indian capital markets have greatly evolved during the last two decades and have emerged on the world stage. To quote a few examples, there are over 6,800 listed companies with a combined market capitalisation exceeding $2.6 trillion, according to a World Bank report. Add to this more than a hundred unicorns and private enterprises seeking to go public, and we have a strong growth scenario.
One factor separating these businesses from their Western counterparts is that many of them are promoter-driven and family-owned. According to a report, published by the Thomas Schmidheiny Centre for Family Enterprise of Indian School of Business, nearly 91 per cent of all listed Indian entities can be classified as family-run.
Such businesses are guided by the policies and principles of the founding families that control them, to the extent that the concept of the company being a separate legal entity almost blurs. While investors benefit from the trust factor and confidence that a promoter family brings, a few past incidents have also shown that investors may suffer in a prolonged family feud, resulting in languishing share price and erosion of shareholder value.
In such situations, investors rely on the impartiality and expertise of Independent Directors (IDs) to protect their interests during such disputes.
The nature of family feuds
A family feud can take various forms and shapes. It usually starts as a small difference of opinion between family members on business strategy or priorities or simply ego problems. However, it may snowball into a significant dispute due to friction arising from questions on inheritance or ownership of a controlling stake in a listed company. The nature of such family feuds in US businesses, much of it also applicable elsewhere, including in India, has been analysed in a Harvard review. The ghost of past family agreements or complex arrangements between members, many a times informal in nature and often not widely known in the public domain, also haunts public shareholders.
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Indian corporate history is replete with conflicts between brothers (Kirloskars of Kirloskar Group or Chabbrias of Finolex Group), fathers and sons (Raymonds and Wadias) or the very recent example of Hikal between a brother and sister.
Such conflicts may range from shareholding rights, representation on the board, amalgamation and rights to engage in a particular business activity. Sometimes, warring factions aim to achieve their objectives in the name of moral arguments. For instance, while equal representation is an absolute must and must be achieved at all costs, promoters may even try to achieve a selective outcome under the garb of gender empowerment or board representation. There have been several examples like Satyam, IL&FS or Yes Bank, where the roles of IDs have come under intense scrutiny. However, their main objective should be to ensure that governance must be the only guiding factor and not other extraneous reasons.
IDs should not become parties to such disputes by siding with any of the parties but aim to safeguard the interest of minority shareholders in all such instances.
What must IDs do?
The Companies Act, 2013, and SEBI regulations cast different responsibilities on IDs. Broadly, the role of an ID is to exercise responsibilities in a bonafide manner. Further, they must not allow any extraneous considerations to vitiate their independent judgment, which is to be made in the company's interest. This may include concurring or dissenting with the decision taken by the board. All such duties become even more important in case of family feuds.
IDs can play a vital role during family disputes by promoting corporate governance, ethical conduct, ensuring strict compliance and controls, and resolving conflicts fairly and equitably. They must ensure that the company complies with all applicable laws and regulations on corporate governance, transparency, and disclosure.
IDs must consistently keep a check on the information affecting the company and act as neutral parties by providing an objective perspective to the shareholders. They must ensure that listed companies maintain distance from the promoters in terms of their conduct and do not try to unnecessarily influence the proceedings between the warring parties.
In fact, IDs can guide and support the management team to ensure that the company's operations continue smoothly during the dispute. They can also help maintain investor confidence and prevent any adverse impact on the company's reputation, financial performance and shareholders’ value.
While the law lays down broad contours, regulators, including SEBI, should frame regulations for such companies as to how efforts must be undertaken to protect the interests of minority shareholders.
The primary role of IDs is to act in fiduciary capacity to ensure that the rights of minority shareholders are shielded from family feuds and frivolous claims by third parties. They must weigh in when there are disputes within promoter factions and act independently in the interest of shareholders and healthy capital markets. Regulators too, should play their part in facilitating induction of reputed IDs on the boards and framing a right set of regulations that help IDs act in such a manner.
(Dhanendra Kumar has formerly been on the board of World Bank Group in Washington DC and was the first chairman of the CCI. He is founding chairman of Competition Advisory Services LLP. Views are personal)