IS SHAREHOLDER’S DEMOCRACY AN ILLUSION AND STOCK MARKET INVESTORS LIABLE FOR CORPORATE FRAUD WITH NO REMEDY.
Can the law be interpreted in such a manner, so as to empowers a group of persons (directors of the company) to act in their absolute discretion to the complete deterrent to the common shareholders and investors. Can it be interpreted in such a manner so as to empower the directors to manipulate the share prices. Can it be interpreted in such a manner so as to empower the directors to turn down the shareholder’s consent. Does shareholder’s democracy has lost its relevance in corporate legislation. Does the concept of “ Corporate Governance “ does not take in its sweep the fair corporate practices which results in enhancement of shareholder’s wealth.
The evolvement of different types of organization for conducting business, with the passage of time, has resulted in the present form of formation of companies with limited liabilities empowering common mass to participate in the business venture without exposing them to risk of unlimited liability. This departure from the partnership form of business (which has unlimited liability of members) was so welcomed that in today’s world the major portion of the world trade in being conducted in form of companies (Private / Public).
Since there is capital participation from large numbers of persons in the company form of organization, the question which arose for consideration is – How to manage its affairs? This is very pertinent as all the contributors of the capital could not be permitted to take part in the management as it may result in chaos and confusion. A similar set of Rules, which is being adopted in
The Management Powers has been specifically described under the Companies Act, 1956. It is true that the powers of management rests or lies with its capital contributors. But since it is impossible to take the consent of all the capital contributors therefore the first and foremost distinction which has been made under the Act is the different types of resolutions which can be passed. Matters of Routine nature can be passed with Majority decision ( Votes in favour is more than against it) but at the same time matter of vital importance needs to be passed with Special Resolution ( Votes in favour is at least thrice than the votes against it).
Besides, management powers have been clearly described between the Directors and Shareholders. The Act itself provides that certain resolution can be passed by the only by the shareholders. Nonetheless, the residuary powers lies with the directors (Section 291 of the Companies Act). But the question which is to be considered is – can the Board of directors in colorable exercise of its powers, suppressed collective decision of the shareholder’s of which they are representative or in any view of the matter, they are bound to act in accordance with the shareholder’s decision. Can the elected representative who is supposed to represent and protect the interest of the persons who have elected them i.e. shareholders, act contrary to the resolution passed by the shareholders. Can he act as an appellate authority to sit over and decide as to whether the decision deserves to be implemented or not and then act accordingly. Or is it their duty to abide by the shareholder’s resolution and do all things which is required to be done to give furtherance thereto. The oblivious answer seems that the directors are bound to give effect to the shareholder’s decision and has no choice in the matter.
These issues came before the Securities Appellate Tribunal in the matter of D Link Vs. SEBI (decided on 14-7-2008). In this matter, Shareholder’s have passed a resolution for the buyback of the shares of the company. Since the company was a listed company the passing of the resolution of buyback of shares by the company was a price sensitive information and was intimated to the stock exchange. It is Important to mention that the information of the passing of resolution of buyback effects the prices of the shares. As a natural consequence the prices of share have increased upto the level of the prescribed buyback price level and even more thereafter. Though inspite of the passing of Shareholder’s resolution, the company did not buybacked its shares. The said company not even intimated SEBI that it will not buyback its shares inspite of passing of Special resolution to the effect. For this act S.E.B.I after enquiry and adjudication came to the conclusion that the company has never an intention to buyback its shares and announcement for the purpose was only to mislead the investors. SEBI further debarred the said company from buying, selling or dealing in the securities in any manner directly or indirectly for a period of one month.
On appeal the judgment of S.E.B.I was set aside and the Hon’ble Securities Appellate Tribunal Came to the following conclusion :-
- Company is not under an obligation to buyback its shares / securities even if its shareholders have passed special resolution authorizing it to buyback its shares.
- Even where the shareholders pass a special resolution, authorizing the company to buyback its shares , it does not become obligatory on the part of the company to buyback its shares, as resolution passed u/s 77 A of the Companies Act, is only an enabling provisions authorizing the company to buyback its shares, if it so desires.
- Regulation 19 (1) (d) of the buyback regulation clearly indicates that once the company has issued letter of offer or public announcement to its shareholders to buyback its shares, it cannot withdraw it.
- Company is not under an obligation to buyback its shares until and unless it has issued letter of offer or public announcement to its shareholders to buyback its shares.
- Even after the shareholder’s approval, the board of directors can choose not to go forward with the buyback.
- It cannot be inferred that the company has no intention to buyback its shares only because (1) it has not appointed a merchant banker to go ahead with the buyback ( 2) not made any public announcement to the effect (3) has not made any offer to the shareholders to buyback its shares.
- The decision to buyback or not, rests with the board of directors of the company and they are the best judge of it.
- Even the company is not required to report to SEBI or even in its director’s report that it has not buybacked its shares inspite of passing of special resolution by the shareholders, in their directors report u/s 217 (2B) of the Companies Act, if the company has not issued letter of offer or public announcement to its shareholders to buyback its shares
MECHANISM OF SHARE MARKET
Share market, economically is said to be near perfect market, where prices are determined by the interplay of the forces of demand and supply. It is also affected by various information like, political, general economic conditions, sectorial information and company specific information. The news that the Board or directors of company are calling for a meeting of shareholder’s to consider buyback of shares itself affects the price of the script very much. Therefore, the news of passing of resolution of buyback by the shareholder’s is bound to affect the price of the script to large extent. Needless, to act that all future trade (in respect of price) gets adjusted eyeing proposed maximum price of buyback. In such an event if the company does not buyback its shares at all, completely ignoring the shareholder’s resolution, is it not a foul play ? not only with the shareholder’s but also the investors who have purchased / sold the script, keeping in view this information of buyback generated by the company itself. How can the directors empowered to play foul in this fashion and dupe the money of lakhs of investors who have traded in the script believing in the information of buyback. In any view of the matter, How can the directors be permitted to act in the aforementioned fashion. If not curbed with iron hands, such practice will be adopted by the directors to manipulate the market in accordance with their own whims and fancies at the cost of common investors.
The aforementioned judgment will have great impact on the Indian Securities Market. With the aforementioned proposition and example now its very easy to fool investors and deprive them from their hard earned money. The modus operadi will be :- Convene the Meeting of Board of Directors and call for the meeting of Shareholder’s for passing the resolution of buyback of shares. Convene the Shareholder’s meeting and get the resolution for buyback of the shares passed. Deal in the shares and earn crores of rupees in pursuance thereof at the cost of investors. Thereafter, don’t buyback the shares and take shelter under the aforestated judgment.
Is the proposition of law as pronounced in the SAT judgment “ D – Link Vs. SEBI“ ( decided on 14-7-2008) not contrary to the principals of Shareholder’s Democracy. How can the directors act contrary to the shareholder’s decisions, whom they represent. How can they be empowered to overrule it and act otherwise. Does this not afford the directors to deal with manipulative share transactions at the cost of investors and shareholders.
CONCLUSION
With the passing of the aforestated judgment and lying down the aforementioned proposition of law, the chances of corporate fraud, at the cost of shareholders, have increased multiple time and in fact the abovestated modus operandi has been legalized, though it may be based on sound legal proposition. This, unfortunately, will have grave consequences, on Indian Stock Market.
WRITTEN BY :-
PRAVEEN AGRAWAL
A.C.S, LL.B,
ADVOCATE ON RECORD,
SUPREME COURT OF
PH # 98117 02850
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