Yes, it will lift corporate governance In the early 1990s when electronic trades, clearance and dematerialised securities were alien to the world, a transnational vote in the securities of a foreign company through American depositary receipts (ADRs) was a logistical nightmare.
Given the short notice period for a general shareholder meet, the ability to transfer the agenda papers across borders, and then transfer of a voting mandate by mail was aslow process.
Today, that logistical hurdle to voting is fully eliminated. Regulations unfortunately took quite some time to recognise that international ADR holding can be voted as easily as Indian shares held in Indian depositories.
The position today is that ADRs can have several voting agreements: no one is permitted to vote; ADR-holder can vote as a shareholder; international depository votes in accordance with the best corporate governance choice; and the depository hands over votes to the management (or a variation of the theme).
Since it is easy to vote ADRs in today’s electronic age and agenda papers can be sent electronically, anything but the second and third options would be simply bad corporate governance.
Given that depository agreements are agreed upon between the company’s management and the international depository, the last option is bad corporate governance.
In any case, whichever way a depository votes, the vote rightfully belongs to the ADR-holder. An ADR-holder is technically a beneficial owner rather than a shareholder, but then so are Indian shareholders holding demat shares.
Till last year, Sebi takeover regulations wrongly exempted ADR-holders from the impact of takeover regulations on the assumption that ADRs do not have votes. This was partly corrected last year.
This month, Sebi proposed outlawing grant of ADR votes to management by way of agreement. Clearly, such agreements are noxious and most western countries don’t allow such practices.
While Sebi seems to clearly have powers to outlaw such conduct, it seems in its board note to have kicked this football to the government or RBI to outlaw.
If Sebi is serious about the issue, it should be proactive and outlaw this practice itself — which it is empowered to do.
Founder Finsec Law Advisors
Don't allow depositories to vote The Sebi proposal to prevent Indian companies issuing ADRs and global depository receipts (GDRs) from incorporating provisions that curtail the voting right of depository receipt holders and that empower the management to exercise voting rights on their behalf, will uplift the standard of corporate governance in listed companies.
Since the provisions relating to issue of ADRs and GDRs fall within the administrative control of the ministry of finance and RBI, Sebi has sought their views to frame regulatory response.
The Sebi proposal proceeds on the basis that in most cases, the voting right is required to be exercised by the depository as per the instructions of the management, which per seis objectionable, because such voting power enhances promoter control on the company.
Certainly, this is an issue that needs to be looked into. And if the regulator’s experience reveals that the promoters normally take undue advantage of such provision in the scheme for issue of ADRs and GDRs, the loophole needs to be plugged.
Empowering holders of ADRs and GDRs to instruct the depository to exercise the voting right on their behalf, as proposed by Sebi, is also not free of consequences.
Firstly, it does not differentiate between genuine institutional investors who may not be interested in acquiring control of the company and who may like to dispose of the underlying shares immediately after conversion to realise return on their investment.
This, in turn, may have an impact on resource-raising by corporates through this route. Secondly, in case of a holder of ADRs and GDRs who ultimately intends to acquire control of the target company, he may be subjected to financial burden for acquiring additional 20% shares of the target company immediately after subscribing to the ADRs and GDRs.
Such substantial financial burden can have an impact on merger and amalgamation proposals between Indian and overseas companies.
This was one of the factors that derailed Bharti-MTN deal in 2009 when Sebi amended the regulations. As a result, Sebi’s proposal deserves a careful examination by the government as well as RBI.
R S Loona
Managing Partner Alliance Corp Lawyers
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