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. Sandeep Parekh
Founder Finsec Law Advisors