Sunday, March 11, 2012

Essay on Shareholders

Essay on Shareholders

Shareholders’ Rights
In the January 10th issue of The Economist I have found an article “India’s Enron” about a big corporate business ethics scandal in India. The article talks about an Indian company called Satyam, which ironically enough means “thruth” in ancient Indian language. Recently was discovered that this one of the biggest software companies in India was engaged in almost $1.5 billion fraud. Two brothers who were running the company turned out to be guilty in the balance sheet machinations. They have inflated the profit of the company, understated its liabilities and overstated the assets for quite a long period of time.

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One of the brothers, Ramalinga Raju, decided to buy two companies that were owned by his company. He would make the purchases if not the disagreement of the shareholders. If the purchase would be made, the shareholders would receive a right to petition to court to dissolve the corporation. According to the textbook, if shareholders find out that “the board of directors is mishandling corporate assets”, the shareholders receive a right to start the liquidation process. Buying the above mentioned companies would be exactly “mishandling corporate assets” and give a right to shareholders to go to court. According to RMBCA, shareholders can initiate liquidation in case if “corporate assets are being misapplied or wasted” – in our case, purchase of two family owned companies. The liquidation can also be initiated if “the acts of the directors or those in control of the corporation are illegal, oppressive, or fraudulent” – in our case balance sheet manipulations. (Miller, p.626-627)

Moreover, shareholders have inspection rights and even though these rights are limited, shareholders can review corporation’s books and records. Shareholders can hire an accountant to check the accounting records as an agent of the shareholders. (Miller, p. 626) These measures are taken in order to minimize the risk of fraud, which, as we see from the above described case, can still happen. Unfortunately, as the article mentions, the shareholders in India are not very active in protecting their rights and monitoring company’s activities. This together with weak enforcement of laws and large loopholes leaves enough space for fraudulent manipulations. In addition to that, according to ACGA, Asian Corporate Governance Association, meetings of shareholders are often scheduled to take place in remote locations to prevent shareholders from participating in the meetings and voting and there is almost no voting by poll. This also violates shareholders’ rights.

Many shareholders in India do not know about their rights and the courts do not always follow the existing legislature. While all these exist, there remains place for corporate fraud. As Ms Gopinath from the ACGA has noticed, corporations in India will not change unless shareholders learn to protect their writes, stand up and make the corporations play fairly.
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