Position and Rights of Minority Shareholders in Listed State Owned Enterprises (SOEs) - Experiences and Lessons from India
36 Pages Posted: 21 Sep 2012
Date Written: September 20, 2012
The presence of the State as a dominant shareholder adds an additional complexity to the corporate governance challenges in organizations as the State often has goals that are different from the goals of the classic private shareholder who only seeks private gain.
While the corporate governance issues arising from the role of the State as a Dominant Shareholder are a sub set of the broader issues that arises from the role of a Dominant Shareholder in expropriating minority shareholder rights in an organization, there is one fundamental difference between the position of minority shareholders in a State owned enterprise (SOE) as compared to the position of minority shareholders in a normal business enterprise. It can be conceivably argued that the mere act of listing of a SOE does not turn them into a capitalist entity whose sole aim becomes that of maximizing the value of the enterprise; the inherent conflict between broader "national interest” (pursued by the State) and the "minority interest" (pursued by the minority shareholders) often continues in a SOE leading to a principal-principal problem between two sets of shareholders who may have different objectives.
Privatization of SOEs inherently reduces the policy space open to government and sets new terms for the relationship between the state and private capital which could give the latter an edge. In the transition period when SOEs are being privatized, foreign investors, even minority ones who have bought into such enterprises on listing, may declare any policy that restrict profiteering, in the interest of development, as amounting to oppression of the minority shareholders and may attempt to cow the State down.
However, given that the value of the listed state entity arises, in many cases, from its monopoly position or from assets created earlier with public money or from assets/rights granted to the entity by the State, the obvious question that arises is to what extent are the new minority shareholders (after listing) entitled to claim exclusive rights on the value unlocked (post listing) and whether the State, as the majority shareholder, is justified in protecting its own interests (which would include broader social interests), however wrong they may be in the eyes of the minority.
The privatization program in India or, as it is more commonly referred to as the disinvestment program, is currently going through the throes of the minority versus majority debate and the challenge is to find an equitable position between the two extreme positions – one where the majority owners view the Company’s objective as being run to serve the public interest and not necessarily to maximize its profits and the other where the minority owners go to the extent of holding the Board members to be in breach of their fiduciary responsibility when they meekly acquiesce to the decisions of the majority owners.
This paper traces the history and provides a snap shot of the disinvestment program in India and, in the backdrop of international best practices, draws useful lessons and pointers for good governance in SOEs in India.
Keywords: State Owned Enterprises, Disinvestment, Privatization, Corporate Governance, Minority Shareholders, India
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