The Ghost of Dematerialisation!

The attempt here is to capture how the self proclaimed small ‘shareholders’ take Corporate world for a royal ride! I am in no way advocating that Companies are good and the shareholder is bad or vice versa.  It is just that the lawmakers left a big hole, intentionally or unintentionally, on a sensitive issue of corporate governance, which has been exploited by a set of people.

Since this is an academic write-up, I’ll start with explaining the term dematerialisation or demat!

Dematerialisation or Demat: It is the system through which shares in a Company are held in an electronic form. Unlike olden times, you don’t get a share certificate. Instead, what you get is a statement evidencing the title of your shareholding in a Company.

Where it started:  The Government of India promulgated the Depositories Act, 1996, which enabled a shareholder to hold shares in electronic form against the traditional physical share certificates. The intention was perfect and it worked well to revolutionize the securities market. All those litigations arising out of bad delivery, delay in transfer of shares, long book closure periods etc. became the thing of past. It also saved lot of money for shareholders as there is no stamp duty on transfer of shares in electronic form.  Awesome progress all in all!

In the year 1998, Securities and Exchange Board of India (SEBI) abolished the concept of market lot. Hitherto, shares were to be bought / sold/ held only in market lot which was traditionally 50 shares or 100 shares. To popularize demat and also to widen investor base, SEBI came out with these reforms, which was initially extended to 31 scrips and later extended to all scrips trading in demat form. 

What did it do: Unscrupulous shareholders started buying 1 or 2 shares each of Companies and strangely, as the law stands today, they are entitled to the same rights as that of any other shareholder with few exceptions? From here began their journey of harassing Companies.  What helps them is the existing archaic Companies’ Act.  Without quoting the sections, it gives them power to inspect a Company’s records, seek copies, move resolutions to remove directors, etc.  Yes, they can also move court against scheme of arrangements / amalgamations etc.

What is happening now: These unscrupulous shareholders harass Companies by making unreasonable demands; the ulterior motive is black mailing and in turn, money-making, and unfortunately, most Companies end up falling for it to buy peace! They threaten Companies by moving a resolution to remove a director, seeking all kinds of documents in the name of corporate governance. The regulators are blissfully silent on this whole issue.

Economics of this misuse: Let me try and put this across through a hypothetical situation.  Say, a shareholder holds 1 share of Rs. 10/- in a Company. To send an annual report to a shareholder who has not provided his/her email id, the Company has to incur at least Rs.30/- (a conservative estimate for printing / mailing).  The trend is, most of these shareholders ask for physical copies for reasons only known to them. Worse, if the Company decides to declare a dividend – say 15%, which is Rs.1.50/-, they have to incur at least Rs. 5/- (mailing of warrant if there is no bank mandate and if there is a bank mandate, mailing intimation about payment of dividend). There are instances when these warrants of Rs. 2/- or Rs. 3/- comes back to the Company for revalidation as the shareholders forget to present them within the stipulated 3 months time. Yes, last year, the Ministry of Corporate Affairs allowed sending communication to shareholders through email. But the catch here is providing email id is not compulsory. Further, sending the reports/ notices through email also has a cost attached to it since the Registrars charge for emailing.  The question is, whom are we serving and how does this madness qualify as corporate governance? Imagine the plight of a Company like Reliance Industries which has around 34 lakh shareholders out of which approx. 33.50 lakh shareholders hold shares that are worth less than a lakh each of rupees in nominal value!

The magnitude of this wastage is not known. Maybe it would be a good idea to ask Companies to disclose expenses incurred on servicing shareholders.  Or should we call it ‘governance’ expenses’.

What happens in a Shareholders meeting:  The scenes witnessed in a typical shareholders meeting are really pathetic. I have had the sad privilege to attend general meetings of several Companies in the last decade and without exception, what happens in a shareholders’ meeting is nothing short of a ‘circus’. These small shareholders land up at the venue to gobble the gift / sweet box / refreshments / meals.  Some of them rarely enter the meeting hall. Thanks to dematerialization, they can open multiple accounts and demand whatever is given for each folio / demat account. They are rarely bothered about the Company’s financials, performance, track record etc.  Their only focus is to extract maximum mileage out of a hapless secretarial department by fighting for an extra food coupon, conveyance and the likes!  Another trend is they normally land up with their entire family including kids. With 1 or 2 shares, they also demand factory / plant visits. Without slightest exaggeration, I have stood witness to scenes as bad as “a shareholder bringing a thermos and taking tea and coffee in the same thermos”.  Of course, there are so many other cheap antics they indulge in which one can’t even imagine. 

The concern: Who benefits out of this whole tamasha? There is a huge cost in serving these shareholders. No one, except these ‘small shareholders’ who have anything but concern on how a Company runs or on the concept of corporate governance.  Why are the regulators silent on this whole mess?   In the process, is it not true that the actual idea of governance gets lost?  Without sounding like an environmental activist, what about the tons of paper being wasted in this whole exercise of sending annual reports?

Plausible Solution: Bring back the concept of market lot or set a minimum investment requirement in Companies for these privileges, i.e., it can be number of shares, amount etc. Others can always invest through mutual funds. Alternatively, curtail rights of shareholders who do not hold minimum number of shares.  i.e., set this at 100 shares or Rs. 50,000 investment amount at least. Shareholders who do not fall in this category should be entitled to only dividend, not even an annual report or attendance in a shareholders meeting. This eligibility setting is not a new concept; the Companies Act has this provision when it comes to eligibility to demand a poll.  A shareholder or group of shareholders should have 1/10^th of the total voting power or must hold shares worth Rs.50,000 to demand a poll. Also, make email id compulsory for a depository account. Regulators can also look at setting up investor centres at major cities where annual reports of all Companies can be provided for reading or should I say ‘analysing’. 

Caveat: I am not advocating that Companies are angels! I firmly believe that if a Company is indulging in unethical activities, it should be punished without exception.  But that should be the job of the regulator and there are enough laws that provide them the power to monitor and penalize. It is far from sensible to leave a Company at the mercy of a bunch of people who has not interest in a Company’s welfare.

On a Concluding Note: What I have listed here today is merely wishful thinking.  As it stands today, in India, the Government acts only on issues which would tend to hurt them or majorly due to the coalition push.

On a lighter note, may be if a coalition partner raises the issue as a condition for support, there could be some action.  Till then, we have to live with this menace.