GuruSpeak | Corporate Penalties – why should minority shareholders pay!​

Kunj B Bansal

The Securities and Exchange Board of India (SEBI) has imposed a fine of ₹625 crore plus 12 per cent interest (for five years) on the National Stock Exchange (NSE), India’s largest equity bourse. It found NSE guilty of not exercising due diligence in the co-location scam.

This is not the first time SEBI has penalised an organization for unacceptable behaviour. There have been several instances in the past of such nature and the victims have been all kinds of organisations – companies, market intermediaries, brokers, etc. In fact, there seems to be a continuous rise in such cases involving financial penalties over the last few years. Besides penalties for wrongdoing, there have been other instances where companies have settled some cases by paying penalties without accepting or denying guilt.

Some cases in the last few months also involved listed public limited companies with multiple shareholders – promoters as well as non- promoters (minority shareholders). Given below are some such instances which involved organizations with multiple shareholders:

In February 2019, Infosys settled a case pertaining to the severance package for former chief financial officer Mr. Rajiv Bansal by paying Rs 34.35 lakh as consent fees to the market regulator, which had found the compensation was not in accordance with the remuneration policy. In May 2016, during the tenure of then CEO Mr. Vishal Sikka, Infosys disclosed that it had awarded over Rs 17 crore as severance pay to Bansal, who resigned in October 2015.

Before that, in November 2018, Reliance Communications (R Com) had settled a case with market regulator SEBI over non-compliance with listing norms, including alleged failure to promptly inform about interest payment default on debentures. The company also settled the issue of non-cooperation with the credit rating agencies and debenture trustees that were in violation of listing norms. In an order, SEBI said the case has been settled after payment of Rs 62 lakh towards settlement charges.

Prior to this, in June 2018, private sector lender Yes Bank and Goldman Sachs settled a SEBI probe into alleged violation of listing and disclosure norms as well as merchant banker regulations, respectively. Individually, Yes Bank paid Rs 40.8 lakh, while Goldman Sachs (India) Securities Pvt Ltd paid Rs 20.8 lakh towards settlement fees.

The penalties have been imposed on private organisations also but this article focuses only on those cases where the companies have multiple shareholders, more specifically on those organizations that have minority shareholders, who are not involved in day to day running of the businesses.

In all these cases the financial penalties have been paid by the companies involved which means the loss is being borne by the shareholders. Is that the right thing? Should the shareholders (especially minority shareholders) pay for such penalties which, in most cases would be an outcome of negligence/mistake/ dereliction/ wrongdoing of some specific individual(s)? Those individual(s) could either be part of the management team or, in some cases, could be directors/ promoter directors/ whole time directors.

Shareholders appoint a capable Board and hire professional management teams to run the businesses. The board members and management teams are compensated, in some cases handsomely, for the expected delivery from them in multiple ways – financial and non-financial. Financial compensation includes fixed salary, bonuses, long term incentives and ESOPs. Non-financial compensation includes facilities such as car, driver, club memberships, health and life insurance etc. These professionals are appointed based on their supposed capabilities and are expected to deliver on their roles. Promoter directors are expected to perform in the beneficial interest of company.

If the company suffers due to non-delivery by these professionals or directors, should such penalties be paid by the company or by these individuals who have clearly failed to deliver the performance expected of them, howsoever unintentional it may be? If the case is of intentional failure or unethical behaviour – all the more so!

Should not such penalties be directly paid by the individual(s) concerned whose dereliction of duty resulted in this financial loss? Why should the company (in turn, shareholders) bear this loss or make this payment? The said loss occurs due to wrong actions by one or more individuals who have failed to perform their duty in an acceptable manner. It is obvious that such individuals (employee(s) and/or director(s)) be made to pay such penalties from their individual financials instead of companies paying for it.

There is no reason shareholders should bear this loss which also results in reduction of profit to that extent and affecting the shareholder value depending upon the amount of penalty. It is high time therefore that SEBI moves beyond imposing penalties. SEBI should ask the companies to identify the individual(s) responsible for lapses/wrongdoings and ensure that the money is recovered from them and not from the company. In fact, it will also have to ask companies and auditors to put in place a mechanism to ensure that company managements do not re-compensate such individual(s) directly or indirectly either immediately or after some time. True, that is easier said than done but then every move starts with baby steps. SEBI has made a good beginning by docking some individuals in the NSE case, but we still have a long way to go to get justice for minority shareholders.

Source From- https://www.moneycontrol.com/news/business/guruspeak-corporate-penalties-why-should-minority-shareholders-pay-4015631.html