Vadra-DLF sweeheart deals: What can minority shareholders do?
Minority shareholders are empowered under the Companies Act to force the management to correct its actions and/or reverse the transactions. Will institutional investors take the lead or sit like the three monkeys
Vadra-gate has not just rocked the Congress and its ruling dynarchy, but also the share price of real estate mogul, DLF. It has also eroded investors confidence in the company and its management. Since the disclosure of the sweet deals, a select section of media has targeted the First Family and raised the issue of corruption and nepotism. At the same time, an equally important issue has gone totally unnoticedsafeguarding the rights of minority shareholders of DLF.
Any retail investormango people in this banana republic as per First SoninLaw of the nationwould just accept it as the way this country works and sell whatever shares he holds in DLF. Very few people, except for chartered accountants, company secretaries and lawyers would know that they have adequate rights to force the management to correct its actions and/or reverse the transactions.
Here, DLF has advanced interest-free loans to Robert Vadras companies. This is also evident from the financial statements filed by his companies with the Registrar of Companies (RoC). DLF has not yet confirmed whether these interest-free loans can be returned. According to Arvind Kejriwals first set of revelations, DLF sold properties to Vadras companies at deeply discounted rates. His second round of attack gave justification of the benefits accrued to DLF and its shareholders (including minority shareholders) for which Vadra was remunerated in form of interest-free loans and properties sold at a deep discount. However, DLF maintains that there are no convolute arrangements and transactions between DLF, the ruling Congress party in Haryana state and Vadra.
A shareholder is not at a loss if DLF is benefited by dealing through Vadra and compensating him for his services. However, if whatever DLF saysthat it has not received any benefits from the ruling Congress governmentis true, then its a bigger cause to worry. In that case, following issues arise:
Why did the DLF management dole out interest-free loans and sell properties at deep discount to Vadras companies, if the company did not gain any economic benefits from Vadra?
If DLFs majority shareholders and management play golf with Vadra and have built up a personal friendship or relationship with him and his family, they can lend him money from their personal accounts or any unlisted companies owned by KP Singhs family, and not from a listed company that is also co-owned by many other investors, including minority shareholders.
Whether these loans are returnable or non returnable?
Even if loans were given to Vadras companies from DLF, why didnt DLF charge interest?
In such case, who will pay the interest and repay the loans extended to Vadras companiesVadras companies or promoters of DLF?
Whether various properties are sold to Vadras companies at a deep discount? There is a need to verify all relevant facts in that case. In case properties are sold at a deep discount, is it justified?
Why was high advance paid to Vadra in select joint venture (JV) deals?
It is important to note that the Punjab & Haryana High Court has ruled against DLF and stated that there is a nexus between Haryana government and DLF. This case is, however, currently sub-judice as the Supreme Court is hearing the case. However, given the severity of charges, it is important for shareholders to know the transactions in detail and discuss the legal validity.
In such situations minority investors have rights under a few provisions of Companies Act, 1956, to bring management down to discuss these issues and also propose resolutions to force corrective actions. Section 169 of Companies Act requires the board of directors of the company to call for an extraordinary general meeting (EGM) of the company on the requisition of shareholders of the company. Here the Companies Act stipulates that shareholders collectively holding 10% of total equity of the company must make this application. This requisition must mention matters which need to be considered in the meeting and submitted at registered office of the company.
If the board does not call for a meeting within 45 days from the date of the deposit of a valid requisition, the requisitionists themselves can call for an extraordinary general meeting. In case of failure of the board of directors to call for an extraordinary general meeting and hence requisitionists calling for the same, any reasonable expenses incurred by the requisitionists shall be repaid to the requisitionists by the company. The company has the right to retain expenses of such meetings from fees or other remuneration paid to the directors.
It may sound difficult and impractical to collect requisitions from thousands of minority shareholders of DLF who would collectively hold 10% of shares of the company. In such a case, a group of DLF investors can approach the National Company Law Tribunal and seek order from the Tribunal calling for an EGM, under Section 186 of the Companies Act. It is important for retail investors to know that this National Company Law Tribunal is very much like a civil court and has similar powers to issue orders and pass judgments, which have to be accepted by everyone.
In this case, as per the provisions of Section 186, the Tribunal either on its own motion or on the application by any shareholder of the company can pass an order calling for an EGM. The order shall also specify the manner in which the said meeting should be held.
As this story is being written there are no evidences that the National Company Law Tribunal has taken cognizance of these issues and has suo moto demanded an inquiry. It is yet to be seen how the National Company Law Tribunal takes action, if in case minority shareholders file a petition with the Tribunal, demanding an EGM to take corrective action to safeguard their interests.
However shady and difficult this DLF-Vadra issue may be, it has the potential of setting precedents and rules on corporate governance and igniting investor empowerment and shareholder activism in the country.