AGM in Corporate Governance

Assignment submitted as per requirement of PGDBL at

NADT, Nagpur
Module 2

Submitted to

<Ms Arpitha H C>

Submitted by

<Saurabh Yadav>

Roll no B80

Batch-71st

Service- Indian revenue Service (IRS IT)

CONTENTS

1. INTRODUCTION

2. CORPORATE GOVERNANCE

3. AGM

4. MEASURE TO INCREASE SHAREHOLDER ENGAGEMENT

5. CONCLUSION

6. BIBILOGRAPHY
The significance of AGM in Corporate Governance:

Corporate Governance:

According to Cadbury Committee (UK), the basic principle of corporate

governance is to separate ownership and management of companies and run them
in the interest of owners rather than the management. In a Public limited set up, a
company pools capital from thousands of shareholders who therefore become the
owners of the company. They effectively play no active role in the day to day
running of the company and delegate all the ‘governance’ to the management.

Most of the large corporate groups in India were born as family-owned businesses.
The family members used to occupy managerial positions and took all the key
business decisions. However, with the LPG reforms of 1991 and the evolution of
equity markets, many of these family-owned businesses listed themselves on the
exchanges. Though no longer the sole owners, the promoters continued to wield
disproportionate influence over decisions.

Companies Act 1956 tried to fix it by requiring company Boards to seek Central
Government permission for certain decisions like loans to directors and
shareholder approvals for decisions like appointment of relatives. In 2000, the
SEBI came up with Clause 49 of the Listing Agreement for all the listed
companies that dealt with the issues of corporate governance based on the
recommendations of Kumaramangalam Birla Committee. At present, the corporate
governance norms in India are governed under three heads: The Companies Act,
Clause 49 in the listing agreement and SEBI’s new Listing Obligations and
Disclosure Requirement Regulations 2015.

AGMs:

The Companies Act 2013 regulates the requirement to conduct an Annual General
meeting of the members to discuss the four ordinary businesses. The four
businesses include 1) Financial statement approval 2) Appointment of Director 3)
Appointment and to fix the remuneration of statutory auditor 4) Declare the
dividend. The AGM should be held within 18 months of the date of company’s
incorporation and, thereafter once a year. The minutes of the AGM must be kept
up to date and pasted in the companies' minute book.
The AGM is the principal forum in which Directors account to shareholders for
their stewardship of the company. The AGM offers a stage for shareholders to ask
questions, debate and exercise their fundamental rights to vote on important
resolutions. Thus the AGMs are very important as it results in some form of a
governance control over companies and it is the only time when the company seeks
shareholders approval and the top management of the company is available for
questions.

However, there is a growing feeling that the meeting, in its traditional form, is no
longer ‘representative and effective’. In the wake of companies becoming more
complex and global, the relevance of AGMs is all the more important. The high
profile scams like the stock market scams (of Harshad Mehta, Ketan Parekh), UTI
scam, Satyam scandal and the recent ICICI bank and IL&FS controversy which
have been termed as the outcomes of failed corporate governance, there is a need
to revive AGMs for more stringent norms surrounding corporate governance to
prevent their recurrence.

Investors must recognize that beyond the regulatory aspect, companies in general
do not have any overwhelming commercial incentive in conducting an AGM. The
biggest beneficiary from the AGM exercise is the minority shareholder. Under the
Companies Act 2013, companies are forced to seek votes from minority
shareholders for approval on implementing some of the management actions. For
some related-party transactions beyond a threshold, the company will now need to
seek approval of a majority of the minority vote.

Criticisms of AGM effectiveness generally fall into two categories, informational

and procedural. On the informational side, critics argue that the meetings yield
little information that is not already available to the market; the materials that are
prepared for the meeting, including the directors’ report, remuneration report,
corporate governance statement, auditor’s report and financial statements are
complex and difficult to understand; and that institutional shareholders gain more
frequent and better quality information than retail shareholders.

When it comes to procedure, critics say that since most shareholders, by number
and by percentage of holding, have already voted by proxy, the deliberations at the
meeting have no material bearing on the resolution of the outcomes. This has also
resulted in falling at falling attendance at AGMs. Research from Equiniti suggests
that 76% of shareholders interviewed think that companies should do more to
encourage shareholder engagement. Some of the measures can be:

MEASURES TO INCREASE SHAREHOLDER ENGAGEMENT

1. Increasing attendance

With globalization, video conferencing and the Internet, it’s not surprising that few
people attend AGMs. SEBI has endorsed AGMs to be held simultaneously at
multiple venues, including virtual venues, to improve the convenience of
attendance for shareholders and to encourage greater shareholder participation and
engagement. A compulsory e-voting platform has been proposed in the Companies
Act 2013.

While being more costly for companies, holding such hybrid – both virtual and
physical – meetings would give the option to shareholders to either attend in
person or online. The opportunity to confront the Board with difficult questions
will be more possible as those at the physical meeting will be able to put forward
questions. The risk of censorship, however, will still be possible with the online
questions. A potential way to mitigate this would be for shareholders to elect an
impartial individual to manage the questions put forward online to ensure that
questions are not ignored. E-voting will mitigate the need for physical completion
of proxy forms.

However, managing cyber-security when it comes to virtual meetings is crucial. It

is an issue that requires vigilance, careful monitoring, and research. In addition, IT
issues are likely to present problems for virtual meetings.

2. Informational & procedural changes

Successful AGMs don’t have to be just massive crowd pullers. Trust and
confidence in the shareholders towards management action in the forthcoming year
is the most critical outcome from an AGM. Shareholders and companies, together,
can make AGMs productive.

After a company sends a notice for an AGM, it is important that shareholders,

based on the documents sent to them and other available information, take the time
to understand the company’s fundamentals and performance.

Shareholders should then make a list of questions for the company management
and send this list to the company in advance so that the questions are addressed by
them in the AGM. To win shareholders’ trust, the management, in turn, should
appreciate shareholder expectations on financial performance as well as corporate
behaviour. AGMs also need greater involvement of auditors to respond to financial
questions.

There also needs to be improvements in the quality, relevance and succinctness of

information being provided to shareholder meetings by: convening a series of
information briefings, webcasts or podcasts leading up to the holding of a
shareholders’ meeting; improved use of audio/visual technology including
infographics and video screening rather than traditional pre-typed reports read
verbatim from the podium.

There needs to be improved skills and meeting management by the chair to

enhance meeting efficiency and effectiveness. More time should be being taken to
explain the company’s future direction and prospects, its strategy and risks, and the
plans for addressing such matters. There should be more information about the
skills, experience and attributes of the board members, especially those standing
for election/re-election.

The presentations of information at the AGM should be disconnected from the

voting on the resolutions by 48 hours to allow opportunity for greater engagement,
informed and shared deliberations, and reflection by shareholders on the issues
before the shareholders’ vote is taken.

At the same time all voting at general meetings, at least on substantive rather than
minor procedural motions, should be by way of formal poll rather than by show of
hands so as to deliver greater assurance of integrity in the voting outcome and
declaration of the result of meeting resolutions by the meeting chair.
Conclusion:

India is an emerging economy but the principles and best practices on corporate
governance mentioned in the Companies Act are among the best in the world. The
regulatory framework for increased disclosures, enhanced shareholder voting rights
and easier management interaction, may just have set the stage for considerably
improving the prospects of all stakeholders. It is important that shareholders and
companies together use the AGM forums to build a strong capital market
environment.

Good Corporate Governance standards are essential to ensure significant value

enhancement to all the stakeholders of a company, including the minority
shareholders, the government and the economy. India has always stood at the top
in protecting the interests of minority shareholders (at 4th place in Ease of Doing
Business Report 2018 by World Bank) and this has been attributed to positive
corporate governance norms that have been put in place by the government and
SEBI.

BIBILIOGRAPHY

1. www.investopedia.com
2. www.moneycontrol.com
3. www.icsa.org
4. Companies ACT
5. Kumarmangalam Birla Committee Report