26 May 2010

ADRs and voting rights

SEBI has come out with a Board note agenda where it discusses what needs to be done to voting rights of shareholders who own American Depository Receipts (ADRs) instead of shares. Here is the agenda note. There has been much media debate mainly supportive of the (seemingly) SEBI attempt to curb voting of ADRs by the depository in favour of incumbent management (promoter group). There has also been some dissent. Umakanth finds it odd to take away the right of depositories from constructing a contract giving away voting rights to management as the ADR holders are sophisticated institutional investors. (though I don't believe that there is any law which allows only institutional shareholders to become ADR holders - anyone with a dollar or more can become an ADR holder representing a single share).

In the past, I have consistently maintained that voting rights must be seen factually. It is wholly immaterial who the legal owner of the shares is. Thus where a person gives up voting rights by contract (whether by a shareholder agreement or by a tri-partite agreement with a depository), the person who actually exercises the vote must face both disclosure standards and also takeover regulation tender offer regulations where applicable. SEBI partly implemented this issue in Sept 2009.

What SEBI seems to be proposing now is one step further - i.e. outlawing all exercise of votes of ADR holders by management of the company. Though at the same time, it seems to suggest, it does not have the power to curtail such rights. I am discussing this in 'The Firm' on CNBC this Friday with Menaka Doshi and two other panelists.

Here is my past position on voting rights and ADRs.


santosh said...

I fully agree with your views. When ADS/ADR is issued against underlying shares of management persons, the Custodian ( confusing to call as depositary) of such shares get voting rights on behalf of either the ADS/ADR holders or on behalf of the management persons. All such acquisition of voting rights beyond threshold limits trigger Takeover Regulations.
If ADS/ADR are issued against fresh issued shars to custodian then also the all Depository agreements confer voting rights on ADS/ADR holders or costodians who get rights to vote on their behalf . Then also ADS/ADR holders get entitlement to vote although only factualyy custodian/ depositary votes.It is entitlement which triggers the Regulations.

anju tolani said...

read your article in the economic times today and it echoes my sentiments exactly, people should be allowed to open their bank accounts based on their election id card anywhere in india without any hassle. as you rightfully mentioned there are thousands of migrant workers who probably have faced this problem of opening an account in the cities they are working in. Fortunately now with the banks becoming computerized one can now deposit money in their accounts from any branch of the bank in any city and also withdraw of course with an ATM, but how many banks in the villages are computerized and how many migrant workers even know about such facilities, ....

I also agree that another uniue identification no does not seem to serve any purpose besides of course of filling the pockets of people issuing it, the election id card really does suffice