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BW Businessworld

Small Share, Big Stake

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The elections may have resulted in a freeze on policy matters, but investors in the infrastructure sector had better watch out. The new government may insist on having a ‘golden share’ in key infrastructure project enterprises with the primary intention of retaining all-important voting (and veto) rights in a project company, even if the government does not have, say, a 26 per cent stake in the project.
“Despite having a 26 per cent share, a joint venture partner has limited rights and cannot block important resolutions,” says Vineet Aneja, a partner with law firm FoxMandal Little. “With a ‘golden share’, which can even be only 1 per cent, a partner can have sweeping rights.”
Often, the government may have stake, but may not have a say in some of the important decisions taken by the board. It will not be, for instance, able to make sure that a metro rail project company does not suddenly take up real estate as its core business.
Borrowed from the British, the concept of a ‘golden share’ was put forward by the Planning Commission in model concession agreements (MCAs) for some critical infrastructure sectors about a year ago. All MCAs are policy documents that have to be cleared by the Union Cabinet. However, prolonged inter-ministerial differences on MCAs left them festering in the draft stages even as the UPA government’s tenure draws to its end.
Gajendra Haldea, principal advisor in the plan pad and the key official behind the drafting of the MCAs, says the intention was to introduce a ‘golden share’ in sectors that require huge investments and have a large user interface with complex inter-relations in other areas such as, say, real estate. “This is predominantly in sectors such as metro rail projects,” he says. The other sectors include airports and railway station projects.
Of these, officials in the commission say only the metro rail MCA has been given final shape. The MCAs for roads and ports, which have been cleared by the government, do not carry a ‘golden share’ clause.
The controversial Hyderabad metro rail project, which was awarded to the Maytas-led consortium last year, is probably the first infrastructure project where the state government has been entitled to a ‘golden share’. The New Delhi railway Station modernisation project is expected to carry the golden share clause next, a prospect that causes some anxiety as it has no precedence in India.
What’s A Golden Share About?
It was the Margaret Thatcher government that first introduced the concept of a golden share in the 1980s, when UK’s public sector companies, especially utilities, were first privatised. Despite having a small shareholding in the privatised entity, with its golden share the government had the right to intervene significantly in the running of the enterprise thanks to its veto power on major corporate decisions. In India, although a ‘golden share’ was conceived for the disinvestment of public sector oil companies, it was never implemented.
Now, infrastructure projects offered by the government in a public-private partnership mode are executed under a special purpose vehicle (SPV) with one or more joint venture partners. The golden share can be introduced through the partners via a contract based on mutual understanding — one clause in the MCA calls for the concessionaire (developer of the project) to execute a shareholder agreement, entitling the government to a golden share.
“The concept of a golden share is not something provided for in the Companies Act, and such a right is available to shareholders through a contract, which becomes binding on the company pursuant to incorporation of such right in its articles,” says Aneja. Indeed, a golden share can give more powers to the government than a JV stake.

A ‘golden share’ will allow the government to exercise extensive powers in
joint venture projects

Veto power to commence any new lines of business. Through this, the government can ensure that the SPV does not branch off into areas that can affect the core business.
Veto power on alterations in memorandum of association and articles of association. The government can ensure that the board does not change the basic constitution of the company.
Veto powers on decisions to wind up the company, including applying to court to wind up the company.
Veto power on decisions to purchase the company’s own shares.
Veto power on decisions to issue sweat equity shares. Through this, the government can disallow decisions of the board to give shares to company’s employees.
Veto power to shift offices of the project outside the state.
Veto power on decision to change the name of the company. Through this clause, the government retains the power to ensure that the promoter does not choose a name for, say, an airport that is contrary to public interest.

The golden share entitles the government to the right to veto relating to 15 issues including: to commence any new lines of business; to make inter-corporate loans and investments’ exceeding 10 per cent of the company’s paid up share capital; to keep registers and returns at any other place than within city, town or village in which the registered office is situated; to reduce the share capital; to issue sweat equity shares; to alter the provisions of the memorandum; to alter or add to the articles of association; to change the name of company; and to purchase the company’s own shares or specified securities. Put together, these provisions allow the government sweeping powers of intervention.
Intention And Perception
What the government intends to do with such a provision is a question of perception, according to Aneja.

Haldea says that the intention of the golden share is not to interfere in the day-to-day functioning of the company, but to ensure that the government is in a position to veto any major change in the business and structure of the company. “Some governments want a part in the joint venture company of a project in order to be entitled to information on the functioning of the company,” says an official who did not want to be named.
His view is not shared by the players behind the infrastructure projects. A few weeks ago, the National Highway Builders Forum wrote to the government that the existing MCA has “enough controls, which could be exercised from time to time by the statutory auditors as well as by the authorities concerned that the project funds are utilised in the defined manner”. The forum saw no requirement for the government to have a nominee with veto powers on the board of the company.
Although, currently, there are no plans to introduce the concept of a golden share in roads, ports and power, some investors and even bankers feel that this may be done once a new government is formed.
The bankers’ perspective rests on the fact that they fund bulk of the project. Jitender Balakrishnan, deputy managing director, IDBI, says with a clause like this, “We would be very cautious about it.”
kandula dot subramaniam at abp dot in
(Businessworld Issue Dated 5-11 May 2009)