Article on “GOLDEN SHARES”
By:
Samant Kumar
5th year BBA LLB,
Symbiosis Law School,Pune.
INTRODUCTION
The concept of State has changed drastically from kingship to democratic. Industrialization has even changed the concept of democratic to Welfare state. As the concept of privatization was introduced for the working of a particular industry. When considering the privatization of an industry, governments often wants to protect what they feel are vital national interests. More often than not these interests are principally political: a government wants to veto the possibility that a key utility or defense function could be bought by a foreign investor, for example. How then to privatize a company, and attract new investment into it, while ensuring that important national interest are protected?
The idea can be that of golden share. This term first came into picture Margret Thatcher’s administration in United Kingdom launched its privatization programme in 1980’s. During that period, the government used to retain a special share, often referred to as a golden share, to protect the ‘public interest’.
What is a Golden Share?
A type of share which gives the shareholders (basically government) a veto power over changes to the company charter. They are a means of protecting key national interests, and are limited to certain specified in the company’s articles of association, and confer no right to interfere on other issues.
A share with special voting rights that give it peculiar power vis-à-vis other share. The term applies particularly to share retained by a government after privatization. If a government wishes to sell off a company in a sensitive industry (say defence) and yet retain control, it can hold on to a golden share. This might give it the right to veto any takeover bid.
Characteristics of Golden Share
Not of Gold- the shares are not made of gold! They are the power, which the government reserves with him to be used in deciding vital issues.
No power of discretional control- Golden shares does not give government any power to control privatized enterprises as they see fit. Their function is not to allow politicians to retain control over a newly privatized business, but to prevent a specified number of dangers being realized.
Yields government special rights- The real beauty of the golden share idea is that while it affords the government special rights, the government can choose not to exercise them. For example, the British government stood aside and allowed Ford to take over Jaguar and British Petroleum to acquire Britoil. Similarly, Singapore relinquished its special golden-share rights in ST Industrial Corporation, ST capital and ST Computer Systems & Services when the government determined that special protection was no longer necessary for these companies.
Functions to appease opponents of privatization- The golden share is in essence a solution that addresses primarily political, rather that legal or economic, concerns. It functions to appease opponents of privatization.
Irony of the golden share- The irony of the golden share is that although it appears regressive in an era of economic liberalization, it has been used by reformers to provide political cover. With it, privatization may be made palatable enough to be pushed through the political process.
Surrender of golden shares- Mindful of the dangers, the UK government tried to ensure that golden shares had a limited lifetime. It actually used the veto power of golden shares only twice. And in practice, UK government have often chosen to surrender golden shares once privatized enterprises have become firmly established.
Golden share-Comparative Analysis
Shark Repellent- The concept of golden share is diagonally opposite to shark repellent which talks of ‘any number of measures taken by a corporation to discourage an unwanted takeover attempt’.
Laissez faire- An economic theory from 18th century that is strongly opposed to any government intervention in business affairs. Sometimes referred to as “Let it be economics”. Laissez faire is French for “leave alone”. The concept of golden share is diagonally opposite to this concept to this concept of Laissez faire.
Types of golden shares-
Two types have been employed: Ones without time limit and the other with the limit (or for specified period). This is usually created to ward off unwelcome takeover bids on the grounds of national security.
Those with limits are generally held by government for a specific period, created to allow privatized companies time to adjust to operating in the private sector. This type is basically prevalent in India.
Usages of this technique in some countries
In UK
Even after that the United Kingdom, supposedly the first to the nations to embark upon widespread privatization of its electricity industries and the worlds most ambitious and path breaking electricity privatization used the technique of golden share to leverage the governments dominion over the electricity industry in power generation companies.
In Japan
On March 2005, several key policy and political decisions on Postal Reform were to be made in Japan. The postal industry of Japan was to be privatized. Recent press reports suggested the ten-year limit on completing privatization, the stock holding relationship among the Postal Holding Company and the new entities, and a provision for “golden shares” which would have the right to block some major decisions.
In Malaysia
In Malaysia, the golden share was used in the sale of shares in Malaysia Airlines, Telekom Malaysia, Perwaja Steel and many other companies.
In Singapore
Similarly, the Singapore government is currently devising a golden share for ST engineering, the conglomerate to be formed from part of Singapore Technologies.
In China
Even China, the communist country of the world used the concept of golden share to bring about the goods of privatization. China’s top leaders have vowed to reform the country’s hemorrhaging state-owned enterprise sector and fro this purpose they used the golden share idea. The golden share was used so that it may be used to assure those Chinese Communist Party cadres whose parents fought for the 1949 Liberation that the state is not selling the shop.
Usages in India
The government is considering acquiring a Golden Share in public sector banks to allow them more headroom to raise fresh capital from the market. A golden share would allow the government to hold a minimum of 51% stake in a bank even if the actual government stake has fallen below that mark on account of fresh capital being raised. The left parties, an ally in the UPA government, had insisted that the government stake in banks must not fall below 51%. The golden share will help meet this objective.
During the disinvestment of Hindustan Petroleum Corporation Limited, there was no golden share clause as the government could veto any resolution made by the board of directors of the divested entity by virtue of holding one token share in it.
On 7th October’2007, State bank of India chairman O. P. Bhatt had said the government should consider having a ‘golden share’ to retain control over the public sector banks while allowing them to raise capital through a restructuring plan. The public sector banks could lose out totally to foreign or private banks in meeting the fast increasing capital needs of the corporate world, particularly for the mergers and acquisition, unless the nationalized banks are equipped to augment their capital.
GOLDEN SHARE: How and when issued
There should be a clause in Articles of Association. This is a tool used in some countries (notably the UK and France). During privatizations, when some restrictions on ownership were deemed important in the public interest the government issues golden share. This share typically, is a single golden share of a company, owned by the government, which has no ability to influence day-to-day management but has the power to assert its influence in major decisions of the company such as amendment of certain provisions in the articles of association, foreign interests being able to acquire more than a certain percentage of the shares. Prevent hostile takeovers which a government judges against the public interest, Restrict the issue of new voting shares etc.
Golden shares are usually retained by the state in infrastructure policies, utilities, natural monopolies, mining operations, defense contractors, and the space industry. They allow their holders to block business moves and counter management decisions, which may be detrimental to national security, to the economy, or to the provision of public services (especially where markets fail to do so). Golden shares also enable the government to regulate the prices of certain basic goods and services – such as energy, food staples, sewage, and water.
Conclusion
With the introduction of golden share it will not lead to a smooth privatization of any company. It can be abused by less scrupulous governments in order to maintain political control over an enterprise while nominally privatizing it and collecting the financial proceeds from the sale. Investors might also be wary of the potential abuse of government power through the golden share.
If we look at the other side of the introduction of golden share then we will realize it can prevent takeovers which a government judges against the public interest. It will also place constraints on the disposal of asset illegally. When a company is being wounded up, it imposes a restriction on the same. It guarantees the place of government appointed directors on the board.
Special features of making provision for golden share in the privatized entity can prove to be a double-edged sword and it may give protection to the government in certain sensitive circumstances but leave the government with the risk of incurring the wrath of shareholders who would be denied the right to accept what might be a very attractive offer for their shares. Therefore in the end I would like to conclude by saying that the power of golden share should be used very cautiously and in rare circumstances.
BIBLIOGRAPHY:
Books and treatises
Ira W. Liberman, Between State and Market: Mass Privatization in Transition Economies, 1997.
Dominique Pannier, Corporate Governance of Public Enterprises in Transitional Economies, 1996.
Cosmo Graham, John MacInnes, Tony Prosser, Industrial Relations and Economic Change, 1988.
Subhash C. Jain, Emerging Economies and the Transformation of International Business, 2006.
M. L Sondhi, Towards a new Era: Economic, Social, and Political Reforms, 2007.
Avtar Singh, Company Law, 2004.
N. D. Kapoor, Company Law, 2004. Journals
University of Allahabad, Indian Journal of Economics, 1916.
Websites
http://www. sebi. gov. in/capitalmarkets/ (visited on 2nd August, 2008 at 7:47 pm).
http://www. mca. gov. in/foreigninvestment/ (visited on 3rd August, 2008 at 3:31pm).
Article on “GOLDEN SHARES”
By:
Samant Kumar
5th year BBA LLB,
Symbiosis Law School,Pune.
INTRODUCTION
The concept of State has changed drastically from kingship to democratic. Industrialization has even changed the concept of democratic to Welfare state. As the concept of privatization was introduced for the working of a particular industry. When considering the privatization of an industry, governments often wants to protect what they feel are vital national interests. More often than not these interests are principally political: a government wants to veto the possibility that a key utility or defense function could be bought by a foreign investor, for example. How then to privatize a company, and attract new investment into it, while ensuring that important national interest are protected?
The idea can be that of golden share. This term first came into picture Margret Thatcher’s administration in United Kingdom launched its privatization programme in 1980’s. During that period, the government used to retain a special share, often referred to as a golden share, to protect the ‘public interest’.
What is a Golden Share?
A type of share which gives the shareholders (basically government) a veto power over changes to the company charter. They are a means of protecting key national interests, and are limited to certain specified in the company’s articles of association, and confer no right to interfere on other issues.
A share with special voting rights that give it peculiar power vis-à-vis other share. The term applies particularly to share retained by a government after privatization. If a government wishes to sell off a company in a sensitive industry (say defence) and yet retain control, it can hold on to a golden share. This might give it the right to veto any takeover bid.
Characteristics of Golden Share
Not of Gold- the shares are not made of gold! They are the power, which the government reserves with him to be used in deciding vital issues.
No power of discretional control- Golden shares does not give government any power to control privatized enterprises as they see fit. Their function is not to allow politicians to retain control over a newly privatized business, but to prevent a specified number of dangers being realized.
Yields government special rights- The real beauty of the golden share idea is that while it affords the government special rights, the government can choose not to exercise them. For example, the British government stood aside and allowed Ford to take over Jaguar and British Petroleum to acquire Britoil. Similarly, Singapore relinquished its special golden-share rights in ST Industrial Corporation, ST capital and ST Computer Systems & Services when the government determined that special protection was no longer necessary for these companies.
Functions to appease opponents of privatization- The golden share is in essence a solution that addresses primarily political, rather that legal or economic, concerns. It functions to appease opponents of privatization.
Irony of the golden share- The irony of the golden share is that although it appears regressive in an era of economic liberalization, it has been used by reformers to provide political cover. With it, privatization may be made palatable enough to be pushed through the political process.
Surrender of golden shares- Mindful of the dangers, the UK government tried to ensure that golden shares had a limited lifetime. It actually used the veto power of golden shares only twice. And in practice, UK government have often chosen to surrender golden shares once privatized enterprises have become firmly established.
Golden share-Comparative Analysis
Shark Repellent- The concept of golden share is diagonally opposite to shark repellent which talks of ‘any number of measures taken by a corporation to discourage an unwanted takeover attempt’.
Laissez faire- An economic theory from 18th century that is strongly opposed to any government intervention in business affairs. Sometimes referred to as “Let it be economics”. Laissez faire is French for “leave alone”. The concept of golden share is diagonally opposite to this concept to this concept of Laissez faire.
Types of golden shares-
Two types have been employed: Ones without time limit and the other with the limit (or for specified period). This is usually created to ward off unwelcome takeover bids on the grounds of national security.
Those with limits are generally held by government for a specific period, created to allow privatized companies time to adjust to operating in the private sector. This type is basically prevalent in India.
Usages of this technique in some countries
In UK
Even after that the United Kingdom, supposedly the first to the nations to embark upon widespread privatization of its electricity industries and the worlds most ambitious and path breaking electricity privatization used the technique of golden share to leverage the governments dominion over the electricity industry in power generation companies.
In Japan
On March 2005, several key policy and political decisions on Postal Reform were to be made in Japan. The postal industry of Japan was to be privatized. Recent press reports suggested the ten-year limit on completing privatization, the stock holding relationship among the Postal Holding Company and the new entities, and a provision for “golden shares” which would have the right to block some major decisions.
In Malaysia
In Malaysia, the golden share was used in the sale of shares in Malaysia Airlines, Telekom Malaysia, Perwaja Steel and many other companies.
In Singapore
Similarly, the Singapore government is currently devising a golden share for ST engineering, the conglomerate to be formed from part of Singapore Technologies.
In China
Even China, the communist country of the world used the concept of golden share to bring about the goods of privatization. China’s top leaders have vowed to reform the country’s hemorrhaging state-owned enterprise sector and fro this purpose they used the golden share idea. The golden share was used so that it may be used to assure those Chinese Communist Party cadres whose parents fought for the 1949 Liberation that the state is not selling the shop.
Usages in India
The government is considering acquiring a Golden Share in public sector banks to allow them more headroom to raise fresh capital from the market. A golden share would allow the government to hold a minimum of 51% stake in a bank even if the actual government stake has fallen below that mark on account of fresh capital being raised. The left parties, an ally in the UPA government, had insisted that the government stake in banks must not fall below 51%. The golden share will help meet this objective.
During the disinvestment of Hindustan Petroleum Corporation Limited, there was no golden share clause as the government could veto any resolution made by the board of directors of the divested entity by virtue of holding one token share in it.
On 7th October’2007, State bank of India chairman O. P. Bhatt had said the government should consider having a ‘golden share’ to retain control over the public sector banks while allowing them to raise capital through a restructuring plan. The public sector banks could lose out totally to foreign or private banks in meeting the fast increasing capital needs of the corporate world, particularly for the mergers and acquisition, unless the nationalized banks are equipped to augment their capital.
GOLDEN SHARE: How and when issued
There should be a clause in Articles of Association. This is a tool used in some countries (notably the UK and France). During privatizations, when some restrictions on ownership were deemed important in the public interest the government issues golden share. This share typically, is a single golden share of a company, owned by the government, which has no ability to influence day-to-day management but has the power to assert its influence in major decisions of the company such as amendment of certain provisions in the articles of association, foreign interests being able to acquire more than a certain percentage of the shares. Prevent hostile takeovers which a government judges against the public interest, Restrict the issue of new voting shares etc.
Golden shares are usually retained by the state in infrastructure policies, utilities, natural monopolies, mining operations, defense contractors, and the space industry. They allow their holders to block business moves and counter management decisions, which may be detrimental to national security, to the economy, or to the provision of public services (especially where markets fail to do so). Golden shares also enable the government to regulate the prices of certain basic goods and services – such as energy, food staples, sewage, and water.
Conclusion
With the introduction of golden share it will not lead to a smooth privatization of any company. It can be abused by less scrupulous governments in order to maintain political control over an enterprise while nominally privatizing it and collecting the financial proceeds from the sale. Investors might also be wary of the potential abuse of government power through the golden share.
If we look at the other side of the introduction of golden share then we will realize it can prevent takeovers which a government judges against the public interest. It will also place constraints on the disposal of asset illegally. When a company is being wounded up, it imposes a restriction on the same. It guarantees the place of government appointed directors on the board.
Special features of making provision for golden share in the privatized entity can prove to be a double-edged sword and it may give protection to the government in certain sensitive circumstances but leave the government with the risk of incurring the wrath of shareholders who would be denied the right to accept what might be a very attractive offer for their shares. Therefore in the end I would like to conclude by saying that the power of golden share should be used very cautiously and in rare circumstances.
BIBLIOGRAPHY:
Books and treatises
Ira W. Liberman, Between State and Market: Mass Privatization in Transition Economies, 1997.
Dominique Pannier, Corporate Governance of Public Enterprises in Transitional Economies, 1996.
Cosmo Graham, John MacInnes, Tony Prosser, Industrial Relations and Economic Change, 1988.
Subhash C. Jain, Emerging Economies and the Transformation of International Business, 2006.
M. L Sondhi, Towards a new Era: Economic, Social, and Political Reforms, 2007.
Avtar Singh, Company Law, 2004.
N. D. Kapoor, Company Law, 2004. Journals
University of Allahabad, Indian Journal of Economics, 1916.
Websites
http://www. sebi. gov. in/capitalmarkets/ (visited on 2nd August, 2008 at 7:47 pm).
http://www. mca. gov. in/foreigninvestment/ (visited on 3rd August, 2008 at 3:31pm).
