Cross-border shareholding occurs when a company's shares are held by investors located in country difference from the country in which the company is registered. As companies become increasingly globalized, cross-border shareholding has become more common. However, cross-border shareholding also presents challenges for corporate governance. In this blog, we will discuss the challenges posed by cross-border shareholding and the measures that companies can take to ensure effective corporate governance.
Challenges of Cross-border Shareholding
Cross-border shareholding presents several challenges for corporate governance. Some of the key challenges are as follows:
Communication: Communication between the company and its foreign shareholders can be difficult due to differences in language, time zones, and cultural norms. This can lead to misunderstandings and delays in decision-making.
Voting Rights: The ownership structure of cross-border shareholding can be complex, with different types of shares carrying different voting rights. This can make it difficult to determine the true ownership structure of the company and can lead to disputes between shareholders.
Regulation: Cross-border shareholding is subject to different regulations in different countries, which can create legal and compliance issues for companies.
Cultural Differences: Cultural differences between countries can impact corporate governance practices, making it difficult to implement consistent governance standards across borders.
Measures to Ensure Effective Corporate Governance
To overcome the challenges posed by cross-border shareholding, companies can take several measures to ensure effective corporate governance. Some of the key measures are as follows:
Shareholder Engagement: Companies shall engage with their foreign shareholders through regular communication, such as conference calls, webinars, and other digital channels. This can help to build trust and promote transparency amongst the foreign shareholders.
Voting Rights: Companies can simplify the ownership structure of their shares by consolidating different share classes or by offering a single class of shares. This can make it easier to determine the true ownership structure of the company and can reduce the potential for disputes.
Regulation: Companies can ensure compliance with different regulatory regimes by appointing local advisors and establishing a robust compliance program. This can help to reduce the risk of legal and regulatory issues.
Appointment of foreign directors: Companies can appoint foreign directors in executive and non-executive roles who have experience in cross-border governance and can provide valuable insights into the cultural and regulatory differences between countries. In this regard, the provisions of the Indian Companies Act, 2013 provide for appointment of foreign directors in Indian companies whether private, listed or unlisted.
Cross-border shareholding presents both opportunities and challenges for companies. While it can provide access to new markets and sources of capital, it can also create governance issues that can impact the long-term success of the company. To ensure effective corporate governance, companies must engage with their foreign shareholders, simplify their ownership structure, ensure compliance with different regulatory regimes, promote cultural awareness, and appoint foreign directors to their boards. By taking these measures, companies can manage the challenges of cross-border shareholding and promote long-term success.
Submitted by,
Kanak Purohit,
Jindal Global Law School
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