Information Rights: An Insight (How Much Is Enough?)
The shareholders and stakeholders of a Company have a right to receive information about the business operations and financial performance of the Company. Section 136 of the Companies Act, 2013 deals with this Information Right of a member of the Company, whereby every Company is required to share their annual report comprising-
· Auditors’ report,
· Financials statements including consolidated statements, if any,
· Other documents forming part of such financial statements, with the members of the Company, at least 21 days before the annual general meeting of the Company.
The Company is also required to make these documents available to its members for inspection at its registered office during the business hours.
Further a listed company having a subsidiary is also required by law to place the above documents on its website.
In case of an unlisted company, it is mandatory to place the financial statement of its subsidiary/(ies) if it has a website.
Why is it necessary for members of the Company to have Information Rights?
The information made available to the stakeholders of a Company enables them to safeguard their investment by making well-informed decisions, such as casting their vote for or against matters raised at an annual general meeting, subscribing to a rights issue, or participating in buyback of shares by the Company, essentially determining whether to hold or sell their shares.
Information Rights of Investors
Since the investors are also shareholders in a Company, they have access to the above information as mandated under the Companies Act.
However, an investor’s stake is typically much higher than that of a regular shareholder. Given the significant financial commitment involved, the investors may seek additional and exhaustive data from the Company such as:
· Half yearly valuation data (as required under the SEBI guidelines in case of certain investors)
· Detailed quarterly progress report, along with bank statements
· Monthly financial statements, management information system reports, setting out a monthly assessment of the business
· A quarterly compliance report certified by the CFO (Chief Financial Officer)
· Annual business plan and any deviation therein
· Availing/ Providing loan or guarantee from/ to any third person
· Investigation/inquiry/legal proceeding against/by the Company
· Any material information relating to the Company, the business and its investments, including resignation of any of the Directors and Key Employees, etc.
Often, an institutional investor or a venture capital fund or an investor with a significant stake in the Company is in a position to secure more beneficial terms including a comprehensive Information Right, while other investors may be permitted a truncated list as Information Right.
Apart from the above, major investors may also have the right to inspect the books and records of the Company whenever the need arises, or have the books audited by an independent party.
Investor Outlook
It goes without saying that investors seek a good return on their investment. But equally important is to safeguard the investment itself. With these primary objectives in mind, investors need detailed information from the Company which support the decision-making process of the investor as described below:
Monitoring Progress: Monthly and quarterly communication comprises both financial and business data, such as revenue, net burn, cash flows, milestones achieved, opportunities available and/or missed, challenges faced and so on.
This data provides insight into the Company’s operations and helps the investors to track the progress and assess if the same is aligned with the investment objectives.
Strategic Decision-Making for the Investor: An investor might consider infusing additional funds into the entity, contemplate an exit or even be compelled to initiate an accelerated exit. All such strategic decisions necessitate detailed information.
Statutory Compliance by the Company: As part of its communication, the Company also shares data on its statutory compliance which provides reassurance to the investors that the Company is not in default of its obligations under the law.
Regulatory requirement: In order to comply with the reporting requirements under applicable law, certain venture capital funds are required to provide its investors with periodic reports containing valuation of their investments, significant risks associated with their portfolio etc. Thus, a venture capital fund would need to obtain this data from the Company.
Thus, armed with detailed information about the Company, an investor can make more informed and well thought out decision to prevent unpleasant surprises and take a more proactive approach, while the Company benefits from the strategic guidance of the investors.
This is why investors negotiate to include as much information as they can under these rights.
Founder Outlook
The investors are able to take an objective view of the business and thus are able to identify issues and support the Company and founders in many ways, some of which are described as below:
Problem solving: Investors are often able to identify risks from the data shared and offer solutions to the Company. For instance, an investor upon noticing a higher customer acquisition cost and a lower lead generation rate might prompt an alternate marketing strategy. This is particularly so in the case of a strategic investor who is more involved and participates actively in the decision-making process of the Company.
Mentoring the founders: When a founder and an investor interact freely and periodically, an investor is able to understand the predicaments which the Company might be grappling with and thus might be able to mentor and provide guidance to the Company.
Networking and collaborations: With their varied experience in the eco-system, an investor is also generally better placed to be able to connect the founders with the right resources for meaningful collaboration and business partnering by offering the founders with better networking opportunities.
Funding requirements: Based on the Company’s growth and expansion plans, the investor might infuse additional funds or connect the founder with other investors.
Approach
To sum up, sharing of information is in the best interests of both the investor as well as the Company. Restricting the flow of information shows lack of transparency which does not inspire confidence in the mind of the investor. On the other hand, investors must not hinder the operations of the Company by placing unreasonable demands or setting unreasonable timelines on the Company.
Investors on their part can let the Company focus on its core operations without burdening the Company with unreasonable demand for data.
Author
Mansi Handa
