CURIOUS CASE OF BLOCKCHAIN TECHNOLOGY IN CORPORATE GOVERNANCE

[Anshuman Singh is a law student at Government Law College, Mumbai}


Introduction


Bitcoin and Blockchain the technology behind it have been the talk of the town and we now seem to be at a crossroads in which this technology offers a shift in our economy, culture, and society. Blockchain is a shared immutable ledger that records transactions and assets, the blockchain ecosystem aims to build decentralized, disintegrated, and distributed technology. Blockchain technology has three distinct and essential characteristics which are; it is transparent, meaning each user can see all the transactions entered on the blockchain since its creation. Secondly, blockchain technology is secure, it is built on cryptographic techniques of private-public keys which makes it an impregnable fortress. Lastly, blockchain is decentralized, meaning it works on a peer-to-peer network where each user has a copy of the decentralized ledger on his or her computer.


Blockchain technology is already widely used for exchanging, fundraising, and for purchasing cryptocurrencies but additional applications like digital asset transfers, smart contracts, and registries also exist. Blockchain technology presents a possible innovation in our traditional Corporate Governance practices, unlike the present system which is prone to hacks and is a cause for security concern much like the recent Air India data breach. . Blockchain or distributed ledger technology will create an everlasting change to our Corporate Governance practices.

Blockchain as a tool in Corporate Governance

Corporate governance has been in the spotlight for over the last few years and is one of the most essential parts of a corporate organization. There have been many cases of failures and scams in the corporate sector due to lack of proper disclosure, less transparency, presence of ineffective internal audit and another one of major problems in corporate governance is often the disputes between the management and shareholders of a company which results in great financial losses. The main characteristics of a company are; limited liability, distinct legal personality, transferable shares, centralized management under a Board, and investor ownership. Allocation of powers in hands of the owners that are shareholders is unfeasible because shareholders of a company constantly changing. Hence the decision-making power is largely vested in the Board of Directors by Company law. Due to such a system, shareholders are left with virtually no powers and have to depend on the Board of Directors to operate the company for them but the interests of the Board can diverge from that of their shareholders, this problem was also mentioned by Adam Smith in his book Wealth of Nation.

Blockchain technology is changing our traditional practices and strategies for corporate governance. Blockchain-based information storage and record-keeping can be faster and more transparent because of the decentralized nature of blockchain than any other present alternative.

Thus, it doesn't come as a surprise that many corporations are now using blockchain technology to advance their corporate governance. The basic benefits that blockchain brings to corporations are increased efficiency by removing administrative burden, mitigating the risk for fraud and it also provides greater transparency to the larger public. Several stock markets around the globe have started testing with blockchain technology for companies to list, trade, and vote their share which grants added advantage to the shareholders, as it leads to greater transparency in the process, faster transfer of ownership, and much less risk of fraud.

Shareholders, Recordkeeping, and Voting

According to Company's Act 2013, shareholders are the owners of the company and they control it through the exercise of their voting rights. Shareholders merely are not the persons who have title to the company but also those who fulfill the information-producing rules that make the crux of corporate law. The law also requires shareholders to approve corporate actions by way of special or ordinary resolutions.

  • One of the major fear amongst investors in purchasing shares of a company is the company's inability to provide accurate and real-time data of share-ownership. This compels the share-holders to trust the companies for the preservation of all their details, data and to inform about the ownership status which becomes a problem especially when larger companies are more prone to data breaches and hacking attempts. Blockchain could allow companies to keep a comprehensive record of all of their shareholders and their transactions on a secure, transferable, and immutable ledger and provide a transparent overview of ownership.

  • Blockchain technology can greatly increase the transparency of a company. Shareholders using blockchain technology could offer a visible real-time observation of their stocks, more transparency in the transfer of stocks from one owner to another, and also lower costs of trading. Public issuing and transfer/trading of stocks can be noted and verified on blockchain replacing the intermediaries with a self-regulated system. Blockchain technology has significant potential in managing company information related to shareholders. As shown by the Delaware Blockchain initiative, Delaware (a state in the U.S.) has already started using and implementing blockchain technology in maintaining its records of shareholders. The Delaware code demonstrates that blockchain can provide a distributed registry of members and under this code, companies would be able to provide shares digitally that would provide transfer of shares in real-time and further reduce transaction costs.

  • Shareholder participation in the affairs of a company is a quintessential part of good corporate governance. The electronic voting system currently in use has not proved to be a good solution for shareholder's participation in decision-making for the company. A major design flaw with an electronic voting system is that it's centralized and thus prone to data breaches. This design flaw is therefore hindering the adoption and implementation of electronic voting as much as it should in this age of computer and technological advancements. Unlike the present system which is a proprietary system, which is centralized by design Blockchain is decentralized, open-source, and distributed ledger technology -that offers a more secure alternative to its counterpart.

Blockchain in shareholder voting is still in its nascent and exploratory stages but it is feasible in this area. Blockchain technology also has the potential to offer a permanent solution to the traditional problems associated with accurate and timely vote confirmations. The implementation of a voting system using blockchain technology can be very beneficial to corporations, the benefits include low costs and increased efficiencies. Further, it also can resolve concerns with over/under voting, investor anonymity, and distribution costs according to the Report submitted by working on issues related to Proxy Advisors, Guide to SEBI)

Insider Trading

Insider Trading deals with a company's security with the help of confidential information which has not been made public by the company for a profit or loss. Section 12A of the SEBI Act,1992, prohibits insider trading that is necessary to make the securities market fair and transparent and it also helps all the investors be on a level playing field. Classic insider trading is based on a direct relationship between shareholders and management of a company and is a securities fraud. In cases like Reliance Industries Limited (RIL) Vs SEBI and Hindustan Lever Limited (HIL) Vs, SEBI, SEBI conducted an investigation and have stringently sought penal actions against companies involved in Insider Trading. According to SEBI's Insider Trading Regulations 1992 all directors, Key Managerial Persons, officers, and substantial shareholders in a listed company have to disclose information to the company to prevent Insider Trading but even after all these regulations and bodies to keep Insider trading in check it is still rampant in the corporate sector.

  • If stock/share transfers are recorded on a public blockchain it may be harder to conceal than on current electronic ledgers. If a company's shares are listed on a public blockchain, they can be observed by the public in real-time at any time. Concealment would be easier if the company were to list its shares on a private blockchain. Even in a private blockchain, it would create more holistic and real-time information of the shares of a company which is much better than the current scenario. Further, Government's access to these blockchain models on which trades are recorded will deter any unlawful activities. Blockchain, Corporate Governance, and Lawyer's role

  • Blockchain technology offers a new solution to an outdated system that has compelled corporate lawyers to not focus on what matters and be stuck dealing with administrative deadlock. It offers to optimize corporate governance and provide more transparency and better protection for the shareholders. Increased share ownership transparency will bring about a leveled playing field in corporate governance and increase stakeholder's participation in the affairs of the company.

The Way Ahead

Blockchain is a very promising technology yet it is still emerging and thus has several weaknesses. These weaknesses if exploited could cause great harm and thus appropriate regulations must be put in place to abate some of these weaknesses. Many countries have started to implement regulations on blockchain technology so no person can harm another because of blockchain. French legislators have already introduced the definition of blockchain in French laws by passing two ordinances and in doing so France has become the first country to officially recognize blockchain technology in the field of financial securities (Regulations of Cryptocurrency: France). In the United States, while cryptocurrency and blockchain haven't been officially regulated, the SEC has important precedents and other securities judgments to rely on. Agencies like IRS (Internal Revenue Services), FTC (Federal Trade Commission), etc. are also trying to regulate blockchain.

In India currently, there is no regulation or law to regulate Blockchain technology. The current legal framework of India is not at par with other countries for the widespread introduction and implementation of blockchain technology the lawmakers will have to consider how the jurisdictions in technology laws apply. The introduction of Blockchain and Cryptocurrency has given rise to a need and that is a development of the technology in harmony with the law so that no person is injured or suffers a loss due to malicious use of the technology. Corporate governance could change in many ways shareholders, investors, directors, etc. could benefit a lot from implementing Blockchain but for a harmonious development of Blockchain and with it our corporate governance we need an effective regulatory system.

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