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http://www.businessworld.in/article/Challenges-In-Protecting-The-Rights-Of-Minority-Shareholders/02-01-2018-136149/ Page 1 of 5
Challenges In Protecting The Rights Of Minority Shareholders-Puneet Rathsharma, Kunal Mehta - BW Businessworld 1/4/18, 10(02 AM
It is not uncommon for controlling shareholders to take actions that are not
in the best interests of the minority shareholders. This includes entering into
unauthorised related party transactions, diversion of company funds, starting
another business, and soliciting existing customers and suppliers, deliberate
reinvestment of profits to deny the minority shareholders of returns, paying
high remuneration and perquisites to the directors, and employees appointed
by the controlling shareholders. A report highlights the quantum of corporate
fraud from 1997 to 2012 in India at a staggering INR 43,815 crore, out of
which 36% of the incidents involved siphoning of funds by promoters / top
management, and 13% of the incidents related to defrauding investors.
The Companies Act, 2013 has introduced various provisions to safeguard the
interests of the minority shareholders. Minority shareholders can move the
National Company Law Tribunal, if the affairs of the company are being
conducted in a manner prejudicial or oppressive to shareholder(s), or to seek
an investigation into the affairs of the company. While the aim of these
provisions are to protect the interests of the minority shareholders, efficient
implementation of these provisions is still a challenge. Practically, since the
management of the company continues to remain vested with the controlling
shareholders, the minority shareholders may not be able to obtain sufficient
evidence, including information, accounts, or records to substantiate their
claim for a wrongdoing. Further, the efficacy of remedies under the
Companies Act, 2013 remains to be tested, and traditionally, litigation based
remedies have proven to be long drawn and expensive. Additionally, the
entire cost of the litigation has to be borne by the shareholder who files the
claim, but the shareholder only gets a proportionate indirect benefit of a
successful claim.
When venture capital and private equity investors, acquire a minority stake in
http://www.businessworld.in/article/Challenges-In-Protecting-The-Rights-Of-Minority-Shareholders/02-01-2018-136149/ Page 2 of 5
Challenges In Protecting The Rights Of Minority Shareholders-Puneet Rathsharma, Kunal Mehta - BW Businessworld 1/4/18, 10(02 AM
a company, they obtain certain contractual rights from the promoters, who
are generally the controlling shareholders. These contractual rights are
commonly specified in the shareholders' agreement ("SHA"), and generally
include the right to proportional board representation, veto rights on certain
matters, and information and inspection rights. Though these rights are
important to safeguard the interests of the minority investors, the
management of the company continues to vest with the promoters, and there
is limited ability to object to poor management decisions. The right of board
representation is also effectively nullified by the promoter's right to appoint
majority directors. The veto rights can be used by the minority investors as a
reactive right to block certain corporate actions, without necessarily
conferring any affirmative right of guiding the management. Further, the
information and inspection rights granted to the minority investors under the
SHA are generally restricted to documents such as statutory records, periodic
filings, books of accounts, and may not provide the investor the access to
underlying documentation that may be necessary to uncover fraudulent
conduct.
The SHA also provides for exit rights to the minority investors. Practically,
the SHA is not always strictly followed, and exit rights available to minority
investors end up remaining on paper. An exit depends on the willingness and
financial wherewithal of the company and the promoter, with the only
remedy for promoter's non-compliance with its obligations under the SHA,
being a long-drawn dispute resolution process. If the promoter and the
minority investors are at loggerheads, the promoter can make it difficult for
the investors to get an exit. If the company is not performing well, it even
becomes difficult to find a third-party purchaser. In many instances, a
minority investor may just have to see the company's value deteriorating as a
silent spectator.
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Challenges In Protecting The Rights Of Minority Shareholders-Puneet Rathsharma, Kunal Mehta - BW Businessworld 1/4/18, 10(02 AM
The rights of the minority shareholders can truly be protected only when the
controlling shareholders recognize that they have legal obligations to all
shareholders, and that they should engage with the minority shareholders
during the decision-making process. Controlling shareholders should also
provide adequate opportunity to minority shareholders to redress their
grievances. The board needs to adopt a more rounded approach, and aim
towards preserving the value of the company rather than catering to the
interests of the controlling shareholders.
http://www.businessworld.in/article/Challenges-In-Protecting-The-Rights-Of-Minority-Shareholders/02-01-2018-136149/ Page 4 of 5
Challenges In Protecting The Rights Of Minority Shareholders-Puneet Rathsharma, Kunal Mehta - BW Businessworld 1/4/18, 10(02 AM
The views expressed in the article above are those of the authors' and do not
necessarily represent or reflect the views of this publishing house. Unless
otherwise noted, the author is writing in his/her personal capacity. They are
not intended and should not be thought to represent official ideas, attitudes,
or policies of any agency or institution.
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