VIVEKANADA INSTITUTE OF PROFESSIONAL STUDIES

Department
VIVEKANANDA SCHOOL OF LAW AND LEGAL STUDIES

Shareholder activism as a new facet of

corporate governance in India-a critique

Submitted by- Reeya Prakash

Enrollment no. - 00717703819

Semester- 5

Section-A

Subject – Corporate Law

Submitted to-

Prof. Dr Neelam
INDEX
1. Introduction
2. Shareholder Activism: the concept
2.1 Who is a shareholder?
2.2 . Collective Action Problems; Shareholder Apathy
2.3 Defining the Concept
3. Regulatory Reforms towards Greater Shareholders Participation
4. Recent Trends of Shareholder Activism in India
5. Power and Effectiveness of Shareholder Activism
6. Conclusion
 1. Introduction
A significant thrust has been seen in the last few decades towards the enriched corporate
governance standards in India. Some of this may regarded as caused by globalization of
governance practices which had affected Indian Companies, regulatory reforms which are
directed by SEBI have also involved in this. Since 2000, SEBI has required public enlisted
companies to install well-recognized governance structures and mechanisms.. These include a self-
governing audit process, an autonomous board of directors, and authorization of financial statements by
the chief financial officer and chief executive officer etc. While, the existing principles are said to be
far from the desired governance practices.

In most of the Indian Companies due to the encouragement of controlling shareholders, one of
the significant drawbacks in the current usual requirement is the lack of shareholder activism,
specifically amongst marketing and institutional investors having minority stakes. This
recognized shortcoming in Indian Corporate governance seem to be resolving through the
beginning of shareholder activism in the Indian corporate sphere, whose efforts have been further
buoyed by regulatory reforms.

Previously the phenomenon of shareholder activism was absent in Indian corporate sphere but it
has rapidly mark its beginning and has become a force to reckon with for Indian listed
companies. Several countries have made modifications by conferring greater powers in the hands
of shareholders, consistent with the modification recently in India also governing developments
have indicated greater participation of shareholder in the companies in the form of postal ballot
an e-voting etc.

Proxy advisory firms which were previously non-existent phenomena in India had a speedy
explosion. It bestows shareholders with the necessary guidance to exercise in a well versed
manner their corporate franchise. The upheaval in corporate boardrooms in India has been
initiated already because of the existence of activist institutional shareholders for instance hedge
funds and private equity funds. While these developments facilitate in the transformation of
corporate governance, shareholder activism encounters certain operational and formal
weaknesses within the Indian markets. In most of the Indian companies the domination of
controlling shareholders utilizes to lessen the effects of shareholder activism. The institutions
and legal system in India are not encouraging to provide cost effective and timely remedies to
shareholders who go for litigation approach to counter managements that are alleged to act
contrary to shareholder interests. In research paper finds that although in Indian markets
shareholder activism is becoming substantial but its impact as a degree of corporate governance
is far from clear.

2. Shareholder Activism: The Concept

2.1. Who is a shareholder?

Any person, company or other institution that owns at least one share of a company’s stock is a
shareholder. Shareholders are owners of a company. A shareholder may also be referred to as a
"stockholder". There is no personal liability of corporate shareholders for the debts and other
obligations of the company. Also the major role in running the company is not of the corporate
shareholders. Common stockholders are, however, able to vote on corporate matters, preferred
stockholders usually do not have voting rights. When the company gain profit and perform well
the shareholders also get benefit and its share price increases, and they also have the right of
trading their share on stock exchange, due to which stock is a highly liquid investment.

2.2. Collective Action Problems; Shareholder Apathy

In large public listed companies, the non-promoter or public shareholders due to relatively
having modest stake does not have sufficient incentive to work together and organize coalitions
for effectively participate in decision making of companies. Even, the controlled companies
which are predominant in India prevents the minority shareholders from coming together due to
collective action problems which lessens their meaningful participation by the exercise of
corporate franchise. Related to the collective action problem is “shareholder apathy”. Since there
is higher cost for the coordination among minority shareholders, either these shareholders refrain
from voting or merely vote in support of management or the controlling shareholder as the case
may be.

2.3. Defining the Concept

Shareholder activism is considered to be a set of “proactive efforts on the part of shareholders to

change firm behaviour or governance rules.” It denotes the efforts of investors to impact the
behaviour of management in governing the company. Activist investors are those investors who
if they are dissatisfied with some facets of management or operations of company, they make an
effort to bring about change within the company without making change in control. Passive
investors are those, who if get dissatisfied with the decisions of management or controlling
shareholders, they sell their shares and exit from the company.
The most important shares of shareholder activism are participative shareholder activism,
interactive shareholder activism. An extended version of such interactive type brings us to the
third category where shareholders adopt a combative strategy

In participative shareholder activism, there is active participation by the shareholders in

corporate franchise through exercising in the meeting their votes. Although minority
shareholders have minute shareholding in the company but on account of their overwhelming
participation cannot be ignored and the course of management go through a change.

The second type of activism is interactive shareholder activism. It involves direct engagement by
the shareholders with the management. Large institutional shareholders interact with the
management and an assessment of affairs is obtained by them of the company. Such interaction
take place in case when a company undertakes a major transaction or when the shareholders are
not convinced by the adopted direction on any matters, or suffer from a adverse material effect.
They interact to obtain information or convince the management of any strategy or change. The
drawback of interactive activism is that there is no legal obligation on the management and
controlling shareholders to interact with shareholders.

Third category, shareholders adopt a combative strategy. This involves attempt to overthrow
incumbent management by the processes such as proxy fights or hostile takeovers which results
in a change in control of the company. More aggressive form involves the initiation of litigation
against the company, its board and management.

3. Regulatory Reforms towards Greater Shareholders Participation

The new Capital Market rules and Company Act 2013 has enhanced the participation of
shareholders in India. These regulations have help in empowerment of the minority shareholders
and now they can actively defend their interest and can make their views known. The
participation of shareholders in company’s management has enhanced by following ways:

a. Electronic voting

Under Company Act 2013

Section 108 of the Company Act 2013 provides that the Central Government can prescribe to
the companies the manner in which the members can exercise their right to vote by electronic
means. Additionally, video conferencing connectivity may also be provided by the
companies in at least five locations in India during such meetings.

The general meeting of company usually occur at the company’s registered office which
made it difficult for the shareholders to travel to such location. Specifically members with
few shares find it pointless to travel long distances to cast their votes. This problem has been
 eliminated by e-voting and now vote can be cast by the shareholders electronically and they
can participate in decision making policy of a Company.

Under SEBI Regulations

In July, 2012 SEBI has made amendments in the listing agreement requiring to provide
e-voting facility by large companies concerning the matters requiring postal ballot.
According to this exemption of rules, now the top five hundred companies on the Bombay
Stock Exchange and the National Stock Exchange provide electronic voting facility and this
is speedily being extended by all listed companies.

b. Approval of related party transaction by minority shareholders

Section 188 of Company Act 2013 provides the requirement of consent of a Board of
Directors by a resolution for a Company to enter into any contract or arrangement with
related party. There should be mention of such contract or arrangement in the Board’s report
to the shareholders along with the justification for entering into such contract or
arrangement1. Where any director or any other employee has entered in any contract or
arrangement without securing the consent of the board or by getting approval through special
resolution in general meeting and in case it does not get ratified by the board or by the
shareholders within three months at a meeting from the date of entering into such contract or
arrangement , then such contract or arrangement at the option of the Board and if the contract
or arrangement is with a related party to any director, or is authorized by any other director,
the directors concerned shall indemnify the company against any loss incurred by it.2

c. Class Action Suit

The SEBI (Investor Protection and Education Fund) Guidelines, 2009, provides that SEBI
can aid investors in undertaking legal proceedings that are in the interest of investors at large
in the company that is listed or proposed to be listed. Section 245 of the Companies Act,
2013 provides for class action suit. Section 245 of the Companies Act, 2013 provides for
class action suit. This can also regard as a feature of shareholder activism as the shareholder
activism involves proceedings for mismanagement against the management of company. The
provision for class action suit enables aggrieved shareholders to enforce their rights by
proceeding against the management. It is due to the provision of class action that the minority
shareholders become active watchdogs of company and not merely helpless spectators. Thus,
a mechanism through which the shareholders have a path for enforcement of their rights can
also be considered as shareholder activism.

1
Companies Act, 2013, sec188 (2)
2
Companies Act, 2013, §188 (3)
d. Participation of Institutional Investors

The Government of India and SEBI have made great efforts to encourage participation of
mutual funds in corporate decision making. In 2010, SEBI has pass a circular to mutual funds
for requiring them to have a crucial role to exercise in a responsible manner their voting
rights in the investee company. Furthermore, the circular provide that to disclose annual
reports and general policies concerning the exercise of votes in the listed companies on their
websites by the asset management companies of mutual funds.

e. Proxy Advisor Industry in India

Since 2010, the proxy advisory industry has bloomed in India. Several recommendations
concerning corporate proposals with respect to various listed companies in India have
published. Their recommendations includes the appointment of auditor, proposals of
company concerning appointment of directors (especially independent directors) and major
corporate transaction such as takeovers and mergers. The recommendations made by proxy
advisor firms have shed greater light on corporate proposals and motivating minority
shareholders to overcome shareholder apathy and collective action problems and for active
participation in corporate decision making. Management and controlling shareholders can no
longer ignore the minority shareholder’s influence.

f. Mismanagement and oppression

Section 241 of the Companies Act, 2013 provides that an application can be filed by any
member including minority shareholders of the company before the tribunal if company’s
affairs are conducted in prejudicial manner and in oppression. The Central Government can
itself apply to the tribunal for an order in case it is of the opinion that company’s affairs are
conducted in prejudicial manner to the public interest.

g. Appointment of director elected by small shareholders

It is a requirement according to section 151 of the Companies Act, 2013 that the small
shareholders should elect one director in the manner and with terms and conditions
prescribed by the Central Government. Small shareholders includes shareholder having
shares of nominal value which should not be more than twenty thousand rupees or any other
sum which may be prescribed. This provision gives power to the small shareholders to elect
 director which can be said as a facet of shareholder activism as the small shareholders are
getting more power.

4. Recent Trends of Shareholder Activism in India

In 2018, the recommendations put forward by the Kotak Committee under the chairmanship of
the Managing director; Mr.Uday Kotak of Kotak Mahindra Bank was accepted by SEBI. The
formation of this committee is for reason of revising the changes to the Companies Act,2013 and
SEBI’s LODAR 2015, as these had many drawbacks which leads to various scams and scandals
in the corporate sector causing havoc of country’s economic growth. The focus of the committee
was on two main objectives which are-

a. Focusing on long term value creation.

b. Protecting the interest of shareholders properly.

The changes which were recommended by the committee and implemented by SEBI are:-

 Auditor related disclosures such as appointment or reappointment of auditors, fees

payable to the auditor, basis of recommendation for appointment of auditor, reason for
resignation by the auditor, credentials of auditors, all has to be informed to shareholder
for an Annual General Meeting (AGM)
 Approval of shareholder by special resolution is required for all related party transactions
and there should not be involvement of shareholders of related party during voting.
 Approval of shareholders is required for the payments of more than 2% consolidated
turnover by listing entities to other entities.

SEBI have accepted these recommendations to be amended in the listing agreement.

Nevertheless, shareholder activism is not regulated. In India there are no particular guidelines for
shareholder activism. The participation of shareholders has been increased during this Covid-19
crisis by virtual Annual General Meeting and Extraordinary General Meeting.

5. Power and Effectiveness of Shareholder Activism

In Indian law, it is mainly directors who mange the affairs and take decision s for the company.
In internal matters of a company there can be influence or interference by any third party, certain
powers are granted to the shareholders holding shares to keep the management and board in
check. One of the recent instance of role of Shareholder Activism is of 2018 on the month of
May, when the two major Fortis Healthcare Ltd’s shareholders having 12% of shares of
company successfully remove a director and appointed new three independent directors to the
board as they were dissatisfied with the ongoing sale process of the company. This is a
significant case reflecting the rise of shareholder activism, showing the power of shareholders
having the ability to change the composition of the board, Hence affecting directly the
management of the company.

Minority shareholders in India experience major oppression and mismanagement in the

companies. They face such oppression mainly in close corporations such as family-run business
or private companies where they are most powerless because unlike shareholders of public listed
companies, such shareholders lack the option of exit if they were dissatisfied with the
management of shares and funds in the company. Therefore the Companies Act, 1956 and
Companies Act, 2013 have provisions to protect the interest of minority shareholders. Redressal
to minority shareholders is available if it is demonstrated that the majority shareholders and
management has mistreated them. Variety of transaction can be influenced which need special
resolution approval by the minority shareholders having more than 25% of voting power of
company.

The remedy of class action suit is available to the shareholders to be filed before the National
Company Law Tribunal on behalf of the company in case of any mismanagement, fraud
practices or oppression is seen in the company. In the case of JM Financial Asset vs. SEBI 2019,
ITC challenged the asset sale of Leela Hotels to Brookfield. ITC is a non-financial investor, and
Life Insurance Corporation, a state- owned insurer, as certain shareholders cannot vote in support
of the sale as they were related parties. This challenge and the appeal subsequent to it were
dismissed; still it represents the extent of shareholders stating their privileges have increased
now. Yet again in a recent event in the context of Merger & Acquisition observed a shareholder
campaign, on December 2019 where an offer has been made by Reliance Industries Ltd (RIL) to
the shareholders of Reliance Retail Ltd (which is a subsidiary of RIL and not listed In stock
market) for a share swap scheme of one RIL share in exchange of four Reliance Retail Ltd’s
share. A threat was made by the minority shareholders to challenge in court this scheme on the
grounds of not providing any exit options for the shareholders due to which RIL were forced to
take back the mandatory share swap scheme and make it optional for the investors in January
2020.

These examples represents that shareholders are now not merely going for exit options but they
are practicing their rights in cases when company is making losses due to fraudulent practices or
mismanagement exercised by the board.
 6. Conclusion

This research paper traces the development of shareholder activism in India. Previously the non-
existent phenomenon has been pave the way into Indian corporate governance within a period of
the last few years. It has been promoted by the regulatory reforms that helped in greater
participation of shareholders in corporate decision-making. More than that, a market
environment for activist investors and corporate governance intermediaries has speedily taken
shape in India. The rapid increase of proxy advisory firms issuing recommendations regarding
the hundreds of Indian listed companies, and prominent examples of institutional investors such
as hedge funds confronting Indian managements is exemplary of the trend.

However, the corporate structure and legal system in India offer considerable resistance that
prevents full utilization of the benefits of shareholder activism. The existence of controlling
shareholders in most Indian companies cushions the impact of activist investors.

Shareholder activism is at developing stage and it comes forward only in occasions where the
institutional investors having significant stake are in a spot to object the quality of corporate
governance. Generally, there is lack of awareness in minority shareholder of the means by which
they can exercise their rights for enhancing good corporate governance practices, increased
activism on the part of shareholders is extremely important. The exercise of rights by the
minority shareholders in terms of shareholder activism can be regarded as a step to make sure
promotion of corporate governance.

The landmark Companies Act, 2013 has present an impressive framework for enhancing the
accountability of firms towards the shareholders, but corporate governance‘s provisions will only
have effect if the shareholders begin to exercise their rights.

The need for shareholder activism can be brought out by analyzing the issues that are a setback
in enforcement of the rights by the shareholders. For instance, the shareholders don’t exercise
their rights and abstain from voting. This is the most serious reason for the lack of shareholder
activism in India. The regulatory system in India is not considered effective enough and the
extent of time taken in resolving a grievance of a shareholder act as a major drawback.
7. References

a. https://blog.ipleaders.in/shareholders-activism-india
b. https://thecompany.ninja/shareholder-activism
c. https://allindialegalforum.in/2021/07/28/the-role-of-shareholder-activism-in-
revolutionizing-corporate-governance/
d. https://uk.practicallaw.thomsonreuters.com
e. https://www.legalserviceindia.com/legal/article-3006-shareholder-activism.html
f. https://www.scirp.org/journal/paperinformation.aspx?
g. Shareholder-s-Activism-in-India.pdf
h. https://www.activistinsight.com/research/Shareholder%20activism%20in
%20India_090816105539.pdf