Name- Ankita Sengupta
College: School of Law, KIIT University
This article explores the impact of shareholder activism on corporate governance in India. Power of the shareholder’s rights and the use of its rights in bringing revolutionary changes in the composition of the board are commendable. With the better implementation of mandatory rules in governing a corporate, organizations have shown better firm values, better decisions, eliminating malpractices within the organization, higher sales and lesser mergers and acquisitions. This paper brings in the recent trends of shareholder activism in India, the power and effectiveness of it and the overall enhancement and thus revolutionizing the structure of corporate governance in every corporate scene.
Keywords: Corporate Governance, Shareholder Activism, Shareholder Rights, Companies Act, Listing Agreement.
In India, Corporate governance is how corporations are directed and controlled. It is a tool used to protect the company, its stakeholders, employees and customers from being subjected to unfair practices within the organization. The vision and objective of any organization hold the actual value which is the ultimate goal of all the members of the company. After Independence, there has been an increase in corruption in the corporate sector which affected the growth of the corporate sector. With the emergence of new and fast-growing businesses facing corruption and nepotism, a corporate governance structure has mandatorily been introduced for companies with large turnovers. Any organization’s ability to allocate its fund and have a secure method of allocation is determined by the right corporate governance. A shareholder of a company is an investor who is a part-owner of the company. The decisions taken by the board will affect the shareholder of the company. That is why the emergence of shareholder activism in corporate governance has been a rising trend that aims at providing value to shareholder’s opinions on the company board, comprising both majority and minority shareholders.
BACKDROP OF THE EMERGENCE OF SHAREHOLDER ACTIVISM
Shareholder activism is defined as “the exercise and enforcement of rights of shareholders to enhance shareholder value over the long term.” Many believe that shareholder activism, especially institutional-investor activism, aids in the development of good corporate governance because investors can fill the void in managerial monitoring.
The board of a company is divided into a hierarchical flow of command and decision making where shareholders are at the bottom of the stair. No shareholder, whether an institution or a private person has been able to bring about changes at the board level. In 1999, the Security Exchange Board of India (SEBI) set up a committee called the Birla Committee to set up norms of corporate governance for all companies listed in the stock exchange. The committee’s main objective was to set up Corporate Governance norms as per the interests of shareholders and Investors. Shareholders ought to have certain rights and obligations in the working mechanism of any company. A strong corporate structure is a kind that allows shareholders to have a powerful presence in the company’s administration while requiring an exclusive standard of corporate behaviour without getting involved in the day-to-day operations. (Birla Committee Report Para 14.1)
RULES GOVERNING SHAREHOLDER RIGHTS
SEBI has been the governing body that regulates corporate governance in the listed companies’ space. Any company which is publicly listed on the SEBI website is mandatorily subjected to the rules and laws of corporate governance. The Companies Act, 2013 is the main governing legislation that regulates the laws related to governance in a company inter alia the constitution of the board which includes the appointment of Independent Directors, Women directors, application of decision, the hierarchy of the management of the company, constitution of committees, powers and responsibilities, rights of a shareholder and inspection of financial statements. Primary regulations of Corporate governance are set by the SEBI (Listing Obligations and Disclosure Requirements) regulations, 2015(“LODR Regulations) which imposes nuances of compliance to the companies listed. Clause 49 of the Listing Agreement introduced in 2004 lays down rules regarding shareholder rights and duties. This improved shareholder activism aims at making the shareholders and stakeholders more involved in the functioning of the company by taking decisions. This protects the well-being of the shareholder, the rights of the shareholder and encourages the company from taking fast-paced decisions.
The following are the rights of Shareholders under Clause 49 of Listing Agreement (G):
- Shareholders must be provided with the data of the candidate up for the appointment of director or re-appointment of director specifying the details needed.
- Quarterly outcomes and introductions made by the organization to analysts will be put on the organization’s website.
- A board committee for the shareholders to be formed to address grievances faced by the shareholders and Investors.
- Right to get information and update regarding share transfer.
However, under the Companies Act,2013 the day to day functionalities of the company is managed by the Managing Director of the company under whom the overall supervision is vested. But for matters which are material in interest to the company, the law requires shareholders to approve of any transaction or action by ordinary or special resolution. Shareholders under recommendations of various committees like the Birla Committee under the chairmanship of Mr Kumar Mangalam Birla, Mr Narayana Murthy and Mr Naresh Chandra, have made valuable recommendations that have been largely implemented in companies for the application of good governance. Shareholders have the right to appoint or remove directors from the board thus, influencing the decision making of a company by simple resolution. They also possess the right to approve matters of a critical transaction, amendments to charter documents, entering into new businesses or Related Party Transactions, into mergers or acquisition decisions, sale of shares or undertakings etc. by special resolution. Shareholders exercise the right to discharge consequential influence over the board to be a person according to whose advice, direction and influence the board of directors is accustomed to act. The shareholders now have a major responsibility to see to the proper governance of the investee company and hold independent responsibility for the same.
RECENT TRENDS OF SHAREHOLDER ACTIVISM IN INDIA
In 2018 SEBI accepted the recommendations of the Kotak Committee chaired under Mr Uday Kotak who is the Managing Director (MD) of Kotak Mahindra bank. This committee was formed to bring in revised changes to the Companies Act, 2013 and SEBI’s LODR 2015, which saw many shortcomings leading to scams and scandals in the corporate world causing havoc for the growth of the country’s economy. The two main objectives on which the committee focused are – a) Focus on long term value creation and b) to protect shareholder’s interests properly. The recommended changes brought forward by the committee and implemented by SEBI are: –
- Auditor related disclosures of any like related to the appointment or re-appointment of auditors, basis of recommendation for appointment, credentials of the auditor, fees payable to the auditor and reason for resignation by the auditor has to be informed to the shareholder for an Annual General Meeting (AGM).
- All Related Party transactions are to be approved by the shareholder by special resolution with no involvement of related party shareholders during voting.
- Payments made by listing entities to other entities of more than 2% of consolidated turnovers will require the approval of shareholders.
These recommendations have been accepted by the SEBI to be amended in the listing agreement. Nonetheless, shareholder’s activism is not regulated. There is no particular guideline of “shareholder activism” in India. But with the enablement of virtual Annual General Meeting and Extraordinary General Meeting because of the Covid-19 crisis, increased shareholder participation is expected to be seen.
POWER AND EFFECTIVENESS OF SHAREHOLDER ACTIVISM
In Indian law, mainly directors manage and take decisions for the company and manage its affairs. Though no third party can influence or interfere in any company’s internal matters, shareholders holding shares in a company have certain powers to keep the board and management in check. One of the recent examples of the role of shareholder Activism is of May 2018 when two major shareholders of Fortis Healthcare Ltd holding 12% shares of the company were successful in removing a director from the board and appointing three new independent directors to the board because they were not happy with the company’s on going sale process. This is a significant case in the rise of shareholder activism as this reflects the power shareholders hold in changing the composition of the board thus directly affecting the management of the company.
In India minority shareholders face major oppression and mismanagement in companies. This mainly occurs with minority shareholders of close corporations, like private companies or family-run businesses where they are most vulnerable as the shareholders lack the method of exit option that other shareholders of public listed companies do if they don’t like the process of management of funds and shares in the company. Therefore minority shareholder interests have been protected under the erstwhile Companies Act, 1956 and the Companies Act, 2013. Redressal to minority shareholders is accessible corresponding to demonstrations of mistreatment by the Majority shareholders and management of the company. Minority shareholders with more than 25% of a company’s voting power can sway a variety of transactions that require special resolution approval.
Shareholders now have a remedy of ‘class-action suit to be filed on behalf of the company before the National Company Law Tribunal (NCLT), if any fraud practices, oppression or mismanagement is seen within the company. In 2019, the asset sale of the Leela Hotels to Brookfield was challenged by ITC in the case of J M Financial Asset vs. SEBI, 2019 where ITC is a non-financial investor, and Life Insurance Corporation, a state-owned insurer, because certain shareholders to the deals were related parties and hence could not vote in favour of the sale. This challenge and its subsequent appeal were dismissed, yet it represents that the degree of shareholders attesting their privileges has now extended. Again in a recent event of shareholder campaign has been observed in a Mergers & Acquisition Context, December 2019 where Reliance Industries Limited (RIL) offered the shareholders of Reliance Retail Ltd (a subsidiary of RIL, which is not listed in the stock market) shares of RIL in a share swap scheme of one share of RIL in exchange of four shares of Reliance Retail Ltd. The minority shareholders of Reliance Retail Ltd threatened to challenge this scheme in court based on not providing any exit options for the shareholders, thus forcing RIL to roll back the mandatory share swap scheme making it optional for investors in January 2020.
These examples show that shareholders are now exercising their rights and are not merely going for the exit option when the company is making losses because of mismanagement or fraudulent practices exercised by the board.
The emergence of good corporate governance is a necessity in the economic growth and as nascent as shareholder activism is present in India, it is evolving quickly and bringing changes to the dynamics of the functioning of the corporate governance mechanism in organizations. Shareholder activism in a company is now making its way into the top hierarchy spot of an organization and taking decisions and giving approvals for transactions that make valuable and important differences to the profitability index of the company.