This article is written by Shivam Dubey, a student of Christ University.

 Shareholders Activism is considered to be a set of “proactive efforts on the part of shareholder to change firm behavior or governance rule.” It signifies the efforts on the part of shareholders or minority shareholders to influence the management in governing the company. Shareholder activism can take shape in an atmosphere where the regulators demand that minority shareholder interests are protected. The Companies Act 2013, following revisions to Clause 49 of the Listing Agreement and other regulatory changes by SEBI have ushered in many changes that enhance the corporate governance landscape in India.[1] The requirements for greater degree of disclosures by companies aided shareholders to analyze particular actions and make better-informed decisions.

Need Of Shareholders Activism In India

In a large public company where shareholdings are diffused, while shareholders are the owner of the company, the managers control the company as shareholders are unable to participate in decision making due to collective action problems. Even in controlled companies, which are predominant in India, collective action problems prevent minority shareholders from, coalescing, which reduce their effective participation through the exercise of corporate franchise. In such a case, the lack of minority shareholders participation augurs to the benefit of controlling shareholders, and managers appointed with their concurrence. Related to collective action problem is “shareholder apathy”. Since the cost of coordination among minority shareholders is high, these shareholders are either abstains from voting or merely vote in favor of management (or controlling shareholders as the case may be). The continuous oppression of the rights of shareholders (especially minority shareholders) evolved the concept of Shareholders Activism in India.

Regulatory Reforms Towards Greater Shareholders Participation

Shareholders participation in India has been enhanced by new capital market rules and Company Act 2013. These regulations empowered the minority shareholders and now they can make their views known, and more actively defend their interests. Shareholders participation in the management of company has been enhanced by following ways:

1. Electronic voting

Under Company Act 2013

Section 108 of Company Act 2013 says that a Central Government may prescribe the class or classes of companies and manner in which a member may exercise his right to vote by the electronic means. Moreover, Companies may provide video conferencing connectivity during such meeting in at least five locations in India.[2] General meeting of company are held at their registered office, therefore it is very difficult for the shareholders to travel to such a location. In particular, members holding a few shares of the company find it futile to travel so far to cast their vote. E-voting has eliminated such problems and now shareholders can cast their vote electronically and participate in a decision making policy of a Company.

Under SEBI Regulations

In July, 2012 SEBI amended the listing agreement requiring large companies to provide electronic voting (e-voting) facility in respect of matters requiring postal ballot. According to this dispensation, the top 500 listed companies on the Bombay Stock Exchange and the National Stock Exchange now provide e-voting facility and this is quickly being extended by all listed companies.[3]

2. Approval of related party transaction by minority shareholders

Section 188 of Company Act 2013 requires consent of a Board of Directors by a resolution for a Company to enter into any contract or arrangement with related party. Such contract or arrangement shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.[4] Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a special resolution in the general meeting and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable 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.[5]

3. Shareholders Class Action Suit

Section 245 of the Companies Act 2013 empower the member, members, depositor or depositors or any class of them can file an application before the Tribunal on behalf of the members or depositors, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors.[6] Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.[7]

4. Participation of Institutional Investors

Greater efforts have been made by Government of India and SEBI to encourage participation of mutual funds in corporate decision making. In 2010, SEBI has enacted a circular to mutual funds requiring them to play an important role to exercise their voting rights in the investee company in a responsible manner. Moreover, the circular says that the asset management companies of the mutual funds to disclose on their websites their annual reports and their general policies regarding the exercise of their votes in the listed companies.[8]

5. Proxy Advisor Industry In India

Since 2010, the proxy advisor industry has blossomed in India. Within a span of 2 years three proxy advisor firms have been established in India, and they have already published hundreds of recommendation regarding corporate proposals relating to various listed companies in India. Their recommendation includes companies proposals relating to appointment of directors (especially independent directors), the appointment of auditors, and major corporate transactions such mergers and takeovers. No longer can management and controlling shareholders ignore the influence of minority shareholders. The recommendation of a proxy advisor firms have the effect of shedding greater light on corporate proposals, and of galvanizing minority shareholders to overcome collective action problems and shareholders apathy and to participate more effectively in corporate decision making.

6. Mismanagement and oppression

Section 241 of Companies Act 2013 says that any member of a Company (including minority shareholders) can file an application before the Tribunal if the affairs of the Company are being conducted in oppressive and prejudicial manner.[9] The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order.[10]

7. Appointment of director elected by small shareholders

Section 151 of the Companies Act 2013 requires that a listed company should have one directors elected by small shareholders in such a manner and with such terms and conditions as may be prescribed by the Central Government. small shareholders includes a shareholder holding shares of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed.

Conclusion

In a large Indian Companies, the Public or Private, shareholders have relatively small stakes and these do not provide sufficient incentives for them to act together and form coalitions to meaningfully participate in the decision making of the company. But, the recent Company Act 2013 and rules and regulations enacted by SEBI have protected the rights of Shareholders (especially minority shareholders). It galvanizes minority shareholders to overcome collective action problems and shareholders apathy and to participate more effectively in corporate decision making.

[1] Shriram Subramanian, Shareholder Activism In India, http://www.ingovern.com/wp content/uploads/2015/02/Shareholder-activism-in-India.pdf (Last accessed 10/04/15 at 12:55).

[2] Ministry of Corporate Affairs, Government of India, Green Initiatives In Corporate Governance- Participation by shareholders in General Meetings under the Companies Act, 1956 through electronic mode , General Circular No. 27/2011 (May 20, 2011).

[3] Security And Exchange Board of India, Amendment to the Equity Listing Agreement – Platform for E-Voting by Shareholders of Listed Entities, Circular CIR/CFD/DIL/6/2012 (Jul. 13 2012).

[4] Companies Act, 2013, §188 (2).

[5] Companies Act, 2013, §188 (3).

[6] Companies Act, 2013, § 245 (1).

[7] Companies Act, 2013, § 245 (2).

[8] Securities and Exchange Board of India, Circular for Mutual Funds, SEBI/IMD/CIR No 18 / 198647/2010 (Mar. 15, 2010)

[9] Companies Act, 2013, §241(1).

[10] Companies Act, 2013, §241(2).