The recent flurry of crises disconcerting the corporate sector at the global stage has triggered a new wave of governance reforms, calling for the better empowerment of both individual and institutional shareholders. India Inc seeks to benefit from such reforms as there aren’t many other countries where curtailing shareholders dominate the corporate landscape. Unswerving with reforms, several countries today are seeking to vest greater power in the hands of shareholders. The recent regulatory advances in India are a testament to the preceding statement as they clearly indicate greater prospects for shareholder involvement through various instruments.
Quick multiplication of proxy advisory firms, which previously was a hypothetical phenomenon in the country, confer shareholders with the needed advice to exercise their rights in an informed manner. The dominance from a surfeit of shareholder activists have already played a decisive role in causing a mayhem in some corporate boardrooms across the country. And while these developments make their share of contributions towards a transformation in the tone of the governance debate, shareholder activism continues to contend with the structural weaknesses rooted in the Indian markets.
The common practice of controlling the investors in most organisations across the nation is dampening the effects of shareholder activism. The state of the judiciary system in the country owing to the high density of the nation isn’t conducive to render meaningful provisions for shareholders in a timely manner, leading them to resort to a hard-pressed litigation process to counter company managements that often have a minimal view of their shareholders’ interests. The simple question that follows is “Does the prevailing legislature in the country have enough provisions to protect the interest of the investors?
Numerous legislations in our country provide for several rights and remedies of the shareholders. Some of the most commonly used under the Companies Act 2013 are:
Board Involvement: The Act enables small shareholders to seek the appointment of a minority shareholder representative on the board of listed organisations. Correspondingly, through an ordinary resolution i.e., simple majority votes cast in favour, directors can also be removed by shareholders.
Class Action: The Act also endows shareholders the right to initiate class action suits if they have reasons to believe that the internal affairs in an organisation are being conducted in a manner which is prejudicial to the interests of the organisation or its shareholders. Such a petition against a company would require the support of at least 100 shareholders or 10% of the total number of shareholders, whichever is lower, or any shareholder holding at least 10% of the shareholding of that company.
Shareholder Approval: Furthermore, under the Act, several statutory matters require prior approval of majority of shareholders including, related party transactions, payment of non-compete fee, investments and borrowings beyond specified thresholds, executive remuneration beyond prescribed thresholds, sale of an undertaking of the company, amendment of the constitutional documents of the company, and issue of new shares.
Even though shareholders in India Inc have only witnessed a few successes in their fights against companies, it should trigger further interests from investors in playing an active role in the management of companies. The Uday Kotak committee in its report recommended harsh penalties for auditors in case of any lapses, protection to whistle-blowers, stern regulations for independent directors, webcasting all shareholder meetings and an introduction of a stewardship code to monitor the engagement of the institutional investors with their investee companies. While shareholder activism in India is still in its nascent stages, the recent slim success rate shall not dissuade activist shareholders from voicing their concerns in the future. It would be fitting to conclude by stating that the recommendations by the Uday Kotak committee, when implemented, would take the shareholder activism movement to unprecedented heights across the Indian corporate landscape.