Shareholder Activism in India

Shareholder activism is a phenomenon which has been gaining prevalence in India. It refers to a concept within corporate governance, where the shareholders of a company become more proactively involved in the functioning and management of the company that they have made investments in. While shareholders usually tend to be passive owners of the company they are invested in, shareholder activism comes into play when such passive players decide to bring about a change in the governance of the company. Usually, this is because the shareholders feel like the company is being run in a poor manner, which will inevitably cause their investments to fail, and would cause them to incur losses. Beyond financial reasons, shareholders might also feel like the management of the company goes against the policies of the company or the industry standards, which might lead to societal harm, and damage to the brand and repute of the company.

The Rise of Shareholder Activism in India

Shareholder activism has been gaining popularity in India due to a multitude of reasons. Some of the most notable ones are that shareholders are now more informed about their investments and rights, there are a higher number of institutional investors, and there has been a rise in the number of proxy advisory firms (‘PAFs’) in the nation. The Securities and Exchange Board of India (Research Analysts) Regulations, 2014, regulate PAFs. Any person who advises an institutional investor or shareholder of a company on how to take advantage of their rights in the company (including suggestions on a public offer or voting recommendations on agenda items) is referred to as a proxy advisor. The voting trends of shareholders have been found to be influenced by PAF recommendations, and this has contributed to increasing shareholder activism.

Furthermore, one of the most important reasons for shareholder activism increasing in the country is the legal remedies, powers and rights of shareholders being expanded. The Companies Act, 2013 (‘Act’) is the primary legislative material to be referred to when speaking of shareholder activism in India. It provides shareholders with certain rights and powers that allows them to have a say in the management of the affairs of the company. An example of such would be certain resolutions requiring the consent of the shareholders, whether by simple majority or special majority. Another example would be the right of the shareholders to appoint or remove directors. Beyond the Act, there are also certain regulations given by the Securities and Exchange Board of India (‘SEBI’), which apply to listed companies. An example of such a regulation is the requirement of a Stakeholders Relationship Committee for certain companies. Another example is the requirement of listed companies to be registered on the SEBI Complaints Redress System (‘SCORES’) platform, which is operated by SEBI, as the name suggests. SCORES allows shareholders and investors to make complaints regarding their grievances against the company whose shares they hold, and to follow the status of such complaints.

Due to certain provisions of the Act, judicial pronouncements, and provision of new regulations by SEBI, shareholders have been given greater rights, powers and remedies, which has led to shareholder activism becoming easier and more prevalent.

The Methods of Participation in Shareholder Activism in India

Now that we understand what shareholder activism is, how do shareholders partake in it, particularly in India? There are several routes and mechanisms utilised by shareholders to become more proactively involved in the management of the company they have invested in. These are:

• The purchase of shares with voting rights: If a person or group of persons hold a greater number of such shares, they would have a more influential vote within the meetings of the company.
• Interaction with the Board of Directors: By frequent interaction with the Board of Directors (‘Board’) of the company, shareholders can have their voices heard and concerns taken in on a consistent basis. This allows the Board to be more aware of the issues and worries of the shareholders, and if all parties are on the same page regarding the overall goals of the company, this allows for a very amicable path forward. Furthermore, it develops a rapport and friendliness amongst the shareholders and the members of the Board, which also aids in any dispute resolution where parties may have conflicting ideas on how the company should manage its affairs.
• Utilising Stakeholders Relationship Committee: A Stakeholders Relationship Committee must be in place for the purpose of resolving security holder grievances at any company that is publicly traded or that has more than 1,000 shareholders, debenture holders, deposit holders, or holders of any other security at any given time within a fiscal year. If such a committee exists in a Company, the shareholders get a forum to have their grievances and concerns heard.
• Making public announcements: In situations where certain concerns and issues are not able to be resolved behind closed doors, whether due to the Board or other members not being co-operative, or there being a fundamental difference in perspectives on how the company should be run, shareholders can voice their grievances in the public forum, which may lead to more pressure being applied for changes to be made within the company.
• Requisitioning directors to convene a meeting: An extraordinary general meeting can be held by shareholders requisitioning the directors to convene such meeting, in order to discuss business issues and express their opinions. The requisitionist shareholders have the right to call a meeting on their own if the directors do not hold an extraordinary general meeting. 10% of the company's shareholders with voting rights must be present in order to call the meeting.
• Approaching the National Company Law Tribunal: Any member or members holding at least 10% of the issued share capital of the company, or a minimum of 100 members, may file a claim with the National Company Law Tribunal (‘NCLT’) for oppression and/or mismanagement on the grounds that the company's affairs are being managed in a way that is harmful to the interests of the company or its members.
• Initiation of a Class action suit: If there exists a class of shareholders that feel their rights have been infringed upon, or that the company is being run in a manner that would be prejudicial to the interests of the company or its shareholders, then such class of shareholders may initiate a class action lawsuit against the company, the directors of such company, and any third-party advisors. For a group of shareholders to be established as a class, there must be any member or members having at least 5% of the issued share capital in an unlisted company or at least 2% of the issued share capital in a listed company; or a minimum of 100 members or at least 5% of the total number of members (whichever is less).
• Shareholder derivative suits: If a board resolution was harmful to the company's interests, a single shareholder, regardless of their shareholding in the firm, may also file a shareholder derivative lawsuit on the company's behalf. There is a pre-requisite condition for such an action, which is that the shareholder approaching the court must do so with "clean hands". The Code of Civil Procedure 1908 specifies the procedure for shareholder derivative suits.
• Making an application to the Serious Fraud Investigation Office: If the shareholders feel that the affairs of the company are being seriously mismanaged, even to the degree of fraud possibly occurring within the company, the shareholders may notify the Central Government that the company needs to be investigated, and such notification is done through the passing of a special resolution. On receipt of such notification, the Central Government can order the Serious Fraud Investigation Office to look into the company and its affairs.

Instances of Shareholder Activism in India in the Recent Past

Shareholder activism has been utilised in India recently for several goals and purposes by the shareholders. In some instances, it has been utilised for restricting the remuneration provided to top executives, or to appoint certain independent directors, or to limit certain related party transactions where it was felt that such transactions would be detrimental to the company and its shareholders. Let us observe some of these instances that have already taken place.

Instances regarding the remuneration provided to the company’s executives

Tata Motors Ltd. asked shareholders for consent to give greater remuneration to the company's top three executives in 2014, and they had to receive shareholders' consent due to the remuneration surpassing the established ceilings. The proposal was rejected because the Board was unable to secure the necessary 75% majority to approve a special resolution in favour of the necessary incremental pay. When the Board presented the identical idea to the shareholders in 2015, they did receive approval from the investors, as investors stated that the prior motion was inconsistent with the company's performance.[1] However, this was among the earliest examples of shareholder activism.

The COVID-19 pandemic's economic impact on Indian companies' revenue and profits, combined with the management's lack of transparency, led to a significant spike in shareholder activism in 2020, in which investors opposed the promoters and management of numerous companies by rejecting board recommendations to raise executive compensation. For instance, in August 2021, Eicher Motor Ltd. was unable to secure enough votes to pass a special resolution that would have permitted Siddhartha Lal, their managing director, to receive a 10% salary increment. Further, shareholders of Hero MotoCorp Ltd, Bajaj Auto Ltd, and Balkrishna Industries Ltd. have also voted against proposals for increasing the remuneration of their respective chairmen, although they were unsuccessful in attaining the majority vote and the proposal was granted.[2]

Shareholders of Balaji Telefilms rejected a proposal to raise the pay of promoter-directors Shobha and Ekta Kapoor in September 2021.[3]

Instances regarding appointment of directors

Shareholder activism is on the rise, and not only regarding proposals calling for higher executive pay. A shareholder activism action involving Zee Entertainment Enterprises Private Limited (‘Zee’), a publicly traded company, and Invesco Developing Markets Fund (‘Invesco’), an institutional shareholder of Zee, was also brought before the Bombay High Court in 2021.[4] The conflict started when Zee refused to schedule a shareholders' meeting in response to a requisition notice from Invesco that asked for the removal of three Zee directors and the appointment of six new independent directors to the Zee Board. Invesco responded by petitioning the NCLT under Section 98 of the Act to call the requested meeting. At the same time, Zee applied for an injunction to stop Invesco from acting in accordance with the requisition and received approval from the Bombay High Court. The Division Bench overturned the Learned Single Judge's ruling and ruled that the term "valid requisition" under Section 100(4) must be interpreted literally and should be limited to "numerical and procedural compliances" without any mention of the "object" of the demand. The Court held that departing from the precedent established in this case would undermine shareholder democracy by supporting the restrictive behaviour displayed by the Board. The Court cited the Supreme Court decision in Life Insurance Corporation of India v. Escorts Ltd.[5], which was decided on the corresponding provision of the former 1956 Act. Zee was under an obligation to call the meeting as a result.

Another example of such an instance involves the California State Teachers Retirement System, an institutional shareholder of Reliance Industries, which, acting on the advice of the proxy advisory firm Glass Lewis, initially opposed the appointment of Yasir Al-Rumayyan, the chairman of the Saudi oil producer Aramco and a governor of the Saudi Arabian Public Investment Fund as an independent director on Reliance's Board. Al-Rumayyan is the governor of the Saudi Arabian Public Investment Fund. The Public Investment Fund had a sizeable investment in two other Reliance group companies, and Aramco was negotiating to purchase a 20% stake in Reliance's oil-to-chemical business, according to the PAF, raising the possibility of a conflict of interest. Later on, though, the appointment was approved.[6]

Instances regarding related party transactions

Transactions involving related parties to the company have been closely watched by active investors. For instance, in 2017, Raymond Ltd. proposed a related party transaction at its Annual General Meeting on 5 June, 2017 that entailed selling the business's assets at a discount to its controlling owners. Since promoters or other controlling shareholders are not entitled to vote in related party transactions, the motion was defeated even though it was just a small portion of the total shareholding which was opposed to it.[7]

Conclusion

As observed in the aforementioned instances, the phenomenon of shareholder activism is gaining traction in India. Due to shareholders being more diligent and aware of their rights, their powers and the remedies afforded to them, they have been able to have a louder voice when it comes to the management of the affairs of a company they have invested in. Furthermore, the increase in the number of institutional investors and PAFs has also contributed to shareholders participating more proactively in running the company and its affairs. In my humble opinion, this is a favourable situation as it gives shareholders more control over how their investments are going to perform, prevents white collar crimes in companies to a degree, and it also gives shareholders a chance to step in where they feel the company is performing in a manner detrimental to society at large, even if profits are being made. This balance of business acumen and corporate governance is a necessity to ensure that the economies of everyone involved are bettered, without affecting society in a significantly negative manner. It must be noted that shareholder activism should also not be given too much power, as it could lead to a situation where business becomes extremely hard to conduct, which would affect the functioning of existing companies and act as a deterrent for foreign or new players looking to enter India’s market. In my opinion, shareholder activism is in a good state as of now, and should be cultivated further in a manner where companies are answerable to their shareholders, without affecting their ease or ability to conduct business in a significantly negative manner.

Article by:

Gautam Khaitan

(Managing Partner)

gkhaitan@opkhaitan.com

Arnav Chaudhary

(Associate)

achaudhary@opkhaitan.com