Shareholder Activism in India

Shareholder activism is a concept within corporate governance where shareholders of a company become more proactively involved in the management of the company that they have invested in.

Usually, this is because the shareholders feel like the company is being run poorly, which could inevitably cause their investments to fail and they would incur losses. Beyond financial reasons, shareholders may feel that the management of the company goes against the policies of the company or the industry standards, possibly leading to societal harm and damage to the repute of the company.

Shareholder activism has been gaining popularity in India as 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.

Furthermore, the legal remedies, powers and rights of shareholders are being expanded. The Companies Act, 2013 (‘Act’), gives shareholders certain rights and powers that allow them to have influence in the management of the company. For example, certain resolutions require the consent of the shareholders, shareholders have powers to appoint or remove directors, etc.

There are also certain regulations given by the Securities and Exchange Board of India (‘SEBI’), like the requirement for listed companies to be registered on the SEBI Complaints Redress System platform, which allows shareholders to raise their grievances against the company and to follow the status of such complaints.

• The purchase of shares with voting rights: If a person or group holds a greater number of such shares, they have a more influential vote during the meetings of the company.

• Interaction with the Board of Directors: By interacting with the Board of Directors (‘Board’), shareholders can have their voices heard on a consistent basis. This allows the Board to be more aware of the issues of the shareholders and it develops a rapport and friendliness amongst the shareholders and the members of the Board, which aids in dispute resolution.

• 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 time within a fiscal year. This gives shareholders a forum to have their concerns heard.

• Making public announcements: If certain issues are incapable of being resolved behind closed doors, shareholders can voice their grievances in public, which leads to pressure on the Board.

• Requisitioning directors to convene a meeting: An extraordinary general meeting can be held by shareholders requisitioning the directors to convene such a meeting. The requisitionist shareholders have the right to call a meeting on their own if the directors do not hold an extraordinary general meeting.

• Approaching the National Company Law Tribunal: Shareholders can 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.

• Shareholder derivative suits: If a board resolution is harmful to the company's interests, a single shareholder with “clean hands” may file a shareholder derivative lawsuit on the company's behalf.

• Making an application to the Serious Fraud Investigation Office: If the shareholders feel that the affairs of the company are being seriously mismanaged, to the degree of possible fraud, they may notify the Central Government that the company needs to be looked into, and the Central Government can order the Serious Fraud Investigation Office to investigate.

Shareholder activism has been utilised in India for several purposes, like restricting the remuneration hikes of executives, preventing appointments of directors, and blocking related party transactions, etc.

Tata Motors Ltd. proposed giving greater remuneration to the company's executives in 2014, and shareholders' consent was required as the remuneration surpassed the established ceilings. This was rejected as the necessary 75% minority shareholder votes to approve a special resolution in favour of the necessary incremental pay was not established.

In August 2021, Eicher Motor Ltd. was unable to secure enough votes for a special resolution that would have permitted their managing director to receive a salary increment.

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 decided in 2021. Zee refused to schedule a shareholders' meeting in response to a requisition notice from Invesco regarding the appointment of independent directors at Zee. The Bombay High Court citing the Supreme Court decision in Life Insurance Corporation of India v. Escorts Ltd., held that departing from the precedent established in this case would undermine shareholder democracy by supporting the restrictive behaviour of the Board. As such, Zee was ordered to call the meeting.

In 2017, Raymond Ltd. proposed a related party transaction regarding selling the business' 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 a small portion of the total shareholding was opposed to it.

The phenomenon of shareholder activism is gaining traction in India. Due to shareholders being more diligent and aware of their rights, powers and the remedies afforded to them, they have been able to have a louder voice when it comes to the management of a company that they have invested in. Furthermore, the increasing numbers of institutional investors and PAFs have also contributed to rising shareholder activism.

In our humble opinion, this is a favourable situation as it gives shareholders more control over the performance of their investments, prevents white-collar crimes to a degree, and also gives shareholders a chance to step in where they feel that the acts of the company may harm society at large. This balance of business acumen and corporate governance is necessary to ensure the betterment of the economies of everyone involved, without affecting society in a significantly negative manner.

However, shareholder activism should not be given too much power, as it could lead to a situation where business becomes extremely hard to conduct, which would hamper the functioning of existing companies and deter foreign or new players from entering India’s market.

About the authors: Gautam Khaitan is the Managing Partner of OP Khaitan & Co. Arnav Chaudhary is an Associate at the Firm.