Abstract
This study examines the corporate law system in India’s legislative framework for protecting shareholders who are in minority. Minority shareholders are an essential part of the business ecosystem and help to maintain the fairness and integrity of the market. The protection of minority stockholders’ rights is crucial in India because the business landscape is diversified and dynamic. This essay looks at the legal structure, historical background, and practical issues of minority shareholders protection in the country. Additionally, it evaluates the efficiency of current legislative guidelines and makes recommendations for prospective changes to increase minority shareholders’ protection in India.
Keywords: Minority Shareholders, Legal Framework, Corporate Governance, India, Shareholders Protection
Introduction
India has been one of the rapidly growing economies in past years, consisting of a mix of agriculture, corporate companies, service sectors, IT, manufacturing, etc. Corporate companies play an important part in the boost of India’s economy whether it is a national company or multinational company. At one point, only India, the largest global firm, had an annual income that was double that of General Motors. Since the industrial strategy of liberalisation and privatisation was put into place in 1991, private foreign capital has been acknowledged as being essential to the quick expansion of the Indian economy. This shows the significance of corporations in the Indian Economy.
Coming back to our topic, Shareholders of a company are those who hold at least one share of that company or institution and enjoy several rights and duties. A shareholder can be any person, institution, or company[1].
Any person, company, or institution that holds less than 51% of a company’s share is known as a minority shareholder of a company. A sizable chunk of India’s corporate landscape is made up of minority shareholders who put their money and faith in publicly traded enterprises. Maintaining market integrity, stimulating investment, and fostering shareholder trust all depend on making sure they are protected. The system which is being used by the Indian corporate law to safeguard and protect the interest and rights of minority stockholders.
Research Methodology
This study will draw upon various sources, including legal texts, case law, company reports, and academic literature, to provide a comprehensive analysis of minority shareholder protection in India.
The research design encompasses both qualitative and quantitative methods, combining a thorough literature review with case studies, and surveys.
I acknowledge potential limitations, such as data availability and the evolving nature of corporate law, which may impact the comprehensiveness of my study.
Literature Review
The Companies Act of 1956 was replaced by the more comprehensive Companies Act of 2013, demonstrating India’s commitment to evolving along with the corporate landscape. Significant modifications to corporate governance were made by the Companies Act of 2013[2], which also included rules to safeguard minority shareholders.
Rights of minority shareholders:
In both private and public corporations, minority stockholders are those who own less than 51% of the company’s stocks. The minority shareholders can either be an individual or an entity. The main motive of minority stockholders is to provide the corporation with share capital and in exchange for that the company will give them some small amount of ownership in the company[3].
Minority shareholders are an individual or entity who holds a very limited influence over a company’s functioning. The Companies Act of 1956 states the “rule of the majority” which established that whoever holds a majority share in a company should regulate its functioning and affairs. But this “rule of the majority” was changed by the Companies Act of 2013 and it gave some influence and authority to the minority stockholders.
The court of law ruled in the suit of “VN Bhajekar v/s KM Shankar[4]” that the few minority shareholders with little influence are not allowed to take legal action asking the judicature to intervene in decisions about the administration of the business. These rules were put in place to safeguard the interests of small stockholders. The Companies Act, 2013 was created to solve these issues.
There are several kinds of rights given to minority stockholders under the Companies Act of 2013, they are provided below:
Protection against mismanagement and oppression – According to the Companies Act of 2013, if any member or members own at least 10% of the issued share capital, or in another situation, not less than 10% or 100% of all members, they must possess the following convictions:
The company is malfunctioning or is ignoring the public or company’s interest or in any case oppressing any member or members of the corporation.
Any case of mismanagement that can significantly affect the corporation. By majority stockholders, there has been a contravention of fiduciary duties.
In any of the situations mentioned above, the minority stockholders have the virtue of moving to the National Company Law Tribunal (NCLT). On receiving such a type of application by the minority stockholders the National Company Law Tribunal (NCLT) may pass any ordinance as it considers or deems fit.
Requisitioning general meeting: Through the Board of Directors (BOD), the minority stockholders who hold at least 10% of the overall voting powers of the corporation can request the BOD to call for an extraordinary general meeting, and in case, if the BOD fails to call an extraordinary general meeting then the shareholders (holding at least 10% of the total voting rights) can hold a general meeting independently and they will also have voting rights at such meeting.
Contractual rights: contractual rights mean the right to contract and are given to the party through legally binding contracts. Through these contractual rights, the minority stockholders get the right to protect their interest by adding some extra conditions on the shareholder’s agreement like limitations on the transfer of corporation’s stock, etc.
Right to appoint the small stockholders director: Appointment of small stockholders director as a right: as given in section 151 of the Companies Act of 2013[5], in case the company is a listed company, all or some of the small shareholders have the right that they can appoint a director which will be known as a small shareholders director. The small shareholders directors are appointed with a view to take care of the inquisitiveness of the small stockholders and also to represent them. Provided that the director is appointed for a fixed period of time and he should necessarily be an independent director., in case the company is a listed company, all or some of the small shareholders have the right that they can appoint a director which will be known as a small shareholders director. The small shareholders directors are appointed with a view to take care of the inquisitiveness of the small stockholders and also to represent them. Provided that the director is appointed for a fixed period of time and he should necessarily be an independent director.
Right to vote (electronically): Under section 108 of the Companies Act of 2013, some of the given companies must allow the e-voting facility to the shareholders of the corporation for more participation of the minority shareholders. This system of e-voting in the meetings leads to active contributions to decision-making by the small shareholders.
Other rights: Apart from the rights mentioned above, the small shareholders are provided with some more rights under the Companies Act of 2013 to protect and safeguard their interest in the company and also to protect them against exploitation. These rights include the right to change or restrict the changes in the share capital of the corporation, and rights provided in the event of a merger or amalgamation of the company.
The above-mentioned rights are some of the major rights that are being guaranteed to minority stockholders under the Companies Act of 2013. Apart from these rights, there is also a duty of the majority stockholders towards the minority shareholders.
Majority shareholders fiduciary duties towards the minority stockholders: These types of duties shall be performed by the majority stockholders with respect to the minority shareholders. These duties include that the majority stockholder shall compulsorily deal with the minority stockholder with honesty, good faith and fairness[6].
Can the court always intercede in the company’s matters?
No, the court cannot always intercede in the company’s affairs and functioning. The resolution taken by the majority stockholders cannot be challenged in a court of law by the minority shareholders under normal circumstances. But under some of the special circumstances such as “negligence, breach of trust or breach of duty by the director”, it can be challenged in a court of law by the minority shareholders and then the corporation may file a lawsuit against some particular directors who have performed such an act. These kinds of situations are called “derivative actions”.
Foss vs. Harbottle – Case Analysis[7]
Facts of the suit in brief – Richard Foss and Edward Starkie Turton, minority stockholders in the Victoria Park Company, filed a lawsuit against the company’s directors, solicitor, and architects, as well as several bankrupt assignees. They alleged fraudulent transactions, insufficiency of qualified directors, and the absence of a clerk or office. The corporation was incorporated in 1837 to maintain the park in Rusholme, Charlton, Lancaster. The shareholders claimed the property was misconduct, and wasted, and mortgages were improperly given. The company’s directors were found to be bankrupt.
Issue – whether a suit can be filed on behalf of the corporation by its members and can the guilty parties be held accountable for their wrong deeds?
Verdict – The Companies Act, as outlined in Section 21 (1) (a) of the Act[8], states that a corporation and its stockholders are considered separate legal entities. The Proper Plaintiff Rule, established by the court, for any wrong done to the corporation, the corporation has the virtue to sue his directors or any other individual or group of individuals outside the company. But in any scenario, only the corporation can sue and not the members of the corporation as established in the basic principle of “Separate Legal Entity”, which clearly states that all the members of the corporation are different from the company. This rule is considered unfavorable for minority shareholders, as they have no say in the company’s actions. To mitigate this harshness, four exceptions have been established: ultra vires and illegal acts, violations of articles by special majority members, invasion of claimant’s individual and personal rights, and fraud committed by the majority themselves. These exceptions help protect basic minority rights, regardless of the majority’s vote. The courts have emphasized the importance of exhausting all redressal options within the internal forum and ratifying irregular conduct by a simple majority.
Role of Independent Directors
An Independent Director can never be an executive or managerial director of a company, he should necessarily be a non-executive director of a corporation, as given in section 149(4) of the Companies Act, 2013. He is a member of a board of directors and does not have any material relationship with the company. He should never be associated with the company’s managerial activities. An Independent Director has traditionally been a highly esteemed and intelligent someone who represents governance within the Board[9].
There are some special qualifications for the nomination of an independent director apart from the common qualifications for the appointment of directors which are listed below.
- He should have expertise and experience.
- He should be a person of integrity.
- He should not have been the promoter of any company.
- He should not have personal or financial relations with the company or promoters of the company.
- He should never be in any of the key operational positions of the company or its subsidiary.
- He should not be holding voting powers of more than 2% in the company.
If we talk about the Independent Director’s responsibilities and duties towards minority shareholders, they bear the crucial responsibility of defending the rights of minority shareholders. They must scrutinize business actions, keep an eye on financial disclosures, and promote transparency to guarantee the rights of minority stockowners. There is always a group of persons, who are in the minority affected by the decisions of the majority group. This needs to be balanced and here independent directors need to voice their voices for minority shareholders. However, it is not the primary job of an independent director but one of the crucial roles is to provide a balance of power in a board and management structure. There is only one entity in the company who can speak up for the safeguard of rights of minority shareholders of the company; however, the Independent Directors are not equipped with enough powers to safeguard the virtue of minority stockowners of the corporation.
Related party Transaction
Provisions for Related Party Transactions are described in Section 188 of the Companies Act[10]. Related Party Transactions are discussed, and they apply to both Public and Private Limited Companies. A related party is typically defined as any individual or organization that is connected to the reporting entity. A person or a close relative of that person may also be considered a related party if they are connected to an entity.
Transactions involving a corporation and its insiders, such as directors, officers, or sizable shareholders, are referred to as related party transactions (RPTs). Despite not being intrinsically bad, these transactions need to be carefully examined for fairness and openness because they may be subject to conflicts of interest.
If improperly handled, RPTs may have negative effects on minority shareholders. Transactions that are unfair or covert might reduce their value and damage public confidence in company governance. Transactions involving a corporation and its connected parties, such as management, board members, and controlling shareholders, are known as related party transactions (RPTs). Minority shareholders may suffer as a result of these transactions because they may be designed to favor linked parties at the expense of the business. A subject of concern in corporate governance is the effect of RPTs on minority shareholders.
The RPT and minority shareholder rights legislation in OECD and non-OECD jurisdictions are examined in a report by the OECD on RPTs and minority shareholder rights. The report also provides a detailed analysis of the legal and regulatory frameworks that have been established in Belgium, France, Italy, Israel, and India[11].
According to a study that examined how RPTs affected companies that were listed on the Hong Kong Stock Exchange between 1998 and 2000, the transactions caused considerable value losses for minority investors. Even the mere mention of an RPT caused very low stock returns.
A higher level of capital market development is linked to stronger minority shareholder protection in prejudicial RPTs, as shown by metrics like higher market capitalization, more domestically listed companies, more IPOs, and lower private benefits of control.
In conclusion, minority shareholders may suffer because of RPTs. Strong regulatory frameworks are essential for safeguarding the rights of minority stockholders and ensuring that RPTs are handled fairly.
Challenges in Safeguarding the Rights of Minority Stockholders
As in democracy, we have seen that the rights of minorities have been neglected by the majority group, the same happened in the case of corporate governance to the minority stockholders. The inability of minority shareholders to make informed decisions might be hampered by information asymmetry between minority and majority stockowners. This discrepancy has the potential to produce unfair results and jeopardize the minority shareholders’ rights. Major challenges which hinder in safeguarding the virtue of minority shareholders are given below.
- The controlling shareholders and the minority stockholders frequently hold different views on how the firm should be run and managed.
- This includes engaging in unapproved related party transactions, diverting company funds, launching a competing enterprise, and approaching current clients and suppliers. It also includes purposefully reinvesting profits to deny returns to minority shareholders and providing high compensation and perquisites to directors and other employees chosen by the controlling stockholders.
- Only when the dominant shareholders acknowledge their legal responsibility to all stockholders and that they should consult the minority stockholders before making decisions can the interests of the minority stockholders be genuinely respected[12].
Cyrus Investments Pvt Ltd v. Tata Sons Ltd and Ors[13]
Facts of the case in brief – Cyril Mistry, the largest shareholder of TATA and Sons, joined the board of Shapoorji Pallonji group in 1991 and became a director in 1994. His company holds around 80% of TATA Son’s shares. In 2006, he joined the board of Tata Sons after his father retired in 2011. In 2012, he was appointed chairman after Ratan Tata’s retirement. In 2017, Tata and Sons appointed N. Chandrasekhar as its Chairman. On February 6, 2017, the board summoned Mistry’s removal as director, sparking a global fight. The removal was not sudden but after deliberation for a long time. Ratan Tata wrote a letter to the Prime Minister mentioning the removal of Mistry, citing his inability to perform his duties.
Background of the case – Cyrus Mistry filed a petition in the National Company Law Tribunal, but the tribunal rejected it, stating there was no mismanagement in the TATA Group company. In December 2019, the National Company Law Tribunal reinstated Mistry as chairman of TATA Sons, but the Supreme Court banned the order, stating it had gaps and errors. The Supreme Court ordered a detailed investigation. Ratan Tata took over as interim Chairman after Mistry’s removal from the position in 2006. In December 2016, a complaint involving alleged mismanagement and maltreatment of minority shareholders was filed with the National Company Law Tribunal by two investment firms backed by the Mistry family.
Verdict – On 24 October 2016, Cyrus Mistry, the chairman of TATA Sons, was removed from his position after a board meeting. The directors of the TATA Group voted to dismiss him, with one vote in favor of Mistry. In 2015, Cyrus Mistry and his two investment firms were removed by the National Company Law Tribunal, which ruled that Mistry had not done anything wrong and the removal was illegal. The Shapoorji Pallonji group stated that they would not take any legal action against TATA Sons.
Cyrus Mistry declared he was unwilling to sue TATA but would seek legal advice over the company’s actions despite the fact that TATA has filed a caveat with all courts. The dismissal of Mistry startled the business community, and the company’s stock price dropped by 3.16%.
Cyrus Mistry argued that he was not receiving the appropriate conditions or attempting to defend himself under the law. He provided evidence of considerable interference while working at the company, arguing that the board never allowed him to work according to his will. The company’s articles of association provide that the board members may only dismiss the chairman if it is determined that he has engaged in fraud, mismanagement, or disloyalty to the business.
The National firm Law Appellate Tribunal (NCLAT) invalidated Cyrus Mistry’s dismissal and halted TATA Sons’ transition from a public to a private firm. The Supreme Court postponed the NCLAT decision because it had “basic errors.”
Suggestions
To protect the Rights of Minority Stockholders we need to take some major steps which are listed below.
- Legislative Reforms: To improve minority shareholder protection, urgent changes to India’s corporate laws should be taken into consideration. Stricter disclosure rules, more precise descriptions of related party transactions, and strategies to lessen information asymmetry may all be part of these reforms.
- Enhancing Enforcement Mechanism: It is crucial to strengthen regulatory organizations and make sure that current rules are strictly enforced. Penalties for violating corporate governance guidelines can serve as a deterrence against unethical behavior.
- Encouraging Shareholder Mechanism: It is crucial to promote a culture of shareholder action. Minority shareholders can be given the confidence to defend their interests by being informed of their rights and given opportunities to participate in company decision-making.
- Proposed Framework for Effective Minority Shareholders: It is essential to create a comprehensive structure that integrates legal changes, regulatory control, and shareholder involvement. Transparency, justice, and accountability should be given top priority in this framework to effectively protect minority owners.
Conclusion
This investigation has revealed important details about the minority stockholder protection system in India. It has shed light on the current situation of minority shareholder protection by highlighting the existing legislative framework, practical difficulties, and the function of important stakeholders. Minority shareholder protection is not just required by law; it also forms the basis of a healthy, just business ecosystem. Their protection is necessary to support investor confidence and ensure corporate governance integrity. A more favorable investment environment can result from improving minority shareholder protection, and supporting corporate ethics while boosting economic growth and stability.
ESHA JAISWAL
PRESIDENCY UNIVERSITY, BANGALORE.
[1] Adam Hayes, Shareholder (Stockholder): Definition, Rights and Types, Shareholder (Stockholder): Definition, Rights, and Types (investopedia.com) (Sep. 12, 2023, 4:56 PM)
[2] The Companies Act, 2013, No. 18, Act of Parliament, 2013(India)
[3] WallStreetmojo, Minority Shareholder – What Is It, Example, Protection Rights (wallstreetmojo.com), (last visited Sep. 12, 2023)
[4] VN Bhajekar v/s KM Shankar, (1934) 36 BOMLR 483
[5] The Companies Act, 2013, § 151, No. 18, Act of Parliament, 2013(India)
[6] CS Ayushi Verma, Protection of Rights of Minority Shareholders, Tax Guru, 1, (2021)
[7] Foss vs. Harbottle, (1843) 2 Hare 461, 67 ER 189
[8] The Companies Act, 2013, § 21 (1) (a), No. 18, Act of Parliament, 2013(India)
[9] Anupama Tripathi, Independent Directors: Introduction, Eligibility, Powers, Appointment Terms, Tax Guru, 1, (2021)
[10] The Companies Act, 2013, § 188, No. 18, Acts of Parliament, 2013(India)
[11] OECD, Related Party Transactions and Minority Shareholder Rights – OECD, (Sep. 12, 2023)
[12] BW Businessworld, Challenges In Protecting The Rights Of Minority Shareholders-Puneet Rathsharma, Kunal Mehta – BW Businessworld (last visited Sep. 13, 2023)
[13] Cyrus Investments Pvt Ltd v. Tata Sons Ltd and Ors, Company Appeal (AT) No. 254 of 2018