Abstract
Activism from shareholders is an emerging phenomenon in transportable law that concerns shareholders’ influence on tradable management, approach, and decision-making. It comprises imaginative shareholder participation in supporting changes inside a firm using a variety of techniques such as deputy competitions, shareholder recommendations, communication with management, and action. Transparency, sustainability or societal responsibility, and CEO remuneration schemes are among the issues that have fuelled shareholder agitation. Activists leverage their holdings in state firms to promote strategic adjustments inside pots, creating lesser accountability and transparency. However, this can lead to disagreements between operations and stockholders over opposing visions regarding the corporation’s direction and goals. Regulatory organizations and legal structures play an important role in creating the landscape of shareholder activism. Proxy regulations Exposure Conditions Shareholder rights vittles’ influence the strategy and efficacy of activist initiatives. Courts frequently refer to judges in disputes stemming from shareholder activism, establishing precedents that restrict the limits of shareholder control. Shareholder activism has an influence on more than just individual firms, including request dynamics, investor attitudes, overall marketable swish practices. It drives pots to reconsider their structures of governance and stakeholder engagement techniques, with the ultimate goal of striking an appropriate equilibrium between shareholder priorities and larger marketing objectives. Understanding the unique characteristics of shareholder representation in marketable law is critical for beneficiaries — companies, regulators, shareholders, and legal practitioners alike — as they navigate the changing landscape of profitable administration, rights for stakeholders, and the connection among shareholders campaigns and the power supply marketable decision-making process.[1]
Key Words
Shareholders Activism, Corporate Governance, Legal Framework, Corporate Decision-Making Shareholder Rights
Introduction
Shareholder activism is a rapidly growing trend in corporate governance, with significant legal implications (Lakmal, 2014). It refers to the active participation of shareholders in influencing company’s decision-making and operations. This can involve shareholder proposals, proxy voting, and advocating for changes in corporate policies and practices. Shareholder activism is based on the belief that shareholders have the right to participate in governance and hold management accountable for their actions.[2]
Corporate governance is the framework of rules and practices that govern how a company operates and is controlled. It encompasses the relationships between shareholders, board members, executives, and other stakeholders. Corporate governance is critical to ensuring that companies operate in a transparent and accountable manner, aligning the interests of shareholders with the long-term goals of the company.
The board’s ability to make sound decisions and protect shareholders’ interests is a reflection of corporate governance capability, and board governance is a crucial component of corporate governance. In addition to the shareholders’ role in corporate governance, there are also legal implications involved. Legal implications arise from the rights and responsibilities of shareholders, as well as the legal framework that governs corporate governance practices. These legal implications include compliance with securities laws, disclosure requirements, fiduciary duties of directors, shareholder rights and remedies.
Research Methodology
The study outlined in this paper delves into the intricate workings of shareholder activism and its effects on corporate governance practices in India. By analysing the underlying causes of
shareholder activism, the research aims to provide a comprehensive understanding of its impact on the Indian market. The paper presents a detailed account of the various facets of shareholder activism and its influence on the corporate governance landscape, offering valuable insights to business leaders, investors, and policymakers alike.
Review of Literature
Shareholder activism has emerged as a significant force in India’s corporate governance landscape, where shareholders use their equity stakes to influence corporate decisions and strategies.
The Companies Act of 2013 empowers shareholders with rights that enable active participation in corporate governance. The Indian corporate sector has seen a rise in institutional investors’ activism, which is directed towards ensuring better management accountability, transparency in operations, and safeguarding minority shareholders’ interests.
Shareholder activism has been instrumental in pushing for enhanced corporate governance practices that demand greater board diversity, executive compensation reforms, and the implementation of robust environmental, social, and governance (ESG) standards. These demands have an impact on corporate policies, investor decisions, and market valuations of companies.[3]
However, shareholder activism in India faces challenges due to the prevalence of family-owned businesses and promoter-led firms, resulting in a concentration of ownership that can stifle the influence of activist shareholders. The regulatory environment, while supportive of shareholder rights, can sometimes be slow to adapt to the rapidly changing landscape of shareholder activism.
The legal implications of shareholder activism extend beyond the immediate interactions between shareholders and company management, potentially influencing corporate law reforms and shaping the future of corporate governance in India. The movement’s growth will be interesting to observe how legal frameworks and corporate practices evolve to accommodate the changing dynamics between shareholders and management.
Overall, shareholder activism is a dynamic and evolving force in India’s corporate governance landscape, offering both opportunities and challenges. As the Indian market continues to mature, the role of shareholder activism is likely to become even more prominent, potentially leading to more robust corporate governance practices and greater alignment between shareholder interests and corporate objectives.
Shareholder Activism
Shareholder activism is a crucial aspect of corporate governance, where investors of a company become more actively engaged in the management of the organization that they have invested in. This practice is mostly driven by the shareholders’ concerns over the company’s poor performance, which could lead to a decline in their investments and potential losses.
Apart from financial reasons, shareholders may also feel that the company’s management is violating the industry standards or policies of the organization, which could lead to societal harm and damage the company’s reputation. Shareholder activists leverage their power to influence the company’s decision-making process by holding a significant number of shares with voting rights. The greater the number of such shares, the more influential the vote of the shareholder during the company’s meetings.[4]
Furthermore, shareholder activism can take various forms, such as submitting proposals, voting on resolutions, or engaging in direct communication with the company’s management. Shareholders may also use social media platforms to voice their concerns, organize protests, or launch public campaigns to raise awareness about the company’s practices.
In summary, shareholder activism plays a crucial role in promoting corporate accountability and responsibility, ensuring that companies operate in the best interests of their stakeholders, including shareholders, employees, customers, and society at large.
Methods for Participating in Shareholder Activism in India.
As a shareholder in a company, it is important to be aware of the various ways in which you can have your voice heard. One of the most effective ways to do this is by interacting with the Board of Directors. By consistently communicating with the Board, shareholders can ensure that their concerns are being heard and that the Board is aware of any issues that may be affecting them. This can also help to establish a rapport between shareholders and Board members, which can be beneficial in resolving disputes.[5]
Another option for shareholders is to utilize the Stakeholders Relationship Committee. This committee is required to be in place at any publicly traded company or any company with more than 1,000 shareholders, debenture holders, deposit holders or holders of any other security at any time within a fiscal year. The committee provides a forum for shareholders to voice their concerns and have their grievances heard.
If issues cannot be resolved through these channels, shareholders can also make their concerns public. This can put pressure on the Board to take action and can help to bring attention to any issues that may be affecting the company.
In some cases, shareholders may need to take more formal action. For example, they may need to requisition directors to convene a meeting. If the directors do not hold an extraordinary general meeting, the requisitions shareholders have the right to call a meeting on their own.
Shareholders can also file a claim with the National Company Law Tribunal (NCLT) if they feel that the company’s affairs are being managed in a way that is harmful to the interests of the company or its members. This can be done by initiating a class action suit or a shareholder derivative suit. In the latter case, a single shareholder with “clean hands” can file a lawsuit on the company’s behalf if they feel that a board resolution is harmful to the company’s interests.
Finally, if shareholders believe that the affairs of the company are being seriously mismanaged, to the extent of possible fraud, they can make an application to the Serious Fraud Investigation Office. This can prompt an investigation into the company’s affairs by the Central Government.[6]
Shareholders Activism in India
Shareholder activism has emerged as a powerful tool in India in recent times, with shareholders leveraging it for a variety of purposes and goals. Some shareholders have used it to restrict the remuneration provided to top executives, while others have used it to appoint certain independent directors or to limit certain related party transactions. Such actions have been taken when shareholders feel that such transactions would be detrimental to the company and its shareholders. It is worth exploring some of the key instances of shareholder activism that have already taken place in India.
Cases of Shareholders Activism in India
Regarding the Remuneration
The Tata Motors Company Ltd. Sought shareholder approval in 2014 to enhance the salary of its most powerful three executives, beyond the stipulated restrictions. The plan was rejected because the Board was unable to acquire the needed 75% consensus for a separate resolution in support of the suggested wages increase. However, when it comes 2015, the Board reintroduced the identical proposal to shareholders and obtained support, since investors considered the earlier motion was incongruous with the company’s success. This occurrence is recognized as one of the first examples of shareholder activism.[7]
The COVID-19 epidemic has had a substantial impact on sales and earnings for Indian businesses. When combined with the management’s lack of openness, this has led to a spike of shareholder activism in 2020. Investors have fought promoters and upper management of some firms by rejecting board plans to enhance executive pay. In this regard, in August of 2021, Eicher Automobile Ltd. Failed to obtain enough votes to adopt an extra resolution that would’ve granted its chief executive officer, Siddhartha Lal, a 10% compensation increase. Similarly, stakeholders of Hero Motorcycle Corporation Ltd, Bajaj Motors Ltd, and the company Balkrishna Industries Ltd. Voted against plans to boost their respective chairmen’s salary, but the proposals were approved since they did not get a majority vote.[8]
Regarding Appointment of Directors
Activism from shareholders is becoming increasingly common, and it is not limited to recommendations for increased CEO remuneration. In 2021, the Bombay High Court heard a shareholder activism suit between the entertainment company Zee Enterprises Private Limited (‘Zee’), a publicly listed firm, and Invesco Development Markets Fund (‘Invesco’), Zee’s institutional shareholder. The conflict began when Invesco demanded shareholders meet in order to eliminate three Zee commissioners and nominate six new directors who are self-employed to the Zee the Board of Directors, but Zee denied to conduct the meeting. In consequence, Invesco approached the National Company Law Tribunal according to Section 98 of the Act in order to conduct the desired meeting, and Zee sought an injunction to prevent Invesco from carrying on the demand, which was granted by the High Court of Bombay.[9]
The Division Bench rejected the Learned Single Judge’s decision, finding that the word “valid requisition” under Section 100(4) should be understood literally and restricted to “numerical and procedural compliances” without regard for the “object” of the demand. The Court referenced the Supreme Court’s ruling in Life Insurance Corp. India v. Escort Ltd., which was based on the similar section of the previous 1956 Act. The Court determined that straying from the precedent set in this case would damage shareholder democracy by encouraging the Board’s restrictive actions. As a result, Zee felt obligated to organize the meeting.[10]
Corporate Governance
Corporate management refers to the rules and ordinances that a firm must follow in order to operate smoothly. The Board of Directors is primarily responsible for ensuring that the company’s corporate governance policy improves. A established Corporate Governance policy is critical for every firm because it promotes transparency, accountability, fairness, appropriate responsibility, and risk management. It establishes a defined structure in which the organization may efficiently control its actions.
Corporate Governance regulations evolved in India in 1998, when different committees were formed under the jurisdiction of the Ministry of Corporate Affairs (also known as MCA) and the Securities and Exchanges Board of India (SEBI). The Companies Act of 2013 and any subsequent information released by the statute or the authority of Corporations serve as a crucial.The Limited Liability Partnerships Act of 2008 assists Limited Liability Partnerships in developing a sound corporate governance framework. The SEBI Regulations control all listed firms in the nation, ensuring that they follow all requirements. As India’s economy grows, the government is adopting a number of aggressive initiatives to ensure that corporations have excellent corporate governance. One such stage is the corporate responsibility (CSR) program.[11]
Principle’s of Corporate Governance
The following is a summary of some of the key principles of Corporate Governance:
- Transparency: This principle involves ensuring that the stakeholders and employees of a company have access to information about its activities. This promotes better decision-making and helps ensure that the company is open and accountable.
2. Accountability: This principle highlights the company’s duty to justify its actions to stakeholders. The board evaluate directors must conduct an analysis of the company’s status and provide stakeholders with a clear report on its choices. To avert problems, the board should keep adequate risk management channels open and engage with stakeholders regularly.
3. Obligation: The committee of directors oversees the company’s activity. They must behave in a trustworthy manner for the firm and its members, and guarantee that everyone in the organization is working toward the same goal.
4. Risk Management: Effective risk management is vital for a company’s existence. The management team and board must identify all types of hazards and how to avoid them.
5. Objectiveness: The governing body of director must treat all stakeholders fairly and equally. They must approach every choice with an unbiased mindset and avoid allowing personal interests to interfere with their business judgments.[12]
Legal Aspects of Corporate Governance
In the corporate world, good corporate governance is critical to the success and sustainability of any business. Companies need to follow several acts and notifications to ensure they are practicing good corporate governance. These include the Companies Act 2013, Securities and Exchange Board of India (SEBI), Standard Listing Agreement of Stock Exchanges, Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI), and Secretarial standards issued by the Institute of Company Secretaries of India (ICSI).[13]
The corporations Act of 2013 has various rules that guarantee strong corporate governance in corporations. One of the important rules requires that every corporation have a committee of executives, comprising a director that is autonomous and a female director. This clause is inserted in the legislation to guarantee that the firm adheres to sound corporate governance and that its shareholders do not experience any concerns. Furthermore, the legislation compels businesses to get involved in programs involving Corporate Social Responsibility (CSR) that benefit both society and the environment.
SEBI is an essential regulator in the Indian stock market. It ensures that companies follow rules and regulations that protect investors and ensure fair practices. According to SEBI laws, corporations must file several annual reports into a registrar to gain a better understanding of the company’s daily operations.[14]
The Standard Listing Agreement of Stock Exchanges is a set of rules and regulations that companies must follow to be listed on stock exchanges. The agreement ensures that companies follow basic norms, such as timely and accurate disclosure of information, maintaining proper accounting records, and providing equal treatment to all shareholders. By adhering to these norms, companies can ensure that they are following good corporate governance practices, which helps build trust with stakeholders and investors.
Overall, companies need to be diligent in following these acts and notifications to ensure they are practicing good corporate governance. By doing so, they can strengthen their reputation, improve their relationship with stakeholders, and ensure long-term success.
Suggestions
Here are some suggestions to improve shareholder activism & corporate governance:
- Be Reliable: Companies should be open and honest about their finances, CEO salaries, organizational systems, and decision-making processes. Shareholder ought to possess access to thorough reports to help them make educated decisions.
- Think Long-Term: To ensure long-term success, businesses must concentrate on ecologically sound, long-term value creation methods that emphasize sustainability in the environment, moral standards, and social responsibility
- Talk It Out: Organizations should promote healthy discussion between shareholders and management. Frequent channels for communication should be established to provide meaningful conversations about strategic direction, performance indicators, and governance processes.
- Expand Your Panel: Companies should strive for a board with different experience, opinions, and independence. Nominate directors from varied backgrounds to promote inclusive decision-making.
- Strengthen Governance: In order to meet the highest corporate governance requirements, companies should build stronger governance structures such as unbiased audit forums, risk prevention frameworks, and rigorous internal control procedures.
- Emphasize Stakeholders: Corporations ought to think about the needs of any stakeholder, including as workers, consumers, and the community, in addition to shareholder interests. Policies should strike a balance between different stakeholder requirements.
- Exercise Your Participating Rights: Shareholders should vote on significant topics, resolutions, and nominations at shareholder meetings.[15]
Conclusion
Activism among shareholders has had a significant influence on corporate governance procedures in India, with an emphasis on increasing transparency, accountability, and ethical behavior. This trend has encouraged corporations to implement measures that correspond with expectations of stakeholders and support sustainable and ethical business practices. However, achieving a balance between shareholder interests and broader sustainable value creation and stakeholder well-being can be challenging, given that shareholders may not always act in the best interest of the company.
To address this issue, the introduction of independent directors on boards and the role of banks and financial institutions as conscience keepers can help to improve corporate governance. Additionally, proxy advisory firms and investor protection organizations can play a critical role in promoting a culture of shareholder activism and improving governance practices. It is essential to remember that governance rights are fundamental and must be upheld to ensure the long-term success of companies.
Author : Sakshi Sutrave College: Seth Shankarlal Lahoti Law College, Kalaburagi (affiliated to Karnataka State Law University, Hubli)
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[13] Institute of Chartered Accountants of India. “Accounting Standards (AS).” Last modified 2023. Accessed May 14, 2024. https://www.icai.org/post/accounting-standards-as.
[14] Institute of Company Secretaries of India. “Home.” Accessed May 14, 2024. https://www.icsi.edu/ssb/home.
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