Shareholder's Activism in India

8/19/2019 Shareholder's Activism in India

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SHAREHOLDER ACTIVISM IN INDIA: A CRITICAL STUDY

SUBMITTED BY:

TUSHAR SOLANKI

(SM0113055)

FACULTY IN CHARGE

MR. ANAND RAMADHAR SHRIVAS

NATIONAL LAW UNIVERSITY, ASSAM

GUWAHATI

31ST OCTOBER 015


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STUDENT CERTIFICATE

Certified that the project entitled ‘SHAREHOLDER ACTIVISM IN INDIA: A CRITICAL

STD!" i# a piece of ori$inal %ona fide re#earch &nderta'en %( )e* It i# f&rther certified that

no part of thi# project ha# %een #&%)itted %( )e for an( el#e p&rpo#e*

!LACE" +&,ahati SIGNATURE OF STUDENT

DATE" -.#t Octo%er/ 01.2 Thar Solan'i


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TABLE OF CONTENTS

1. I#$%&'$*

1.1. L*$+%$%+ R+-*+

1.. S&/+ #' O+$*-+

1.3. R+2+% !%&4+

1.6. R+2+% M+$&'&4&78

. S%+&4'+% A$*-*2: T+ C+/$

.1. W& *2 S%+&4'+%9

.. C&44+$*-+ A$* !%&4+2 S%+&4'+% A/$8

.3. S%+&4'+% !22*-*$8 2 $+ S$%$*#7 !&*#$

3. R+74$&%8 R+;&%2 T&%'2 G%+$+% S%+&4'+% !%$**/$*

6. C&%/&%$+ G&-+%##+ I#$+%+'*%*+2

6.1. !%&


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practice# that ha3e had their i)pact on Indian co)panie#/ re$&lator( refor)# directed %( the

Sec&ritie# and E6chan$e 7oard of India 8SE7I9 ha3e al#o had a part to pla(* Since 0111/

SE7I ha# re&ired p&%lic enli#ted co)panie# to in#tall ,ell;reco$ni5ed $o3ernance #tr&ct&re#

and )echani#)#* The#e incl&de an a&tono)o %oard of director#/ a #elf;$o3ernin$ a&dit

proce##/ and a&thori5ation of financial #tate)ent# %( the chief e6ec&ti3e officer and chief

financial officer/ and the li'e*. The#e effort# ha3e %een in3ol3ed %( the #toc' )ar'et# that

ha3e reflected a pre)i&) to,ard# $ood $o3ernance practice#*0

At the #a)e ti)e/ the e6i#tin$ principle# are #aid to %e far fro) the de#ired/ and $o3ernance

cri#e# #&ch a# that o%#er3ed in the Sat(a) acco&ntin$ #candal ha3e hi$hli$hted thi# line of

critici#)*- +i3en the enco&ra$e)ent of controllin$ #hareholder# in )o#t Indian co)panie#/

one of the note,orth( #hortco)in$# in the c&rrent di#pen#ation i# the a%#ence of #hareholder acti3i#)/ partic&larl( a)on$#t in#tit&tional and )ar'etin$ in3e#tor# that hold )inorit(

#ta'e#*(, available at http?@@ssrn.com

@abstract91444=B


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The #peed( e6plo#ion of pro6( ad3i#or( fir)#/ a hitherto non;e6i#tent pheno)enon in India/

%e#to,# #hareholder# ,ith the $&idance nece##ar( to e6erci#e their corporate franchi#e in a

,ell;3er#ed )anner* The e6i#tence of acti3i#t in#tit&tional #hareholder# #&ch a# pri3ate e&it(

f&nd# and hed$e f&nd# ha# alread( initiated an &phea3al in #o)e corporate %oardroo)# in

India*

4hile the#e de3elop)ent# pa3e the ,a( for a tran#for)ation in the intention of the

$o3ernance de%ate/ #hareholder acti3i#) enco&nter# certain operational and for)al

,ea'ne##e# ,ithin the Indian )ar'et#* The do)ination of controllin$ #hareholder# in )o#t

Indian co)panie# operate# to di)ini#h the effect# of #hareholder acti3i#)* The le$al #(#te)

and in#tit&tion# in India are not enco&ra$in$ to renderin$ ti)el( and co#t;effecti3e re)edie#

to #hareholder# ,ho accept a liti$ation approach to co&nter )ana$e)ent# that are alle$ed toact contrar( to #hareholder intere#t#* Thi# paper find# that altho&$h #hareholder acti3i#) i#

%eco)in$ #&%#tantial in the Indian )ar'et#/ it# i)pact a# a de$ree of corporate $o3ernance

enhance)ent i# far fro) clear*

The paper deal# ,ith the theoretical fra)e,or' of #hareholder participation in corporate

de)ocrac(/ and co))ent# on the inefficiencie# of the pre#ent #tr&ct&re/ %efore $oin$ on to

define the concept of #hareholder acti3i#) and to de#cri%e it# 3ario t(pe#* =art III loo'# at

the hi#torical po#ition in India ,here #hareholder pa##i3it( ,a# the nor)* =art IV e6a)ine#

3ario re$&lator( refor)# &nderta'en in India that ena%le #hareholder# to %e )ore

participati3e in corporate deci#ion;)a'in$* The#e incl&de )ea#&re# #&ch a# e;3otin$/ 3irt&al

#hareholder#" )eetin$#/ and 3otin$ policie# for )&t&al f&nd#* =art IV e6plore# the role# of

corporate $o3ernance inter)ediarie# #&ch a# pro6( ad3i#or( fir)# and $o3ernance anal(#t#

and their i)pact on #hareholder acti3i#)* =art V e3al&ate# the li'el( i)pact of #hareholder

acti3i#) in India after con#iderin$ the e)pirical e3idence fro) other co&ntrie#/ and =art VI

concl&de#*

1.1. L*$+%$%+ R+-*+

S*#7 A-$%, >C&/#8 L?, E2$+%# B&&@ C&/#8, L@#&, 013.

Thi# %oo' $i3e# the %a#ic idea a%o&t the #hareholder and their role in the %ine## for)ation

and ho, the( can for) %ine## enterpri#e for their o,n intere#t* It al#o pro3ide the other

a#pect# for for)in$ an( %ine## enterpri#e# and condition# re$ardin$ the #a)e*


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D%. S%8, H.K., >C&/#8 L?, U#*-+%24 L !4*2*#7 C&., N+ D+4*,

013.

Thi# %oo' $i3e# the f&nda)ental principle# re$ardin$ the for)ation of the co)pan( and

different 'ind# of part# related to it* It define# the #hareholder#" role in a #eparate chapter and

$i3e# the 3a#t 'no,led$e re$ardin$ their role# in the co)pan( and )ana$in$ the

ad)ini#tration of the co)pan( ,ith other official# of the co)pan(*

D%. T%*/$*, S.C., >M&'+%# C&/#8 L?, C+#$%4 L !4*$*,

A44', 01.

Thi# %oo' $i3e# the %a#ic idea a%o&t the #hareholder and their role in the %ine## for)ation

and ho, the( can for) %ine## enterpri#e for their o,n intere#t* It al#o pro3ide the other

a#pect# for for)in$ an( %ine## enterpri#e# and condition# re$ardin$ the #a)e*

*#, N.K., >C&/#8 L: L #' !%$*+?, D++/ D++/ !4*$* !-$.

L$'., N+ D+4*, 011

Thi# %oo' $i3e# the f&nda)ental principle# re$ardin$ the for)ation of the co)pan( and

different 'ind# of part# related to it* It define# the #hareholder#" role in a #eparate chapter and

$i3e# the 3a#t 'no,led$e re$ardin$ their role# in the co)pan( and )ana$in$ the

ad)ini#tration of the co)pan( ,ith other official# of the co)pan(*

V%&$$*4 U@#$, >T+ A'-+#$ &; S%+&4'+% A$*-*2 *# I#'*?, &%#4

G&-+%##+, V&4. 1 N&. =, 01.

The article $i3e# the proper &nder#tandin$ of the topic #hareholder acti3i#) in India and

pro3ided the 3ario i##&e# related to it* It e6plain# all the a#pect# re$ardin$ the #hareholder

acti3i#) and al#o anal(#i# the c&rrent #cenario related to the acti3i#) &nder Indian la,# ,ith

re$ard# to %ine## and it# #tr&ct&re*


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1.. S&/+ #' O+$*-+

Tho&$h the #tate)ent )ention# >Shareholder# Acti3i#) in India: A Critical St&d(?/ the

re#earcher #pecifie# the #&%ject area to &nder#tand the #hareholder# acti3i#) in India and al#o

trie# to criticall( anal(#i# the i)portance and it# i)pact on Indian co)panie#*

1.3. R+2+% !%&4+

4hether the trend of #hareholder# acti3i#) in India pro3ide the lar$e and #)all co)panie#/

fir)#/ etc*/ an( ne, fra)e,or' and ho, the #hareholder# ta'in$ the initiati3e# to pro3ide

their hand to %&ild Indian )ar'et at lar$e@

1.6. R+2+% M+$&'&4&78

R+2+% D+2*7#

To cond&ct )( re#earch project ,e ,ill e the#e t,o t(pe# of re#earch de#i$n: E6plorator(

and De#cripti3e*

D&$%*#4 M+$&': The )ethodolo$( that ,e ed in thi# project i# doctrinal* I ,ent thro&$hdifferent %oo'# and article# in the li%rar( and tried to $ather infor)ation re$ardin$ the topic

and ,ill tr( to incorporate tho#e )aterial# in o&r project*

S&%+2 &; D$

I ha3e ed #econdar( #o&rce# of data for the p&rpo#e of )( Re#earch ,or' ,hich incl&de#

%oo'# and #e3eral article#* I cannot definitel( for$et to ac'no,led$e the 3ario internet #ite#

,hich ha3e %een of i))en#e e in cond&ctin$ )( #t&d(*

L**$$*

The project i# not ,itho&t it# o,n #et of li)itation# ho,e3er a care ha# %een ta'en to red&ce

the) to a )ini)al le3el* A# the topic de)and# #o the re#earcher li)it# it# #cope to

#hareholder# acti3i#) to India and I enco&ntered t,o %a#ic li)itation# d&rin$ the co)pilation

of thi# project that i# lac' of ti)e and re#o&rce# to perfor) the e6ten#i3e #t&d(*


8/26

C/$+%

S%+&4'+% A$*-*2: T+ C+/$

.1. W& *2 2%+&4'+%29

An( per#on/ co)pan( or other in#tit&tion that o,n# at lea#t one #hare of a co)pan("# #toc'*

Shareholder# are a co)pan(# o,ner#* The( ha3e the potential to profit if the co)pan( doe#

,ell/ %&t that co)e# ,ith the potential to lo#e if the co)pan( doe# poorl(* A #hareholder )a(

al#o %e referred to a# a B#toc'holderB*2

nli'e the o,ner# of #ole proprietor#hip# or partner#hip#/ corporate #hareholder# are not

per#onall( lia%le for the co)pan("# de%t# and other o%li$ation#* Al#o/ corporate #hareholder#

do not pla( a )ajor role in r&nnin$ the co)pan(* The %oard of director# and e6ec&ti3e

)ana$e)ent perfor) that f&nction* Co))on #toc'holder# are/ ho,e3er/ a%le to 3ote on

corporate )atter#/ #&ch a# ,ho #it# on the %oard of director# and ,hether a propo#ed )er$er

#ho&ld $o thro&$h 8preferred #toc'holder# &all( do not ha3e 3otin$ ri$ht#9* The( al#o

%enefit ,hen the co)pan( perfor)# ,ell and it# #hare price increa#e#/ and the( ha3e the ri$ht

to trade their #hare# on a #toc' e6chan$e/ ,hich )a'e# #toc' a hi$hl( li&id in3e#t)ent*

.. C&44+$*-+ A$* !%&4+2 S%+&4'+% A/$8

In lar$e p&%lic li#ted co)panie#/ the p&%lic 8or non;pro)oter9 #hareholder# ha3e relati3el(

)ode#t #ta'e# and the#e do not pro3ide #&fficient incenti3e# for the) to ,or' to$ether and

or$ani5e coalition# to )eanin$f&ll( participate in deci#ion;)a'in$ of co)panie#* In the

cla##ic 7erle Mean# Corporation ,here #hareholdin$ i# diffed/ ,hile the #hareholder#

are o,ner# of the co)pan(/ the )ana$er# controllin$ the co)pan( a# #hareholder# are &na%le

to participate in deci#ion;)a'in$ d&e to collecti3e action pro%le)#* E3en in controlled

)

* Adolf A* 7erle +ardiner C* Mean#/ The Modern Corporation and =ri3ate =ropert( Collecti3e action pro%le)# are the diffic&ltie# that ari#e in achie3in$ con#en# a)on$ a diffed

#et of #hareholder# ,ho do not pla( an acti3e role in the co)pan(* The hetero$eneit( of intere#t# and

differin$ le3el# of infor)ation a3aila%le ,ith the#e #hareholder# e6acer%ate the pro%le)#* See/

Stephen M* 7ain%rid$e/ Director =ri)ac(: The Mean# and End# of Corporate +o3ernance/ F N4**L* REV* 2


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co)panie#/ ,hich are predo)inant in India/G collecti3e action pro%le)# pre3ent )inorit(

#hareholder# fro) coale#cin$/ ,hich red&ce# their effecti3e participation thro&$h the e6erci#e

of corporate franchi#e* In #&ch a ca#e/ the lac' of )inorit( #hareholder participation a&$&r# to

the %enefit of the controllin$ #hareholder#/ and )ana$er# appointed ,ith their conc&rrence*

Related to the collecti3e action pro%le) i# >#hareholder apath(?*F Since the co#t# of

coordination a)on$ )inorit( #hareholder# are hi$h/ the#e #hareholder# either a%#tain fro)

3otin$ or )erel( 3ote in fa3o&r of )ana$e)ent 8or the controllin$ #hareholder#/ a# the ca#e

)a( %e9*.1

4ith thi# %ac'$ro&nd/ it ,o&ld %e ef&l to e6a)ine ho, #hareholder acti3i#) )a( %e

defined/ and al#o to con#ider 3ario t(pe# of acti3i#)*

D+;*#*#7 $+ C+/$

Shareholder acti3i#) i# con#idered to %e a #et of >proacti3e effort# on the part of

#hareholder# to chan$e fir) %eha3io&r or $o3ernance r&le#*?.. It #i$nifie# the effort# on the

part of in3e#tor# to infl&ence the %eha3io&r of )ana$e)ent in $o3ernin$ the co)pan(*

Acti3i#t in3e#tor# are >often 3ie,ed a# in3e#tor# ,ho/ di##ati#fied ,ith #o)e a#pect of a

Sha&n J* Mathe,/ Ho#tile Ta'eo3er# in India: Ne, =ro#pect#/ Challen$e#/ and Re$&lator(Opport&nitie#/ 0118-9 COLM* 7S* L* REV* G11K +eor$e S* +ei#/ Can Independent 7loc'holdin$

=la( M&ch of a Role in Indian Corporate +o3ernance@/ - COR=* +OVERNANCE L* REV* 0G-

80119*

9 ahan Roc'/ #&pra note .2/ at .1-G;-FK See al#o/ Randall S* Tho)a#/ The E3ol3in$ Role of

In#tit&tional In3e#tor# in Corporate +o3ernance and Corporate Liti$ation/ . VAND* L* REV* 0FF

8011G9K Stephen J* Choi Jill E* i#ch/ On 7e(ond Cal=ERS: S&r3e( E3idence on the De3elopin$

Role of =&%lic =en#ion &nd# in Corporate +o3ernance/ . VAND* L* REV* -.2 8011G9*

1= See/ Lee Harri#/ Mi##in$ in Acti3i#): Retail In3e#tor A%#tinence in Corporate Election#/ 01.1COLM* 7S* L* REV* .1


10/26

co)pan("# )ana$e)ent or operation#/ tr( to %rin$ a%o&t chan$e ,ithin the co)pan( ,itho&t

a chan$e in control*?.0 Acti3i#t in3e#tor# can %e contra#ted fro) pa##i3e in3e#tor#/ ,ho rarel(

participate in corporate deci#ion;)a'in$* =a##i3e in3e#tor# &all( 3ote ,ith their feet* If

the( are not #ati#fied ,ith deci#ion# ta'en %( the )ana$e)ent or controllin$ #hareholder#/

the( #i)pl( e6it the co)pan( %( #ellin$ their #hare#/ a practice fancif&ll( referred to a# the

>4all Street ,al'*?.-

There are 3ario #hade# of #hareholder acti3i#)/ altho&$h thi# paper pri)aril( deal# ,ith

three/ referrin$ fir#t t(pe a# >participati3e? #hareholder acti3i#)* In thi# t(pe/ #hareholder#

a##&)e $reater re#pon#i%ilit( for participatin$ in #hareholder )eetin$# and e6erci#in$ their

corporate franchi#e* Thi# ,a(/ $reater participation %( )inorit( #hareholder# co&ld ha3e an

i)pact on the o&tco)e of corporate deci#ion#* E3en if the deci#ion# the)#el3e# )a( not %edifferent %ecae )inorit( #hareholder# )a( onl( ha3e infinite#i)al #hareholdin$ in the

co)pan(/ their o3er,hel)in$ re#pon#e cannot %e i$nored alto$ether %( )ana$e)ent# and

controllin$ #hareholder#* 4hile #hareholder#/ partic&larl( of the in#tit&tional 3ariet(/ are

de)on#tratin$ $reater intere#t in participati3e acti3i#)/ le$al refor)# in 3ario j&ri#diction#

are &tili5in$ #oft la, and #elf;re$&lator( )echani#)# to enco&ra$e $reater participation %(

#hareholder# in corporate deci#ion;)a'in$*.Interacti3e? #hareholder acti3i#) in3ol3e# the

direct en$a$e)ent %( the #hareholder# ,ith the )ana$e)ent* Lar$e in#tit&tional #hareholder#

#ee' to interact ,ith the )ana$e)ent and o%tain an a##e##)ent of the affair# of the co)pan(*

S&ch interaction &all( ta'e# place ,hen either the #hareholder# are &ncon3inced of the

direction adopted %( the )ana$e)ent on certain )atter#/ or ,hen the co)pan( &nderta'e# a

)ajor tran#action 8#&ch a# a )er$er9 or #&ffer# a )aterial ad3er#e effect 8#&ch a# a #i$nificant

lo##/ or other e6traordinar( e3ent #&ch a# a corporate fra&d9* Shareholder# not onl( interact to

o%tain )ore infor)ation fro) the )ana$e)ent/ %&t al#o to con3ince the )ana$e)ent of the

1" +illan Star'#/ #&pra note F/ at 2*

1# Ja(ne Eli5a%eth Pan$lein/ ro) 4all Street 4al' to 4all Street Tal': The Chan$in$ ace of

Corporate +o3ernance/ .. DE=AL 7S* L*J*


11/26

#trate$( to %e follo,ed and chan$e# to %e effected to enhance 3al&e to #hareholder#* .2 The

di#ad3anta$e of the interacti3e t(pe of acti3i#) i# that )ana$e)ent and controllin$

#hareholder# are &nder no le$al o%li$ation to in3ol3e ,ith #hareholder#/ and can )erel(

choo#e to i$nore the)* In #&ch a ca#e/ the interacti3e effort# )a( not %e prod&cti3e*

An e6tended 3er#ion of #&ch interacti3e t(pe %rin$# to the third cate$or( ,here

#hareholder# adopt a co)%ati3e #trate$(* Thi# in3ol3e# effort# to o3erthro, inc&)%ent

)ana$e)ent thro&$h proce##e# #&ch a# pro6( fi$ht# or ho#tile ta'eo3er# that re#&lt in a

chan$e in control of the co)pan(*. A )ore a$$re##i3e for) in3ol3e# the initiation of

liti$ation a$ain#t the co)pan(/ it# %oard and )ana$e)ent* Certain t(pe# of in3e#tor#/ #&ch a#

pen#ion f&nd# and hed$e f&nd#/ ha3e &tili5ed thi# #trate$( )ore recentl( in certain

j&ri#diction# li'e the S to achie3e their $oal#*.

4ith thi# %ac'$ro&nd re$ardin$ the %a#i# for/ and t(pe# of/ #hareholder acti3i#)/ the paper

no, t&rn# to the de3elop)ent of the pheno)enon in India*

1) Thi# t(pe of acti3i#) i# %eco)in$ pro)inent ,ith certain t(pe# of in#tit&tional in3e#tor# #&ch a#

hed$e f&nd#* Tho)a# 4* 7ri$$#/ Corporate +o3ernance and the Ne, Hed$e &nd Acti3i#): An

E)pirical Anal(#i#/ -0 J* COR=* L* G. 80119K Marcel ahan Ed,ard 7* Roc'/ Hed$e &nd# in

Corporate +o3ernance and Corporate Control/ .22 * =A* L* REV* .10. 80119*

1* 7ri$$#/ #&pra note .2 at G.K 7rian R* Cheffin# John Ar)o&r/ The =a#t/ =re#ent and &t&re of

Shareholder Acti3i#) %( Hed$e &nd#/ - J* COR=* L* 2. 801..9*

1> ahan Roc'/ #&pra note .2/ at .1-G;-FK See al#o/ Randall S* Tho)a#/ The E3ol3in$ Role of

In#tit&tional In3e#tor# in Corporate +o3ernance and Corporate Liti$ation/ . VAND* L* REV* 0FF

8011G9K Stephen J* Choi Jill E* i#ch/ On 7e(ond Cal=ERS: S&r3e( E3idence on the De3elopin$Role of =&%lic =en#ion &nd# in Corporate +o3ernance/ . VAND* L* REV* -.2 8011G9*


12/26

C/$+% 3

R+74$&%8 R+;&%2 $&%'2 G%+$+% S%+&4'+% !%$**/$*

O3er the la#t decade/ re$&lator( effort# in India ha3e foced on ind&cin$ $reater

participation in #hareholder deci#ion;)a'in$*.G Thi# ha# %een i)ple)ented thro&$h a #tep;%(;

#tep approach that addre##e# different facet# of #hareholder participation* The#e incl&de the

)anner of 3otin$/ the )anner of participatin$ in #hareholder# )eetin$#/ and ,hether

#hareholder# )i$ht %e co)pelled to ca#t their 3ote#* Each of the#e i# addre##ed in a proper

)anner *.F

A. V&$*#7 M+$&'2

In 011./ the facilit( of 3otin$ %( po#tal %allot ,a# introd&ced* 01 Thi# ,a# intended to addre##

the pro%le)# faced pri)aril( %( retail #hareholder# ,ho had to attend and ph(#icall(

participate in #hareholder )eetin$#/ often in re)ote location# of the co&ntr(* The #(#te) of

po#tal %allot per)it# #hareholder# to #end in their 3ote# %( po#t in#tead of per#onall(attendin$ and 3otin$ at a )eetin$* A #et of r&le# pro)&l$ated %( the Central +o3ern)ent

1 Sec .809/ Co)panie# Act/ .F2/ ,herein ann&al $eneral )eetin$# can %e held onl( at the

re$i#tered office of the co)pan( or at #o)e other place ,ithin the #a)e cit(/ to,n or 3illa$e a# the

re$i#tered office/ altho&$h there are no $eo$raphical re#triction# a# far a# other #hareholder#" )eetin$#

are concerned*

19 John Ar)o&r =ri(a Lele/ Law, Finance, and Politics: The Case of India/


13/26

li#ted certain re#ol&tion# that are to %e )andatoril( p&t to 3ote %( po#tal %allot*0. In other

ca#e#/ the co)pan( ha# the option to offer the po#tal %allot facilit(*00

4hile the po#tal %allot facilit( repre#ented a #ea chan$e in ter)# of pro3idin$ a %etter option

for retail #hareholder# to ca#t their corporate franchi#e/ it failed to )a'e a #erio i)pact* The

po#tal %allot facilit( )a( ha3e re)o3ed #o)e of the proced&ral o%#tacle# to #hareholder

3otin$/ %&t it ,a# not intended to addre## the %roader i##&e# of collecti3e action pro%le)# and

#hareholder apath(* Moreo3er/ #ince #hareholder# are &na%le to participate in the di#c#ion#/

and to o%tain the %enefit of the deli%eration# in the )eetin$ %efore the( ca#t their 3ote#/

participation le3el# ha3e %een fo&nd to %e e6tre)el( lo,* One report #tate# that the re#pon#e

of #hareholder# thro&$h po#tal %allot ha# %een a%(#)all( lo, at onl( a%o&t - on a3era$e*0-

+i3en the inade&ate f&nctionin$ of the po#tal %allot #(#te)/ )ore recent re$&lator(

de3elop)ent# ha3e #o&$ht to &tili5e technolo$ical ad3ance)ent# to enhance #hareholder

participation and 3otin$*0


14/26

earl( to $a&$e the effecti3ene## of e;3otin$/ it i# e6pected to $enerate $reater participation %(

#hareholder#* or e6a)ple/ the e;3otin$ proce## i# le## co#tl( co)pared to the po#tal %allot/

and in3ol3e# le## ti)e and effort on the part of the #hareholder# a# ,ell a# the co)pan(* 0

Ho,e3er/ d&e to it# reliance on technolo$(/ the #&cce## of e;3otin$ ,o&ld depend on the

e6tent of penetration of co)p&ter# and the Internet acro## the co&ntr(*0G

B. S%+&4'+% M++$*#72

In order to ena%le the #hareholder# to e6erci#e their corporate franchi#e in an infor)ed

)anner/ it i# i)portant that the( are a%le to participate in )eetin$#/ %oth to )a'e an

a##e##)ent a# to the )anner in ,hich the( #ho&ld e6erci#e their 3ote#/ al#o to #pea' at the

)eetin$# and con3e( their 3ie,# to ena%le the other #hareholder# to e6erci#e their 3ote# in an

infor)ed )anner a# ,ell* Reco$ni5in$ the li)itation# of ph(#ical #hareholder#" )eetin$#/ the

+o3ern)ent of India ha# introd&ced the concept of electronic participation* Co)panie# )a(

no, pro3ide the option to #hareholder# to attend )eetin$# electronicall(/ thro&$h a&dio;

3i#&al )ean#/ #&ch that >all per#on# participatin$ in that )eetin$ co))&nicate

conc&rrentl( ,ith each other ,itho&t an inter)ediar(/ and participate effecti3el( in the

)eetin$*?0F Moreo3er/ co)panie# )a( pro3ide 3ideo conferencin$ connecti3it( d&rin$ #&ch

)eetin$# in at lea#t fi3e location# ,ithin India* -1 At the #a)e ti)e/ re#pon#i%ilit( i# placed on

the co)pan( and the chair)an of the )eetin$ to p&t in ade&ate #afe$&ard# to en#&re the

inte$rit( of the )eetin$* Altho&$h the#e )ea#&re# ,ere initiall( intended to %e )andator( for

li#ted co)panie# in the period #&%#e&ent to the financial (ear 01..;.0/ concern# ,ere rai#ed

"> Vinod othari/ E;3otin$ %eco)e# )andator( for all li#ted co)panie#/ MONE!LIE/ J&l( ./

01.0K Tania i#hore/ E;3otin$ ,ill )a'e life ea#ier for in3e#tor#/ 7SINESS STANDARD/ J&l(


15/26

re$ardin$ the le$al 3alidit( of electronic )eetin$# in the conte6t of the Co)panie# Act/ d&e to

,hich #&ch electronic )eetin$# are intended to %e optional for li#ted co)panie# too* -.

Since the#e )ea#&re# are onl( di#cretionar(/ and are (et to %e f&ll( operati3e/ the( are

&nli'el( to %e ,idel( follo,ed* 4hile it i# certainl( pro%a%le that #o)e of the %l&e;chip

co)panie# ,ill adopt the#e 3ol&ntar( )ea#&re#/ ,ide#pread co)pliance acro## corporate

India )a( ha3e to ,ait*

C. V&$*#7 2 R+2/**4*$8

Shareholdin$ in a co)pan( i# con#idered to %e a %&ndle of ri$ht#* -0 One #&ch ri$ht conferred

i# to participate in corporate deci#ion;)a'in$ thro&$h the e6erci#e of 3otin$ po,er* In thi#

j&ri#pr&dential fra)e,or'/ an( 'ind of d&tie# or acco&nta%ilit( to e6erci#e 3otin$ ri$ht# i#

antithetical to the ri$ht# or entitle)ent;%a#ed &nder#tandin$ of #hare o,ner#hip* Hence/

#hareholder# cannot &all( %e o%li$ed to e6erci#e their 3otin$ ri$ht# in an( )anner/ or at all*

Thi# le$al &nder#tandin$ of #hare o,ner#hip doe# not a##i#t $reater #hareholder participation

in co)panie#/ the #i$nificance of ,hich i# #hareholder pa##i3it(*

Altho&$h #hareholder# cannot %e co)pelled to e6erci#e their 3ote#/ re$&lator( a&thoritie#

ha3e %e$&n to adopt )ar'et;%a#ed approache# to addre## pa##i3it( a)on$ in#tit&tional

in3e#tor#* In a )o3e that i# #o)e,hat &ncon3entional in the Indian conte6t/ SE7I ha# #o&$ht

to e6hort a #pecific t(pe of in#tit&tional in3e#tor/ i*e* )&t&al f&nd#/ to e6erci#e their 3otin$

ri$ht# in in3e#tee co)panie# in a re#pon#i%le )anner* In 01.1/ SE7I i##&ed a circ&lar to

)&t&al f&nd# re&irin$ the) to >pla( an acti3e role in en#&rin$ %etter corporate $o3ernance

of li#ted co)panie#*?-- Adoptin$ a >co)pl(;or;e6plain? approach/-


16/26

their $eneral policie# and proced&re# re$ardin$ the e6erci#e of 3ote# on li#ted co)panie#* -2

Moreo3er/ the( are al#o re&ired to di#clo#e the #pecific e6erci#e of 3otin$ ri$ht# in re#pect of

identified )atter# #&ch a# corporate $o3ernance/ chan$e# to capital #tr&ct&re/ )er$er#/

ta'eo3er#/ and the li'e*-

7( i)po#in$ co)p&l#or( di#clo#&re re#pon#i%ilitie# and there%( i)pro3in$ tran#parenc(/ thi#

re&ire# )&t&al f&nd# to ta'e a )ore acti3e and con#idered role ,hile e6erci#in$ their 3otin$

ri$ht# on co)panie#* It )a( no lon$er %e po##i%le for )&t&al f&nd# to either a%#tain fro)

3otin$ or to $rant pro6ie# in fa3o&r of )ana$e)ent# or controllin$ #hareholder# ,itho&t

follo,in$ a rea#oned deci#ion )a'in$ proce##* Thi# i# partic&larl( rele3ant %ecae

in#tit&tional in3e#tor# #&ch a# )&t&al f&nd# po##e## #&%#tantial #hareholdin$ 8at lea#t in the

a$$re$ate/ if not indi3id&all(9 ,ith the po,er to tip the #cale# on 'e( 3otin$ )atter# #&ch a#)er$er#/ chan$e of control tran#action#/ preferential allot)ent# of #ec&ritie# and the li'e*

4hile SE7I"# circ&lar technicall( applie# onl( to )&t&al f&nd#/ it# %roader )e##a$e co&ld

,ell pa3e the ,a( for $reater participation %( other t(pe# of in#tit&tional #hareholder#*

D. A22+22*#7 $+ R+;&%2

The re$&lator( refor)# di#c#ed in thi# #ection ha3e %een fra$)ented in nat&re/ %&t their

co))on the)e ha# %een to increa#e #hareholder participation in )eetin$# and 3otin$* Thi#

,o&ld #tren$then the hand# of )inorit( #hareholder#/ %oth of the retail and in#tit&tional

3arietie#/ %( re)o3in$ 3ario proced&ral h&rdle# that ha3e i)peded their e6ten#i3e

participation in the pa#t* 7( i)po#in$ #te,ard#hip re#pon#i%ilitie# on in#tit&tional in3e#tor#

#&ch a# )&t&al f&nd#/ SE7I"# $oal ha# %eco)e clearer*

At the #a)e ti)e/ it ,o&ld %e i)pr&dent to a##&)e that #&ch re$&lator( refor)# ,o&ld %(

the)#el3e# in#til $reater #hareholder participation* More #pecificall(/ in#tit&tional #hareholder

#4 In #&ch an approach/ altho&$h there i# no co)p&l#ion to co)pl( ,ith #&ch re&ire)ent/ the

per#on# #&%ject to it are re&ired to )a'e appropriate di#clo#&re# on ,hether the( co)pl( ,ith the

re&ire)ent/ or alternati3el( to e6plain the rea#on# for non;co)pliance* Anita Indira Anand/ An

Anal(#i# of Ena%lin$ 3#* Mandator( Corporate +o3ernance: Str&ct&re# =o#t;Sar%ane# O6le(/ -. DEL*

J* COR=* L* 00F/ 00F;-1 80119

#) The SE7I Circ&lar for M&t&al &nd#/ #&pra note


17/26

acti3i#) )t %e #elf;$enerated/ altho&$h a trend in India to,ard# #&ch acti3i#) appear# to

%e de3elopin$ #teadil(*-

De#pite the#e re$&lator( refor)#/ one #i$nificant area of concern contin&e# to %e the lac' of

ade&ate infor)ation a3aila%le ,ith #hareholder# in order to ena%le the) to e6erci#e their

con#idered 3ote* 4hile the Co)panie# Act doe# contain ela%orate pro3i#ion# a# to the notice

to %e $i3en to #hareholder# to con3ene )eetin$#/ %oth in ter)# of the ti)e period and

infor)ation to %e pro3ided/-G the di#clo#&re and tran#parenc( #tandard# follo,ed in practice

contin&e to %e %elo, par*-F 4hile there ha# %een a $rad&al increa#e in the a)o&nt and &alit(

of infor)ation di##e)inated to #hareholder# to elicit their franchi#e/ it i# ar$&a%l( inade&ate*

The lac' of a3aila%ilit( of &alit( infor)ation #tri'e# at the heart of #hareholder indifference

in the e6erci#e of 3otin$ ri$ht#* Inter)ediarie# #&ch a# pro6( ad3i#or# and $o3ernanceanal(#t# can %rid$e the infor)ational di#parit( to #o)e e6tent* See/ infra/ =art IV*

# QQ .-/ -F-/ Co)panie# Act/ .F2*

#9 )a'anth Varottil/ Corporate +o3ernance in MA Tran#action#/ L&ncheon Addre## at the

International 7ar A##ociation Conference on BThe Indian Stor( in +lo%al Mer$er# and Ac&i#ition#B/

M&)%ai 8Mar* F/ 01.09*

4= Malini +o(al/ Ho, and ,h( tran#parenc( in %oardroo)# help# %oth India Inc in3e#tor#/ THEECONOMIC TIMES/ Septe)%er -1/ 01.0*


18/26


19/26

the appoint)ent of director# 8e#peciall( independent director#9/ the appoint)ent of a&ditor#/

and )ajor corporate tran#action# #&ch a# )er$er# and ta'eo3er#*


20/26

the indtr( ,ill al#o help to in#til $lo%al %e#t criteria and practice# a)on$#t Indian

co)panie#*

=ro6( ad3i#or( fir)# al#o %enefit in#tit&tional in3e#tor# in other ,a(#* or in#tance/ it i# no

lon$er nece##ar( for in#tit&tional in3e#tor# #pend effort# and co#t# on re#earch/ a# the( can

#i)pl( o&t#o&rce the#e f&nction# to o&t#ide fir)#*


21/26

C/$+% 5

E-4$*#7 $+ I/$ &; S%+&4'+% A$*-*2

After con#iderin$ the trend# re$ardin$ #hareholder acti3i#) that are e)anatin$ fro) India/

and a##e##in$ the po##i%ilitie# and li)itation# ,ithin the Indian conte6t/ it i# nece##ar( to

e3al&ate the effecti3ene## of #&ch acti3i#) a# a )ea#&re of enhancin$ corporate $o3ernance/

%oth $enerall( a# ,ell a# in the #pecific conte6t of India*

D*2$*44*#7 $+ E-*'+#+

The pre#ent #t&d( find# palpa%le anecdotal e3idence that #ho,ed a lar$er role on the part of

acti3i#t #hareholder# in India #ince 01.. than that ,itne##ed in the pa#t* Thi# i# d&e to the

e6ertion# of the corporate re$&lator# to enhance #hareholder participation in corporate

deci#ion;)a'in$ thro&$h 3ario #tandard# #&ch a# e;3otin$/ e;)eetin$# and the i)po#ition

of a #te,ard#hip role# on in#tit&tional in3e#tor# #&ch a# )&t&al f&nd#* Apart fro) %ein$

n&d$ed %( the re$&lator#/ certain acti3i#t in3e#tor# the)#el3e# ha3e accepted alon$ the

)antle of infl&encin$ corporate $o3ernance in co)panie# in ,hich the( ha3e placed* The

e)er$ence of a #tron$ #et of infor)ational inter)ediarie# in the for) of pro6( ad3i#orie#

#i$nal# a ne, era in #hareholder acti3i#) in India* 2.

)1 Ree%a Pachariah =artha Sinha/ FII$P!s% holdings set to change/ TIMES O INDIA/ Septe)%er

0


22/26

4hile #o)e $eneral trend# in India can %e $leaned fro) anecdotal e3idence/ there i# little

trac' record to %&ild an( e)pirical e3idence (et* Altho&$h there are e)pirical #t&die# carried

o&t in other )ar'et#/ the( re)ain e&i3ocal a%o&t the po#iti3e i)pact of #hareholder acti3i#)

on corporate $o3ernance*20 A n&)%er of rea#on# ha3e %een offered/ that ran$e fro) the

)ethodolo$ical to the #&%#tanti3e* At the o&t#et/ there are diffic&ltie# in )ea#&rin$ the

effecti3ene## of #hareholder acti3i#)*2- or in#tance/ there i# often no p&%lic e3idence of the

interacti3e effort# of #hareholder# to infl&ence corporate $o3ernance in in3e#tee co)panie#*

Moreo3er/ there are diffic&ltie# in e#ta%li#hin$ the caal lin' %et,een acti3i#) and %etter

corporate $o3ernance*2p&r#&e

)" or a di#c#ion of #e3eral e)pirical #t&die#/ #ee/ +illan Star'#/ #&pra note FK 7lac'/ #&pra note

.1*

)# +illan Star'#/ #&pra note F/ at .;.*

)4 Id* at .*

)) 7lac'/ #&pra note .1/ at .2*

)* +illan Star'#/ #&pra note F/ at -2*

)> +illan Star'#/ #&pra note F/ at -


23/26

a$enda# not #hared %( and often in cla#h ,ith tho#e of pa##i3e in3e#tor#*? 2F Moreo3er/

in#tit&tional in3e#tor# are #&%ject to inherent conflict# of intere#t* Altho&$h the( )a( hold

#hare# for the %enefit of their o,n in3e#tor# 8#&ch a# &nit;holder# in a )&t&al f&nd9/ it i# the

)ana$er# ,ho e6erci#e 3otin$ ri$ht# in the in3e#tee co)panie#* There i# a ri#' that the

acti3i#t approach )a( %e %eneficial to the )ana$er#/ %&t not nece##aril( in the intere#t# of the

&lti)ate in3e#tor# or &nit;holder# in the in#tit&tion* 4hile there i# (et no e3idence of #&ch a

di#tinct conflict that ha# e)anated in India/ the i)portance of it# ad3er#e effect on

#hareholder acti3i#) cannot %e i$nored*1

E;;+$ C$%&44+' C&/#*+2

4hile e3al&atin$ the i)pact of #hareholder acti3i#)/ re$ard )t %e had to the o,ner#hip

#tr&ct&re of co)panie#* Acti3i#) )a( ha3e a different effect on co)panie# ,ith controllin$

#hareholder# a# oppo#ed to tho#e ,itho&t* or e6a)ple/ in co)panie# ,itho&t controllin$

#hareholder#/ the infl&ence of acti3i#t #hareholder# and increa#ed 3otin$ %( #hareholder# )a(

ha3e a direct %earin$ on the o&tco)e of propo#al# )ade %( )ana$e)ent*. On the other hand/

,here controllin$ #hareholder# are do)inant/ it i# &nli'el( that effort# on the part of the

re$&lator# to pro)ote #hareholder 3otin$ or acti3i#t #tance# adopted %( certain in#tit&tional

#hareholder# ,ill ha3e the #a)e effect a# in co)panie# ,ith diffed #hareholdin$* A#

7e%ch&' and Ha)dani note:

In .companies with controlling shareholders/ 0, the rles governing voting

procedres are li+el( to "e inconse1ential# Controllers$naffected "( the

collective action and free$rider pro"lems that discorage action "( dispersed

shareholders$will e)ercise their voting power even withot rles to facilitate

)9 7ain%rid$e/ #&pra note .1/ at .K I)an Ana%ta,i L(nn Sto&t/ id&ciar( D&tie# for Acti3i#t

Shareholder#/ 1 STAN* L* REV* .022 8011G9 8ar$&in$ that acti3i#t #hareholder# are #cepti%le to

$reed and #elf;intere#t/ ,hich )t %e co&nter%alanced %( foi#tin$ fid&ciar( d&tie# &pon the)9* See

al#o/ I)an Ana%ta,i/ So)e S'eptici#) a%o&t Increa#in$ Shareholder =o,er/ 2- CLA L* REV* 2.

80119*

*= or an e6ten#i3e di#c#ion of the conflict i##&e in China/ #ee Chao i/ In#tit&tional Shareholder

Acti3i#) in China: La, and =ractice 8=art .9/ 011 I*C*C*L*R* 02./ 02G;0*

*1 Ho,e3er/ e3en in #&ch ca#e#/ the e3idence i# &ncon3incin$* or e6a)ple/ a recent report indicate#

that #hareholder# do not nece##aril( 3ote alon$ ,ith reco))endation# )ade %( pro6( ad3i#or( fir)#*

Ja)e# R* Copland/ =olitici5ed =ro6( Ad3i#er# 3#* Indi3id&al In3e#tor#/ THE 4ALL STREETJORNAL/ Octo%er G/ 01.0


24/26

shareholder voting# Frthermore, as long as a controller has enogh votes to

determine voting otcomes, even rles that facilitate voting "( minorit(

shareholders will not ena"le them to pass resoltions not favored "( the

controller #-2

In in#ider econo)ie# #&ch a# India/ d&e to the infl&ence of controllin$ #hareholder#/ acti3i#t

in3e#tor# ,o&ld not find it ea#( to alter the o&tco)e of deci#ion# )ade at #hareholder#"

)eetin$#* Thi# )a( in t&rn red&ce the incenti3e# of acti3i#t in3e#tor# to adopt #tance# that

operate to act a# a chec' on )ana$e)ent* A# a corollar(/ controllin$ #hareholder# are le##

li'el( to %e deterred %( the action# of acti3i#t #hareholder#*

In a #t&d( that i# #pecific to India/ +ei# ha# concept&all( and e)piricall( de)on#trated that

,hile independent %loc' holdin$ %( in#tit&tional in3e#tor# i# $enerall( ef&l in theor(/ it i#

&nli'el( to ha3e an( i)pact on corporate $o3ernance in India d&e to the c&rrent o,ner#hip

#tr&ct&re of Indian co)panie# ,ith concentrated #hareholdin$*-

C42*

Thi# paper trace# the e3ol&tion of #hareholder acti3i#) in India* Hitherto non;e6i#tent/ the

pheno)enon ha# %een hered into Indian corporate $o3ernance ,ithin a #pan of the la#t t,o

(ear#* It ha# %een facilitated thro&$h re$&lator( refor)# that ena%le $reater participation of

#hareholder# in corporate deci#ion;)a'in$* More than that/ a )ar'et en3iron)ent for acti3i#t

in3e#tor# and corporate $o3ernance inter)ediarie# ha# rapidl( ta'en #hape in India* The

proliferation of pro6( ad3i#or( fir)# i##&in$ reco))endation# in re#pect of h&ndred# of

Indian li#ted co)panie#/ and hi$h;profile e6a)ple# of in#tit&tional in3e#tor# #&ch a# hed$e

f&nd# confrontin$ Indian )ana$e)ent# i# e)%le)atic of the trend*

*" L&cian A* 7e%ch&' A##af Ha)dani/ The Eli3e W&e#t for +lo%al +o3ernance Standard#/ .2

* =a* L* Re3* .0-/ .0F. 8011F9*

*# +ei#/ #&pra note *


25/26

Ho,e3er/ the corporate #tr&ct&re and le$al #(#te) in India offer con#idera%le re#i#tance that

pre3ent# f&ll &tili5ation of the %enefit# of #hareholder acti3i#)* The e6i#tence of controllin$

#hareholder# in )o#t Indian co)panie# chion# the i)pact of acti3i#t in3e#tor#* The le$al

#(#te) i# not cond&ci3e to #hareholder liti$ation/ ,hich i# a tool &tili5ed %( acti3i#t in3e#tor#

in other j&ri#diction#/ often #&cce##f&ll(* At an o3erall le3el/ there i# al#o #o)e pe##i)i#)

a%o&t the i)pact of #hareholder acti3i#) on the lon$;ter) perfor)ance of co)panie# and

#hareholder 3al&e*

In %&ildin$ &pon the pre#ent #t&d(/ f&t&re effort# )a( %e &nderta'en on t,o front#* ir#t/

there i# a need for $reater e)pirical re#earch on the i)pact of #hareholder acti3i#) in India/

,hich ,o&ld help %etter &nder#tand it# de#ira%ilit( and effect in the Indian conte6t* Second/

)ore effort# )t %e ta'en to enhance the po,er of )inorit( #hareholder# ,ho are co)pelledto act in the #hado, of controllin$ #hareholder#* The#e incl&de )ea#&re# #&ch a# c&)&lati3e

3otin$ for appoint)ent of independent director#/


26/26

S+'%8 S&%+2

A%$*4+2 R+;+%%+':

Varottil )a'anth/ ‘The Ad3ent of Shareholder Acti3i#) in India"/ Jo&rnal on +o3ernance/

Vol* . No* / 01.0*

B&&@2 R+;+%%+':

Sin$h A3tar/ ‘Co)pan( La,"/ .th Edition/ Ea#tern 7oo' Co)pan(/ L&c'no,/ India/ 01.-*

Dr* Sahara(/ H**/ ‘Co)pan( La,"/ ni3er#al La, =&%li#hin$ Co*/ Ne, Delhi/ 01.-*

Dr* Tripathi/ S*C*/ ‘Modern Co)pan( La,"/ Central La, =&%lication#/ Allaha%ad/ 01.0*

Jain/ N**/ ‘Co)pan( La,: La, and =ractice"/ Deep Deep =&%lication# =3t* Ltd*/ Ne,

Delhi/ 01..

Documents

Shareholder's Activism in India