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Introduction
The emergence of Shareholder Activism is a new facet of corporate governance in India. The Key drivers which facilitate shareholder activism are the regulatory reforms which give scope for shareholder participation and market forces which create an activist stance in the investors. Shareholder Activism in India is consistent with the International trend. Although the impact of shareholder activism on corporate governance may not be unambiguous in companies which have large shareholding pattern, the influence that shareholder activism has on corporate governance cannot be disregarded.
Need for empowerment of the investors
In the wake of corporate frauds in India, the corporate governance reforms reflect empowerment the investors. In India, the corporate sector is dominated by the promoters and controlling shareholders, in such a scenario, the need for empowerment of the investors through shareholder activism becomes more significant. The recent regulatory reforms in India empower the shareholders and facilitate their participation through various mechanisms such as e-voting, voting through postal ballots, etc. However, in spite of furtherance of shareholder activism by the regulatory regime in India, the impact of shareholder activism may get dampened on account of the fact that many companies in India are widely controlled by majority shareholders.The influence of controlling shareholders in India is very magnificent and the current scenario is characterized by the lack of shareholder activism in the institutional and retail investors.
Meaning of Shareholder activism
Shareholder activism may be defined as series of proactive efforts on the part of the shareholders to influence the behavioral patterns of the firm and the governance rules. Hence, it is a mechanism to change the manner of the company’s management without an actual change in the control of the company.[1]
The most important shares of shareholder activism are participative shareholder activism, interactive shareholder activism and shareholder activism whereby a combative strategy is used. In the participative shareholder activism, the shareholders actively participate in corporate franchise by exercising their votes in the meetings. Although, they are be the minority shareholders, on account of the overwhelming participation of the minority shareholders; the course of management undergoes a change[2].
The Companies Act, 2013 in relation with Shareholder Activism
The Companies Act, 2013 can be considered as a furtherance of the protection of investors and facilitation of greater participation by the shareholders.
Voting by postal ballot
Section 110 of the Companies Act, 2013 provides for voting by postal ballot. This provision was contained even in the Companies Act, 1956. Voting by postal ballot can be regarded as a mechanism to facilitate greater participation of the shareholders. The SEBI has also taken steps in the direction of propagation of class action suits.
Class action suit
The SEBI (Investor Protection and Education Fund) Guidelines, 2009, provide that the SEBI can aid investors in undertaking legal proceedings that are in the interest of investors at large in the company that is listed or proposed to be listed[3]. Section 245 of the Companies Act, 2013 provides for class action suit. This can also be regarded as a facet of shareholder activism because shareholder activism includes proceedings against the management of the Company for alleged mismanagement. The provision for a class action suit would enable the aggrieved shareholders to proceed against the management and enforce their rights. The aspect of class action suits has been successful in the US to promote shareholder activism. The provision of class action suit may be observed as a basis of which the minority shareholders can become active watchdogs of the Company instead of helpless spectators.[4] Thus, a mechanism whereby the shareholders have an avenue to enforce their rights can also be regarded as a furtherance of shareholder activism.
Manner of Participation of Shareholders
The various angles of shareholder activism may be reflected in terms of manner of participation of shareholders in meetings and the role of shareholders in corporate decision making.
Manner of Casting Votes
The facility of voting by postal ballot was introduced in 2001 which enable the member who could not physically attend the meeting for casting the votes may cast their votes through post instead of being physically present at the company meeting and it was made compulsory by the Central Government to provide a facility of voting by postal ballot. But it failed to make an impact as the shareholder participation through postal ballot remained as low as 3% on an average.
Companies (Passing of the Resolution by Postal Ballot) Rules, 2011 were passed which specifically recognized voting through the electronic means.
Participation of Shareholders in Meetings
It is important that the shareholder shall exercise their voting rights in an informed manner and the same is possible only when the shareholders are present in the meetings and get an opportunity to engage in deliberations for exercise of corporate franchise. The government of India recognized that the shareholders may have some limitations in being physically present in the meetings. Hence, the Government of India introduced the concept of e-participation. The companies were required to provide the shareholders an option to attend the meeting through audio visual means in such a manner that all the participants can communicate and participate effectively[5].
Voting in the Meetings as a Responsibility
Shareholding in a Company can be considered as a bundle of rights.[6] The right to cast vote and participate in the corporate franchise is the most significant right of a shareholder. Shareholders, however, have the discretion to vote or refrain from voting. The regulatory authorities had recognized the passivity among the retail and institutional investors in terms of exercising their voting as a responsibility.
Example of Shareholder Activism in India
Although the Companies Act, 2013 facilitated a few reforms in furtherance of shareholder activism[7], there was a recent instance which reflects shareholder activism in action.
The Children’s Investment Fund is a hedge fund in the United Kingdom. TCI holds 1% shares in Coal India which is a government company wherein the government holds 90% stake. TCI raised the concern that Coal India has huge government influence and thus was refusing to sell its products at market prices. TCI also raised issues about the governance of Coal India as a public listed company. According to the Articles of Association 0f Coal India, the President of India has the power to direct the affairs of the company and the same was received as a satisfactory answer by TCI. TCI went on to initiate a legal action against Coal India before the Kolkata court. It has also proceeded to initiate arbitration with Coal India as the opposite party under certain bilateral investment treaties[8]. TCI is a hedge fund that has a track record of being successful in terms of shareholder activism in many other countries.
The main allegations of the TCI in the lawsuit were that the Ministry of Coal did not permit Coal Indi as an independent company. Also, the international market pricing norms are not followed by Coal India. Also, TCI pointed out that the Directors of Coal India were not performing their duties in a reasonably efficient manner and fail to exercise care and skill, which is the main reason for the Company running into losses[9]. The Government denies being bound to follow the international pricing norms and did not accept the allegations of TCI[10]. While the suit remains to be decided, regardless of whether or not TCI succeeds in the case; what needs to be observed is that shareholder activism can be utilized as a weapon in the hands of the minority shareholders to enforce their rights.
It can thus be inferred that shareholder activism is a proactive action of the shareholders and many not require complex reforms for initiation. For instance, class action suit as a provision in the Companies Act, 2013 did not exist when TCI initiated the suit and set an example of shareholder activism in India. Thus, it may be further be purported that on account of the recent regulatory reforms in India, shareholder activism may be seen as a manner of enforcement of rights of the shareholders against their companies.
Evaluating the Need of Shareholder Activism
The aspect of shareholder activism in India may be termed as almost non-existent. In order to promote shareholder activism, the ministry of corporate affairs and Securities and Exchange Board of India in order to promote protection of investors and raise awareness amongst the shareholders. Clause 49 of the listing agreement provides for various disclosures and maintenance of transparency[11].
In the Satyam scam, the when the management of Satyam Computers Limited decided to take over the Maytas Infrastructure Limited, the Institutional Investors pressurized the management to withdraw its decision henceforth, the decision was withdrawn only in account of the pressure faced from the shareholders. After this, the value of the American Depository Receipts, which were listed in the New York Stock Exchange, fell down. Consequent to this, the shareholders in the US filed various class action suits against director of Satyam Computers Limited alleging its directors have committed violations of the US Securities Exchange Act, 1934, by issuing materially false and misleading statements. Hence, in terms of occurrence of corporate frauds such as the Satyam Fiasco, it becomes exceedingly necessary for the shareholders to exercise diligence and ensure that their rights are protected. In case of lack of shareholder activism, major corporate frauds would become rampant. Thus, the Satyam scam can be viewed as a result of failure of corporate governance on the part of the Company and lack of shareholder activism.
Conclusion
Shareholder activism in India is at a nascent stage and comes to the fore only in instances where institutional investors holding a significant stake are in a position to question the quality of corporate governance.[12] The minority shareholders are generally not aware of the means through which they can exercise their rights and in order to enhance good corporate governance practices, increased activism on the part of the shareholders is extremely critical.[13] The exercise of rights by the minority shareholders in terms of shareholder activism can be regarded as a step to ensure furtherance of promotion of corporate governance.
The landmark Companies Act, 2013 has put in an impressive framework for making firms more accountable to shareholders, but the provisions on corporate governance will have teeth only if shareholders start exerting their rights[14].
The need for shareholder activism can be brought out by analyzing the issues that are a setback in enforcement of the rights by the shareholders. For instance, the shareholders do not exercise their rights and abstain from voting; this is the most crucial reason for the lack of shareholder activism in India. The regulatory system in India is not considered effective enough and the extent of time taken in resolving a grievance of a shareholder act as a major drawback[15]
References:
[1] Bernard Black, Shareholder Activism and Corporate Governance in the United States, in PETER NEWMAN (ED.), available at http://ssrn.com/abstract=45100
[2] Financial Reporting Council, The UK Stewardship Code (September 2012), available at http://www.frc.org.uk/Our-Work/Codes-Standards/Corporate -governance/UK-Stewardship-Code.aspx.
[3] http://indiacorplaw.blogspot.in/2009/06/shareholder-activism-and-class-action.html Section 245
[4]http://www.openthemagazine.com/article/business/thumbs-up-for-shareholder-activism
[5] Ministry of Corporate Affairs, Government of India, Green initiative in the Corporate Governance – Participation by shareholders in general meetings under the Companies Act, 1956 through electronic mode, General Circular No. 27/2011 (May 20, 2011)
[6]Cambridge Gas Transportation Corporation v. Official Committee of Unsecured Creditors of Navigator Holdings [2006] UKPC 26, [2007]
[7] Jayanta Mallick, Shareholder Activism gains foothold in 2012, Business Line, http://www.thehindubusinessline.com/markets/shareholders-activism-gains-foothold-in-2012/article4210248.ece
[8]Coal India faces a surprising case of shareholder activism in India, available at http://www.policymic.com/articles/6356/coal-india-faces-a-surprising-case-of-shareholder-activism-in-india
[9] Umakanth Varottil, EMERGENCE OF SHAREHOLDER ACTIVISM IN INDIA, NSE Quarterly Briefing, April 2013, available at http://www.nse-india.com/research/content/res_QB1.pdf
[10]TCI plea to raise prices has no legal basis: Coal India, The Economic Times http://articles.economictimes.indiatimes.com/2013-01-28/news/36596302_1_cil-directors-coal-prices-coal-india
[11]Shareholder Activism-Healthy trend for Corporate Governance
[12]Enhancing Transparency and Accountability in Indian Corporates, available at http://www.kpmg.de/docs/Enhancing_Transparency.pdf
[13]ibid
[14] India’s missing shareholder activists, http://www.livemint.com/Opinion/NvhadreiRdsM4bJbMSTAxK/The-lack-of-shareholder-activism-in-India.html
[15] Shareholder Activism: Greenmail to Governance, http://www.advantage-india.in/GreenmailtoGovernance.pdf
