Shareholder Activism in India: Emerging Trends and Legal Challenges : Author: Aryaman Bandi
Shareholder activism is fast becoming an important part of corporate governance in India, where all the shareholders of a company are increasingly taking an active role in how companies are managed. In other words, the shareholders have the power to make binding decisions for the entire company. This Article will be examining the growing role of shareholders, most particularly the minority investors, in majorly influencing the corporate decision-making through voting, board participation, and engagement with management
ARTICLE
Abstract
Shareholder activism is fast becoming an important part of corporate governance in India, where all the shareholders of a company are increasingly taking an active role in how companies are managed. [1]In other words, the shareholders have the power to make binding decisions for the entire company. This Article will be examining the growing role of shareholders, most particularly the minority investors, in majorly influencing the corporate decision-making through voting, board participation, and engagement with management. It also examines the legal framework under the Companies Act, 2013 and SEBI regulations, along with various challenges which are regulatory hurdles and risk of misuse. This article argues that Shareholder activism can improve corporate governance and accountability, but the success on this mainly depends on maintaining a balance between shareholder interests and managerial freedom.
Introduction
Companies in this era are expected to maintain transparency, follow good governance practices and add responsibly towards their shareholders and stakeholders. Due to the constant changing corporate environment, company’s shareholders are increasingly becoming more involved in decisions and functioning of companies. This growing involvement of the shareholders is mostly commonly referred to as Shareholder activism. The term Shareholder activism refers to efforts made my shareholders to pressure management into making changes to corporate governance, strategy or social policies. This can take different forms such as including voting on important resolutions, questioning the company’s management and proposing changes to the board. Shareholder activism is well-established in countries like United States (USA) and the United Kingdom (UK), but it is slowing gaining importance in India as well. The rise of institutional investors, awareness among the small shareholders and increased corporate disclosure has contributed to this change. Shareholder activism in India has also faced several challenges which include lack of adequate information, company’s management resistance and difficulty in balancing shareholder interests with managerial autonomy.
This Article will be examining the emerging trends in Shareholder activism in India and the legal framework that governs it.
Legal Framework
Shareholder activism in India has developed alongside the strengthening of corporate governance and shareholder rights. Before, Shareholders of a company didn’t play much of a role while all the important decisions pertaining to the company was taken by the Company’s management. However, greater access to corporate information and the growing awareness of shareholder rights have encouraged investors to take a active role in these affairs.
The Companies Act 2013 which has replaced the older Companies Act 1956 provides the basic legal framework for shareholder participation in India. The act gives shareholders various rights such as access to company’s information, appointment and removal of company directors and general meetings. Various provisions which relate to oppression and mismanagement provide shareholders with legal remedy when the company’s affairs are performed in a manner which oppose the shareholder’s interests. The SEBI (Securities and Exchange Board of India) plays an important role as well. The SEBI LODR (Listing Obligations and Disclosure Requirements) Regulations, 2015 which had come into effect on December 1 2015 which require listed companies to follow various corporate governance and disclosure standards. These requirements essentially enable shareholders to receive information which is necessary to make decisions.
In addition to all this, the Insolvency and Bankruptcy Code, 2016, takeover regulations and SEBI’s rules relating to related-party transactions and shareholder approvals provide further avenues through which shareholders can protect their interests.
Core Analysis
1)Rise of Shareholder Activism in India.
Previously, Shareholder activism in India wasn’t prevalent in India, but recently it has grown significantly with increasing participation of institutional investors, foreign investors and informed minority shareholders. With the rise of Shareholder Activism, Shareholders have become more willing to question the company’s management demand greater accountability. The shareholders don’t remain as passive investors and instead pursue an active role as they use voting rights, engagement with management and using various legal means to influence major corporate decisions
2)Role of Institutional Investors and Proxy Advisory Firms.
[2]Institutional investors play a very important role because of shares they hold in various companies. Major decisions taken by the investors can influence the outcome of important resolutions such as related party transactions, mergers and acquisitions and other corporate matters. Proxy advisory firms support shareholder participation by analysing resolutions and providing recommendations. This has encouraged Companies to be more considerate and responsive to shareholder’s concerns.
3)Legal Challenges and Limitations
Although shareholder activism is growing in India, it has faced several legal and practical difficulties. The small shareholders lack adequate resources, important information, or collective strength to challenge decisions taken my the company’s management. Sometimes, there can be conflict between activist shareholders and the company’s directors, mostly when activists demand changes in corporate strategy or management. Futhermore, activism which is driven by short-term financial interests can clash with the long term interests of a company.
4)Balancing Activism with Corporate Governance
The effectiveness of shareholder activism can depend on maintaining a good balance between shareholder rights and managerial autonomy. A good engagement with companies can encourage them to improve transparency, accountability and decision-making. Also at the same time, purely profit driven activism can create imbalance within a company. Informed voting, responsible participation by institutional investors and effective regulatory oversight can help ensure shareholder activism can become a constructive tool by improving corporate governance rather than just challenging the company’s management.
Counterarguments and Limitations
[3] Shareholder activism can improve corporate accountability but also has drawbacks and limitations. Activists can sometimes focus on short-term financial gains rather than long terms interests of the company. Large investors can have a much greater influence compared to minority shareholders which creates an imbalance in participation. Moreover, aggressive activism can create problems with management and interfere with business decisions. Hence, Shareholder activism needs to be exercised responsibly.
Conclusion
Shareholder activism in India has slowly become an important part of modern corporate governance. The shift from passive role to active participation has given shareholders and investors a strong voice in matters which affect the direction of companies, management and transparency. The Companies Act, 2013 and SEBI regulations are provided shareholders with various rights through which they can question a company’s decisions and demand greater accountability. Shareholder activism cannot exist without challenges. Some of the challenges as mentioned before are limited participation by small shareholders, company management resistance, information gaps and possibility of short term interests which can influence corporate decisions can reduce it’s overall effectiveness. Futhermore, restricting shareholder involvement can could possibly weaken important check on managerial power. In conclusion, we shouldn’t treat shareholders and management as opposing forces rather encourage constructive engagement between them.
References
1) Susmita Biswas, Subhajit Chakraborty ‘The existence of shareholder activism in India: A factual occurrence or a deceptive perception?’ (2024) Volume 10(3) First Paragraph 233
2) https://blog.ipleaders.in/shareholder-activism-and-its-influence-on-corporate-decision-making/
3) 3) R. ABHINAV, S. MAHARISHI, ‘https://tijer.org/tijer/papers/TIJER2312008.pdf’ December 2023, Volume 10, Issue 1
5) https://www.investopedia.com/terms/s/shareholderactivist.asp.
[1] Susmita Biswas, Subhajit Chakraborty ‘The existence of shareholder activism in India: A factual occurrence or a deceptive perception?’ (2024) Volume 10(3) First Paragraph 233.
[2] https://blog.ipleaders.in/shareholder-activism-and-its-influence-on-corporate-decision-making/
[3] R. ABHINAV, S. MAHARISHI, ‘https://tijer.org/tijer/papers/TIJER2312008.pdf’ December 2023, Volume 10, Issue 1