The Advent of Shareholder Activism in India

8/18/2019 The Advent of Shareholder Activism in India

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Journal on Governance, Vol. 1 No. 6, 2012

THE ADVENT OF SHAREHOLDER

ACTIVISM IN INDIA

Umakanth Varottil *

The recent spate of crises afflicting the corporate and

financial sectors around the world has triggered a newwave of corporate governance reforms, which call for

greater empowerment of institutional and retail shareholders. The need for such reforms cannot be

greater than in India where controlling shareholders,

or promoters, dominate the corporate landscape.

Consistent with reforms in several countries that seek to

confer greater power in the hands of shareholders, therecent regulatory developments in India signify a

greater opportunity for shareholder participation in the form of postal ballot, e-voting and the like. The rapid

proliferation of proxy advisory firms, a hitherto non-existent phenomenon in India, bestows shareholders

with the advice necessary to exercise their corporate franchise in an informed manner. The presence of

activist institutional shareholders such as private equity funds and hedge funds has already caused an upheaval

in some corporate boardrooms in India.

While these developments pave the way for atransformation in the tenor of the governance debate,

shareholder activism encounters certain structural andinstitutional weaknesses embedded in the Indian

markets. The dominance of controlling shareholders in

* Assistant Professor, Faculty of Law, National University of Singapore. I thank thestudents in the Corporate Governance course at the NUJS Summer School held atIIM-Shillong in June 2012, and the participants at the National Seminar on“Corporate Laws: Contemporary Issues & Challenges” held at the Gujarat

National Law University, Gandhinagarin October 2012, for thought-provokingdiscussions that have helped shape this paper. All errors and omissions are mine.

Email: [email protected]


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Journal on Governance [Vol 1:583583

most Indian companies operates to dampen the effects

of shareholder activism. The legal system andinstitutions in India are not conducive to rendering

timely and cost-effective remedies to shareholders whoadopt a litigation strategy to counter managements that

are perceived to act inimical to shareholder interests.This paper finds that although shareholder activism is

becoming palpable in the Indian markets, its impact asa measure of corporate governance enhancement is far

from clear.


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2012] The Advent of Shareholder Activism in India 584

CONTENTS

I. Introduction

II. Shareholder Activism: The Concept

A. Collective Action Problems; Shareholder Apathy

B. Defining the Concept

III. Shareholder Passivity as the Starting Point

IV. Regulatory Reforms Towards Greater Shareholder Participation

A. Voting Methods

B. Shareholder Meetings

C. Voting as Responsibility

D. Assessing the Reforms

V. Corporate Governance Intermediaries

A. Proxy Advisors in India: Their Influence

B. Concerns and Possible Mitigating Factors

C. Other Informational Intermediaries

VI. Feasibility of Interactive/Combative Strategies

A. Interactive Strategy

B. Change of Control Strategy

C. Litigation Strategy

VII. Evaluating the Impact of Shareholder Activism

A. Distilling the Evidence

B. Effect on Controlled Companies

VII. Conclusion


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I. Introduction

The last two decades have witnessed a significant thrust

towards enhanced corporate governance standards in India. Whilesome of this may be attributable to the globalization of governance

practices that have had their impact on Indian companies, regulatoryreforms spearheaded by the Securities and Exchange Board of India

(SEBI) have also had a role to play. Since 2000, SEBI has required public listed companies to deploy well-recognized governance

structures and mechanisms. These include an independent board ofdirectors, an independent audit process, certification of financial

statements by the chief executive officer and chief financial officer,and the like.1These efforts have been embraced by the stock markets

that have conferred a premium towards good governance practices.2

At the same time, the existing standards are said to be far fromthe desirable, and governance crises such as that witnessed in the

Satyam accounting scandal have underscored this line of criticism.3 Given the influence of controlling shareholders in most Indian

companies, one of the significant shortcomings in the current

dispensation is the lack of shareholder activism, particularly amongst

1 Corporate governance measures are administered through clause 49 of the listingagreement entered into between listed companies and the stock exchanges.Although the listing agreement is essentially a contractual arrangement, it hasstatutory support as violations of the listing agreement could result in penalconsequences. §23E, Securities Contracts (Regulation) Act, 1956.

2 Bernard S. Black & Vikramaditya S. Khanna, Can Corporate Governance

Reforms Increase Firms’ Market Values? Evidence from India, JOURNAL OFEMPIRICAL STUDIES, Vol. 4 (2007), available at http://ssrn.com /abstract=914440;Dhammika Dharmapala & Vikramaditya Khanna, Corporate Governance, Enforcement, and Firm Value: Evidence from India, (2008) available athttp://ssrn.com/abstract=1105732.

3 Umakanth Varottil, A Cautionary Tale of the Transplant Effect on IndianCorporate Governance, 21(1) NAT. L. SCH. I ND. R EV.1 (2009).

http://ssrn.com/abstract=1105732http://ssrn.com/abstract=1105732


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institutional and retail investors that hold minority stakes.4 This perceived weakness in Indian corporate governance appears to be

addressing itself through the onset of activist shareholders in the

Indian corporate sphere, whose efforts have been further buoyed byregulatory reforms. The phenomenon of shareholder activism, hithertoabsent in India, has made its mark rapidly, and has become a force to

reckon with for Indian listed companies.

Consistent with reforms in several countries that seek to confergreater power in the hands of shareholders, the recent regulatory

developments in India signify a greater opportunity for shareholder participation in the form of postal ballot, e-voting and the like. The

rapid proliferation of proxy advisory firms, a hitherto non-existent phenomenon in India, bestows shareholders with the advice necessary

to exercise their corporate franchise in an informed manner. The presence of activist institutional shareholders such as private equity

funds and hedge funds has already caused an upheaval in some

corporate boardrooms in India.

While these developments pave the way for a transformation in

the tenor of the governance debate, shareholder activism encounterscertain structural and institutional weaknesses within the Indian

markets. The dominance of controlling shareholders in most Indiancompanies operates to dampen the effects of shareholder activism. The

legal system and institutions in India are not conducive to renderingtimely and cost-effective remedies to shareholders who adopt a

litigation strategy to counter managements that are perceived to act

inimical to shareholder interests. This paper finds that although

shareholder activism is becoming palpable in the Indian markets, its

impact as a measure of corporate governance enhancement is far fromclear.

Part II of this paper deals with the theoretical framework ofshareholder participation in corporate democracy, and comments on

4 Id ., at 49.


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the inefficiencies of the present structure, before going on to define the

concept of shareholder activism and to describe its various types. PartIII looks at the historical position in India where shareholder passivity

was the norm. Part IV examines various regulatory reforms undertakenin India that enable shareholders to be more participative in corporate

decision-making. These include measures such as e-voting, virtualshareholders’ meetings, and voting policies for mutual funds. Part IV

explores the roles of corporate governance intermediaries such as proxy advisory firms and governance analysts and their impact on

shareholder activism. Part V examines the feasibility of combativestrategies by activist shareholders, which include proxy fights, change

of control and litigation against companies, directors and management.Part VI evaluates the likely impact of shareholder activism in India

after considering the empirical evidence from other countries, and PartVII concludes.

II. Shareholder Activism: The Concept

Before examining definitions of “shareholder activism”, it

would be useful to identify the problem that the concept seeks to

address.

A. Collective Action Problems; Shareholder Apathy

In large public listed companies, the public (or non-promoter)

shareholders have relatively small stakes and these do not providesufficient incentives for them to act together and form coalitions to

meaningfully participate in decision-making of companies. In theclassic Berle & Means corporation where shareholding is diffused,5

while the shareholders are owners of the company, the managerscontrolling the company as shareholders are unable to participate in

5 ADOLF A. BERLE & GARDINER C. MEANS, THE MODERN CORPORATION ANDPRIVATE PROPERTY 47 (1932).


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decision-making due to collective action problems.6 Even in controlledcompanies, which are predominant in India,7 collective action

problems prevent minority shareholders from coalescing, which

reduces their effective participation through the exercise of corporatefranchise. In such a case, the lack of minority shareholder participationaugurs to the benefit of the controlling shareholders, and managers

appointed with their concurrence. Related to the collective action problem is “shareholder apathy”. Since the costs of coordination

among minority shareholders are high, these shareholders eitherabstain from voting or merely vote in favor of management (or the

controlling shareholders, as the case may be).8

Due to collective action problems and shareholder apathy, bothretail and institutional investors have historically been passive

shareholders. The evolution of more active shareholders has beenfairly recent. It is only in the 1980s that even developed economies

such as the United States (US) witnessed the phenomenon of active

investors, which began through institutional investors such as pension

funds and other large institutional investors.9 Unsurprisingly, this field

6 Collective action problems are the difficulties that arise in achieving consensusamong a diffused set of shareholders who do not play an active role in thecompany. The heterogeneity of interests and differing levels of informationavailable with these shareholders exacerbate the problems. See, Stephen M.Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97

NW. U.L. R EV. 547, 557 (2003).7 Shaun J. Mathew, Hostile Takeovers in India: New Prospects, Challenges, and

Regulatory Opportunities, 2007(3) COLUM. BUS. L. R EV. 800; George S. Geis, Can Independent Blockholding Play Much of a Role in Indian Corporate Governance?,3 CORP. GOVERNANCE L. R EV. 283 (2007).

8

See, Lee Harris, Missing in Activism: Retail Investor Abstinence in Corporate Elections, 2010 COLUM. BUS. L. R EV. 104, 166; Frank H. Easterbrook & Daniel R.Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395 (1983). See also, LucianBebchuk, The Case for Increasing Shareholder Power , 118 HARV. L. R EV. 833,877 (2005) (Noting some of the reasons why shareholders may have a tendency tovote in favor of management proposals).

9 Stuart Gillan & Laura T. Starks, The Evolution of Shareholder Activism in theUnited States (2007), available at http://ssrn.com/abstract=959670.


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has attracted academic research only more recently,10 as compared to

other areas of corporate governance.

With this background, it would be useful to examine howshareholder activism may be defined, and also to consider various

types of activism.

B. Defining the Concept

Shareholder activism is considered to be a set of “proactiveefforts [on the part of shareholders] to change firm behavior or

governance rules.”11

It signifies the efforts on the part of investors toinfluence the behavior of management in governing the company.

Activist investors are “often viewed as investor s who, dissatisfied withsome aspect of a company’s management or operations, try to bring

about change within the company without a change in control.” 12 Activist investors can be contrasted from passive investors, who rarely

participate in corporate decision-making. Passive investors usuallyvote with their feet. If they are not satisfied with decisions taken by the

management or controlling shareholders, they simply exit the company

by selling their shares, a practice fancifully referred to as the “WallStreet walk.”13

10 See e.g., Bernard Black, Shareholder Activism and Corporate Governance in theUnited States, in PETER NEWMAN (ED.), THE NEW PALGRAVE DICTIONARY OF

ECONOMICS AND THE LAW (1998), available at http://ssrn.com/abstract=45100; Stephen M. Bainbridge, Shareholder Activism and Institutional Investors, UCLA

SCHOOL OF LAW, LAW & ECONOMICS R ESEARCH PAPER SERIES, available at

http://ssrn.com/abstract=796227; Roberta Romano, Less is More: Making Institutional Investor Activism a Valuable Mechanism of Corporate Governance,18 YALE J. ON R EG. 174 (2001).

11 Black, supra note 10 at 3.12 Gillan & Starks, supra note 9, at 5.13 Jayne Elizabeth Zanglein, From Wall Street Walk to Wall Street Talk: The

Changing Face of Corporate Governance, 11 DEPAUL BUS. L.J. 43 (1998).However, there could be an argument that the potential for exit by large investors

http://ssrn.com/abstract=45100http://ssrn.com/abstract=45100http://ssrn.com/abstract=796227http://ssrn.com/abstract=796227http://ssrn.com/abstract=45100


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There are various shades of shareholder activism, although this paper primarily deals with three. I refer to the first type as

“participative” shareholder activism. In this type, shareholders assume

greater responsibility for participating in shareholder meetings andexercising their corporate franchise. This way, greater participation byminority shareholders could have an impact on the outcome of

corporate decisions. Even if the decisions themselves may not bedifferent because minority shareholders may only have infinitesimal

shareholding in the company, their overwhelming response cannot beignored altogether by managements and controlling shareholders.

While shareholders, particularly of the institutional variety, aredemonstrating greater interest in participative activism, legal reforms

in various jurisdictions are utilizing soft law and self-regulatorymechanisms to encourage greater participation by shareholders in

corporate decision-making.14

The second type of activism is more upfront. “Interactive”

shareholder activism involves the direct engagement by the

shareholders with the management. Large institutional shareholdersseek to interact with the management and obtain an assessment of the

affairs of the company. Such interaction usually takes place wheneither the shareholders are unconvinced of the direction adopted by the

management on certain matters, or when the company undertakes amajor transaction (such as a merger) or suffers a material adverse

effect (such as a significant loss, or other extraordinary event such as acorporate fraud). Shareholders not only interact to obtain more

might itself have a disciplinary effect on management. As to the efficacy of largeinvestor exits, see, Anat R. Admati & Paul Pfleiderer, The “Wall Street Walk”

and Shareholder Activism: Exit as a Form of Voice, 22 R EV. FIN. STUD. 2245(2009).

14 See, 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. For a survey of trends regardingactivism in various leading jurisdictions around the world, see, Lisa M. Fairfax,Shareholder Democracy on Trial: International Perspective on the Effectivenessof Increased Shareholder Power , 3 VA. L. & BUS. R EV. 1 (2008).


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information from the management, but also to convince the

management of the strategy to be followed and changes to be effectedto enhance value to shareholders.15 The downside of the interactive

type of activism is that management and controlling shareholders areunder no legal compulsion to engage with shareholders, and can

simply choose to ignore them. In such a case, the interactive effortsmay not be fruitful.

An extended version of such interactive type brings us to the

third category where shareholders adopt a combative strategy. Thisinvolves efforts to overthrow incumbent management through

processes such as proxy fights or hostile takeovers that result in achange in control of the company.16 A more aggressive form involves

the initiation of litigation against the company, its board andmanagement. Certain types of investors, such as pension funds and

hedge funds, have utilized this strategy more recently in certain jurisdictions like the US to achieve their goals.17

With this background regarding the rationale for, and types of,

shareholder activism, the paper now turns to the evolution of the

phenomenon in India.

15 This type of activism is becoming prominent with certain types of institutionalinvestors such as hedge funds. Thomas W. Briggs, Corporate Governance andthe New Hedge Fund Activism: An Empirical Analysis, 32 J. CORP. L. 681(2007); Marcel Kahan & Edward B. Rock, Hedge Funds in CorporateGovernance and Corporate Control , 155 U. PA. L. R EV. 1021 (2007).

16 Briggs, supra note 15 at 681; Brian R. Cheffins & John Armour, The Past, Present and Future of Shareholder Activism by Hedge Funds, 37 J. CORP. L. 51(2011).

17 Kahan & Rock, supra note 15, at 1038-39; See also, Randall S. Thomas, The Evolving Role of Institutional Investors in Corporate Governance and Corporate Litigation, 61 VAND. L. R EV. 299 (2008); Stephen J. Choi & Jill E. Fisch, On Beyond CalPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance, 61 VAND. L. R EV. 315 (2008).


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III. Shareholder Passivity as the Starting Point

During the initial years since India’s independence, shareholder

passivity was all-pervasive. The equity markets were considerablyshallow, and retail investment in Indian listed companies wasnegligible.18 Although a few leading Indian business houses had listed

companies within their stables, retail investors were unable to makeany dent in the influence of controlling shareholders, who wielded

significant control over their companies due to the substantialshareholding they commanded. Even if retail shareholders were able to

participate in shareholder meetings and express their views,managements and controlling shareholders could afford to ignore the

minority voice due to their negligible shareholding in the company andtheir consequent inability to affect the outcome of corporate decisions.

The legal regime governing corporate decision-making did not cometo the aid of retail shareholders either. Company meetings had to be

convened at specified physical locations.19 Several leading companies

had their registered offices in remote locations, which made retail

participation impossible, if not cumbersome. All of these resulted in passivity among retail shareholders.

On the other hand, certain institutional shareholders such as

banks, development financial institutions (DFIs) and the then largestmutual fund, the Unit Trust of India (UTI), held larger stakes in

companies in comparison to retail shareholders.20 It is reasonable toexpect these institutions to exercise their investment oversight more

actively. However, that was not necessarily the case. The banks, DFIs

18 John Armour & Priya Lele, Law, Finance, and Politics: The Case of India, 43

LAW & SOC’Y R EV. 491, 496.19 §166(2), Companies Act, 1956, wherein annual general meetings can be heldonly at the registered office of the company or at some other place within thesame city, town or village as the registered office, although there are nogeographical restrictions as far as other shareholders’ meetings are concerned.

20 Jayati Sarkar & Subrata Sarkar, Large Shareholder Activism in CorporateGovernance in Developing Countries: Evidence from India (2000), available athttp://www1.fee.uva.nl/fm/Conference/cifra2000/sarkar.pdf, at 8.


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and UTI were heavily subjected to governmental and bureaucratic

control and influence.21 Although these institutional shareholders oftenappointed their nominees to the boards of investee companies and also

exercised their voting rights somewhat regularly, they were never perceived as independent investors or as a threat to management and

controlling shareholders. The strong nexus that existed betweengovernment and industry ensured that the management always enjoyed

the support of these institutional shareholders.22 Hence, although theinstitutions exercised greater level of participation than retail

shareholders, their influence as activists was minimal at best. Theseinfluences continued to a large extent post-liberalization in 1991, but

the shareholding of such government-controlled banks and institutionsin Indian companies has witnessed a dramatic fall in recent years,23

due to which their influence has considerably waned.

A related category of institutional shareholders is foreign portfolio investors. They invest into Indian listed companies through

multiple routes. Prominent among them is the foreign institutionalinvestor (FII) route, whereby FIIs may acquire and divest shares in

Indian companies through the stock exchange.24 All administrative

aspects of the investments are handled through domestic custodiansappointed for the purpose.25 Although FIIs hold substantial shares in

21 Omkar Goswami, The Tide Rises, Gradually: Corporate Governance in India (2000), available at http://www.oecd.org/corporate/corporateaffairs/corporategovernanceprinciples/1931364.pdf, at 8.

22 Id .23 Mathew, supra note 7, at 834.24 Both SEBI and the Reserve Bank of India (RBI) have created a separate facility

for investment by FII’s into Indian companies. See, e.g., Securities and ExchangeBoard of India (Foreign Institutional Investors), Regulations, 1995.

25 §16, Securities and Exchange Board of India (Foreign Institutional Investors),Regulations, 1995.


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Indian companies, they have seldom exercised voting rights in thosecompanies, barring exceptional circumstances.26

Another category of foreign investors subscribes to depositoryreceipts (DRs) in Indian companies instead of acquiring the underlyingshares.27 Interestingly, investors in DRs have not displayed any

keenness at all in the exercise of voting rights on the underlyingshares. As a matter of law, since it is the depository that holds the

underlying shares, only it can exercise voting rights, and the DRholders do not have any legal right to vote.28 A number of different

models were adopted through market practice to address this.29 Insome cases, voting rights have been conferred on the depository, to be

exercised according to the instructions of the board of directors of thecompany. In such a case, the votes of the DR holders’ shares will be

aggregated with that of the management (and indeed, the controllingshareholders). In other cases, custodians must exercise voting rights on

the DRs only when that is legally required . Since Indian corporate lawdoes not obligate shareholders to exercise voting rights, it is not

possible to envisage a situation when voting rights will ever beexercised on such shares. Only in limited instances are depositories

required to exercise voting rights according to the wishes of the DRholders. All of these suggest that in case of companies with DRs, the

votes in respect of the DRs are either exercisable in accordance with

26 Reeba Zachariah & Partha Sinha, FII- PEs’ holdings set to change, TIMES OF

I NDIA, September 24, 2009; S. Murlidharan, Encourage GDRs, Not FIIs, THE

HINDU BUSINESS LINE, January 18, 2012.27 In the 1990s and 2000s, several Indian companies approached the international

capital markets to issue global depository receipts (GDRs) and Americandepository receipts (ADRs), which are listed on stock exchanges overseas. This

route proved advantageous for Indian companies to attract foreign capital at a premium to the domestic market.

28 Under various provisions of company legislation, only members registered in the books of such a company are entitled to receive notices of meetings and toexercise voting rights. See, e.g., §§ 82, 172, Companies Act, 1956.

29 These are set out in some detail in a background paper issued by SEBI. Securitiesand Exchange Board of India, Voting Rights of GDR / ADR Holders, available athttp://www.sebi.gov.in/boardmeetings/132/votingrights.pdf.

http://www.sebi.gov.in/boardmeetings/132/votingrights.pdfhttp://www.sebi.gov.in/boardmeetings/132/votingrights.pdf


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the wishes of management, or the DRs have been effectively

disenfranchised. Managements and controlling shareholders thereforefaced virtually no influence from foreign institutional investors, who

either invested directly or through DRs.

Shareholder passivity, both among retail and institutionalshareholders, was the norm following liberalization as well, and

continued to be so until very recently. However, this status quo seemsto have been disturbed more lately in the phase after the Satyam

accounting scandal. Not only have the regulators begun to recognizethe need for greater shareholder participation in Indian listed

companies, but investors themselves (particularly financialinstitutions) have sought to monitor their investments more carefully.

The paper now turns to these developments and their impact oncorporate governance in India.

IV. Regulatory Reforms Towards Greater Shareholder

Participation

Over the last decade, regulatory efforts in India have focused

on inducing greater participation in shareholder decision-making. Thishas been implemented through a step-by-step approach that addressesdifferent facets of shareholder participation. These include the manner

of voting, the manner of participating in shareholders meetings, andwhether shareholders might be compelled to cast their votes. Each of

these is addressed below.

A. Voting Methods

In 2001, the facility of voting by postal ballot was introduced.30 This was intended to address the problems faced primarily by retail

shareholders who had to attend and physically participate in

30 §192A, the Companies Act, 1956.


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shareholder meetings, often in remote locations of the country. Thesystem of postal ballot permits shareholders to send in their votes by

post instead of personally attending and voting at a meeting. A set of

rules promulgated by the Central Government listed certain resolutionsthat are to be mandatorily put to vote by postal ballot.31 In other cases,the company has the option to offer the postal ballot facility. 32

While the postal ballot facility represented a sea change in

terms of providing a better option for retail shareholders to cast theircorporate franchise, it failed to make a serious impact. The postal

ballot facility may have removed some of the procedural obstacles toshareholder voting, but it was not intended to address the broader

issues of collective action problems and shareholder apathy. Moreover,since shareholders are unable to participate in the discussions, and to

obtain the benefit of the deliberations in the meeting before they casttheir votes, participation levels have been found to be extremely low.

One report states that the response of shareholders through postal

ballot has been abysmally low at only about 3% on average.33

Given the inadequate functioning of the postal ballot system,

more recent regulatory developments have sought to utilizetechnological advancements to enhance shareholder participation and

voting.34 On this occasion, the initiative emanated from SEBI. In July

31 These are matters that materially affect shareholder interest, such as alteration ofthe constitutional documents, sale of substantial undertaking of the company,

buyback of shares, issue of shares with differential voting rights, and the like. §4,Companies (Passing of the Resolution by Postal Ballot) Rules, 2001.

32 Although not mandated by legislation, SEBI exhorted companies to undertake

shareholder voting through postal ballot even in other cases by imposing this as acondition while granting specific dispensations to companies, such as inexemptions from making an offer under SEBI’s takeover regulations.

33 Welcome to the World of E-Voting , THE FIRM: CORPORATE LAW IN I NDIA, July 2,2012.

34 The law explicitly recognizes the possibility of shareholder voting throughelectronic mode. §192A , Companies Act, 1956. Moreover, the Companies(Passing of the Resolution by Postal Ballot) Rules, 2001 were superseded by the


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2012, SEBI amended the listing agreement requiring large companies

to provide electronic voting (e-voting) facilities in respect of mattersrequiring postal ballot.35 According to this new dispensation, the top

500 listed companies on the Bombay Stock Exchange and the NationalStock Exchange are required to provide e-voting facility with effect

from October 1, 2012. Two agencies have already been certified to provide e-voting platforms.36 Although it is too early to gauge the

effectiveness of e-voting, it is expected to generate greater participation by shareholders. For example, the e-voting process is less

costly compared to the postal ballot, and involves less time and efforton the part of the shareholders as well as the company. 37 However, due

to its reliance on technology, the success of e-voting would depend onthe extent of penetration of computers and the Internet across the

country.38

B. Shareholder Meetings

In order to enable the shareholders to exercise their corporatefranchise in an informed manner, it is important that they are able to

participate in meetings, both to make an assessment as to the manner

in which they should exercise their votes, also to speak at the meetings

Companies (Passing of the Resolution by Postal Ballot) Rules, 2011, with effectfrom May 30, 2011, which expressly recognize voting by electronic mode.

35 Securities and Exchange Board of India, Amendment to the Equity Listing Agreement – Platform for E-Voting by Shareholders of Listed Companies,Circular CIR/CFD/DIL/6/2012 (Jul. 13, 2012).

36 Id . These agencies are the Central Depository Services (India) Limited (CDSL)and the National Securities Depository Limited (NSDL). Both these agencieshave established e-voting systems, available at http://www.evotingindia.com/and https://www.evoting.nsdl.com/r espectively.

37 Vinod Kothari, E-voting becomes mandatory for all listed companies,MONEYLIFE, July 16, 2012; Tania Kishore, E-voting will make life easier forinvestors, BUSINESS STANDARD, July 4, 2012.

38 It would not be far-fetched to expect persons holding shares in companies to haveaccess to computers and the Internet.

http://www.evotingindia.com/https://www.evoting.nsdl.com/https://www.evoting.nsdl.com/http://www.evotingindia.com/


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and convey their views to enable the other shareholders to exercisetheir votes in an informed manner as well. Recognizing the limitations

of physical shareholders’ meetings, the Government of India has

introduced the concept of electronic participation. Companies maynow provide the option to shareholders to attend meetingselectronically, through audio-visual means, such that “all persons

participating in that meeting … communicate concurrently with eachother without an intermediary, and … participate effectively in the

meeting.”39 Moreover, companies may provide video conferencingconnectivity during such meetings in at least five locations within

India.40 At the same time, responsibility is placed on the company andthe chairman of the meeting to put in adequate safeguards to ensure the

integrity of the meeting. Although these measures were initiallyintended to be mandatory for listed companies in the period

subsequent to the financial year 2011-12, concerns were raisedregarding the legal validity of electronic meetings in the context of the

Companies Act, due to which such electronic meetings are intended to

be optional for listed companies too.41

Since these measures are only optional, and are yet to be fully

effective, they are unlikely to be widely followed. While it is certainly possible that some of the blue-chip companies will adopt these

voluntary measures, widespread compliance across corporate Indiamay have to wait.

39 Ministry of Corporate Affairs, Government of India, Green initiative in theCorporate Governance – Participation by shareholders in general meetings

under the Companies Act, 1956 through electronic mode , General Circular No.27/2011 (May 20, 2011), ¶ 4(a).

40 Id ., at ¶ 6.41 Ministry of Corporate Affairs, Governance of India, Green Initiatives in

Corporate Governance – Further Clarification regarding participation byShareholders or Directors in meetings under the Companies Act, 1956 throughelectronic mode – authorization regarding e-voting , General Circular No.72/2011 (Dec. 27, 2011).


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C. Voting as Responsibility

Shareholding in a company is considered to be a bundle of

rights.42 One such right conferred is to participate in corporatedecision-making through the exercise of voting power. In this

jurisprudential backdrop, any kind of obligation or responsibility toexercise voting rights is antithetical to the rights or entitlement-based

understanding of share ownership. Hence, shareholders cannotgenerally be compelled to exercise their voting rights in any manner,

or at all. This legal understanding of share ownership does notfacilitate greater shareholder participation in companies, the

consequence of which is shareholder passivity.

Although shareholders cannot be compelled to exercise theirvotes, regulatory authorities have begun to adopt market-based

approaches to address passivity among institutional investors. In amove that is somewhat unconventional in the Indian context, SEBI has

sought to exhort a specific type of institutional investor, i.e. mutualfunds, to exercise their voting rights in investee companies in a

responsible manner. In 2010, SEBI issued a circular to mutual funds

requiring them to “play an active role in ensuring better corporategovernance of listed companies.”43 Adopting a “comply-or-explain”approach,44 SEBI requires asset management companies of mutual

42 Cambridge Gas Transportation Corporation v. Official Committee of UnsecuredCreditors of Navigator Holdings plc, [2006] UKPC 26, [2007] 1 AC 508;Borland's Trustee v. Steel Brothers & Co Ltd,[1901] 1 Ch 279.

43 Securities and Exchange Board of India, Circular for Mutual Funds,SEBI/IMD/CIR No 18 / 198647/2010 (Mar. 15, 2010) [hereinafter the SEBICircular for Mutual Funds].

44 In such an approach, although there is no compulsion to comply with suchrequirement, the persons subject to it are required to make appropriatedisclosures on whether they comply with the requirement, or alternatively toexplain the reasons for non-compliance. Anita Indira Anand, An Analysis of Enabling vs. Mandatory Corporate Governance: Structures Post-SarbanesOxley, 31 DEL. J. CORP. L. 229, 229-30 (2006).


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funds to disclose on their websites and in annual reports their general policies and procedures regarding the exercise of votes on listed

companies.45 Moreover, they are also required to disclose the specific

exercise of voting rights in respect of identified matters such ascorporate governance, changes to capital structure, mergers, takeovers,and the like.46

By imposing mandatory disclosure obligations and thereby

enhancing transparency, this compels mutual funds to take a moreactive and considered role while exercising their voting rights on

companies. It may no longer be possible for mutual funds to eitherabstain from voting or to grant proxies in favor of managements or

controlling shareholders without following a reasoned decision-making process. This is particularly relevant because institutional

investors such as mutual funds possess significant shareholding (atleast in the aggregate, if not individually) with the power to tip the

scales on key voting matters such as mergers, change of control

transactions, preferential allotments of securities and the like.

While SEBI’s circular technically applies only to mutual funds,

its broader message could well pave the way for greater participation by other types of institutional shareholders.

D. Assessing the Reforms

The regulatory reforms discussed in this section have been

fragmented in nature, but their common theme has been to increase

shareholder participation in meetings and voting. This would

strengthen the hands of minority shareholders, both of the retail and

institutional varieties, by removing various procedural hurdles thathave impeded their extensive participation in the past. By imposingstewardship responsibilities on institutional investors such as mutual

funds, SEBI’s goal has become clearer.

45 The SEBI Circular for Mutual Funds, supra note 43 at ¶ 4(ii).46 Id . at ¶ 4(ii).


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At the same time, it would be imprudent to assume that such

regulatory reforms would by themselves instill greater shareholder participation. More specifically, institutional shareholder activism

must be self-generated, although a trend in India towards suchactivism appears to be developing steadily.47

Despite these regulatory reforms, one significant area of

concern continues to be the lack of adequate information availablewith shareholders in order to enable them to exercise their considered

vote. While the Companies Act does contain elaborate provisions as tothe notice to be given to shareholders to convene meetings, both in

terms of the time period and information to be provided,48

thedisclosure and transparency standards followed in practice continue to

be below par.49 While there has been a gradual increase in the amountand quality of information disseminated to shareholders to elicit their

franchise, it is arguably inadequate. The lack of availability of qualityinformation strikes at the heart of shareholder indifference in the

exercise of voting rights. Intermediaries such as proxy advisors andgovernance analysts can bridge the informational disparity to some

extent.50 While such intermediaries played a negligible role, if at all, in

Indian corporate governance in the past, they have revolutionized thegovernance sphere in the last two years. In the next Part, I consider theimpact of these intermediaries on shareholder activism in India.

47 See, infra, Part IV.48 §§ 173, 393, Companies Act, 1956.49 Umakanth Varottil, Corporate Governance in M&A Transactions, Luncheon

Address at the International Bar Association Conference on "The Indian Story inGlobal Mergers and Acquisitions", Mumbai (Mar. 9, 2012).

50 Malini Goyal, How and why transparency in boardrooms helps both India Inc &investors, THE ECONOMIC TIMES, September 30, 2012.


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V. Corporate Governance Intermediaries

Globally, governance intermediaries such as proxy advisors

play a significant role in influencing corporate decision-making. Proxyadvisory firms analyze corporate proposals and makerecommendations to their clients, who are primarily institutional

investors, on the manner in which they should exercise their votes.51 The firms also put out public recommendations, which can be utilized

by retail shareholders for whom it is uneconomical to specifically turnto proxy advisors.52 The proxy advisory industry is rather well

established internationally, and it is actively involved in corporategovernance in jurisdictions such as the US. For example, the industry

leader, Institutional Shareholder Services (ISS) controls about 61% ofthe market,53 and is a force to reckon with, as its recommendations are

capable of swinging the votes at shareholders’ meetings and alteringthe outcome of the decision taken.

A. Proxy Advisors in India: Their Influence

Since 2010, the proxy advisory industry has blossomed in India

as well. Within a span of two years, three proxy advisory firms have been established in India,54 and they have already published hundreds

of recommendations regarding corporate proposals pertaining tovarious listed companies in India. Their recommendations cover

companies’ proposals relating to the appointment of directors(especially independent directors), the appointment of auditors, and

51 Paul Rose, On the Role and Regulation of Proxy Advisors, MICHIGAN LAW

R EVIEW: FIRST IMPRESSIONS, available at http://www.michiganlawreview.org

/articles/on-the-role-and-regulation-of-proxy-advisors.52 Id .53 James R. Copland, Yevgeniy Feyman & Margaret O’Keefe, Proxy Monitor 2012:

A Report on Corporate Governance and Shareholder Activism 22 (Fall 2012),available at http://www.proxymonitor.org/pdf/pmr_04.pdf.

54 They are (i) InGovern (http://www.ingovern.com/); (ii) Institutional InvestorAdvisory Services (IIAS) (http://www.iias.in/); and (iii) StakeholdersEmpowerment Services (SES) (http://www.sesgovernance.com/index.html).

http://www.ingovern.com/http://www.iias.in/http://www.iias.in/http://www.ingovern.com/


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major corporate transactions such as mergers and takeovers.55 Where

there are governance concerns, the recommendations of proxy advisorshave been against the management proposals. For example, these firms

have recommended against appointment of independent directors whohave served companies for a long period of time, although there is yet

no maximum tenure mandatorily prescribed for independentdirectors.56 They have raised similar concerns with respect to auditor

appointments.57 They have also registered opposition in the case ofmergers and corporate restructurings where there is a likelihood value

to the public shareholders might be eroded.58

No longer can managements and controlling shareholdersignore the influence of minority shareholders (both institutional and

retail). The recommendations of the proxy advisory firms have theeffect of shedding greater light on corporate proposals, and of

galvanizing minority shareholders to overcome collective action problems and shareholder apathy and to participate more effectively in

corporate decision-making. The fledgling nature of the proxy advisoryindustry in India and the absence of systematic empirical evidence

might not yet indicate whether there has been greater exercise of

minority franchise in Indian listed companies, but the fact that therecommendations are discussed in the public domain in a transparentmanner (such as through the financial press) is expected to operate as a

set of checks and balances against managements and controllingshareholders from initiating proposals that might not pass muster from

a governance standpoint.

55 Bhuma Srivastava, Proxy advisory firms give a boost to shareholder activism,THE MINT, June 29, 2012; Naren Karunakaran, Proxy firms wade through proposed resolutions, THE ECONOMIC TIMES, November 29, 2011.

56 Sucheta Dalal, Proxy advice: Check on misgovernance, MONEYLIFE, August 11,2011.

57 Id .58 K ARUNAKARAN, supra note 55.


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Another positive effect of the proxy advisory industry is itsability to constantly enhance governance standards. Although listed

companies in India are required to comply with the standards of

corporate governance set out by law,59

the close monitoring by proxyadvisory firms will motivate companies to elevate their standards ofgovernance. It is expected that the industry will also help instill global

best standards and practices among Indian companies.

Proxy advisory firms also benefit institutional investors in

other ways. For example, it is no longer necessary for institutionalinvestors to spend efforts and costs on research, as they can simply

outsource these functions to external firms.60 The investors and their

managements can train their resources on investment analysis anddecisions, and minimize their focus on governance decisions in theirinvestee companies. Moreover, managers of institutional shareholders

tend to discharge their responsibilities to their own investors by relyingupon external independent advice on voting and governance matters.61

While the emergence of the proxy advisory industry representsa whole new chapter in Indian corporate governance as it generates the

much need activism among public shareholders, it is necessary to

caution against some possible concerns that have been witnessed inother jurisdictions. It is much too early to determine their impact inIndia yet, but lessons from experiences in those jurisdictions would

play a role in better moderating the functioning of the industry in Indiaso as to take full advantage of its benefits by addressing any ill-effectsalong the way.

59 While some of the corporate governance standards are mandatory (e.g.Companies Act, 1956; Clause 49 of the listing agreement), others are voluntaryand to be adhered to on a “comply-or-explain” basis (e.g. Ministry of CorporateAffairs, Government of India, Corporate Governance Voluntary Guidelines2009).

60 R OSE, supra note 51. 61 Paul Rose, The Corporate Governance Industry, 32 J. Corp. L. 887, 926 (2007).


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B. Concerns and Possible Mitigating Factors

At a conceptual level, there are different lines of concerns

raised regarding the operation of proxy advisory firms. 62 Theseconcerns have emanated globally in the industry, and are not specific

to India, where the experience with the industry is fairly new. First , proxy advisory firms may suffer from conflicts of interest, either

actual or potential, that may impinge upon the independence andimpartiality of their recommendations. Proxy advisory firms comprise

both for-profit entities that must raise revenues to carry on their business, and some non-profit entities.63 While for-profit entities

mainly charge their customers (being institutional investors) a fee forthe advisory services rendered, some firms also seek other income by

offering consultancy services.64 Often, such services, which are in thenature of governance consultancies, are provided to listed companies.

This raises conflict concerns, as the independence of recommendations put out in respect of such companies is not beyond doubt.65 It is not

known if such conflicts have manifested in the Indian context yet, butit is useful to take cognizance of international practices that have

emanated.

Second , there are concerns regarding the policies followed bythe proxy advisory firms while conducting their research and issuing

recommendations. One of the criticisms is that the governancemethodologies and metrics developed and utilized are too general and

do not pay sufficient attention to the specificities involved in eachcompany.66 For example, there could be a tendency to adopt a “check -

the- box” or “one-size-fits-all” approach, without delving into thecircumstances that operate in each company or with respect to

62 A detailed discussion of these is contained in Rose, supra note 61 at 906-19.63 Id . at 892.64 Id . at 898.65 Id . at 906-07.66 Id . at 907-08


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different proposals.67 Excessive standardization of recommendationswill have the effect of substantially diluting their value, and

obliterating the contributions that proxy advisory firms can make

towards better corporate governance.

Third , the functioning of proxy advisory firms can be subjected

to more optimal monitoring with a robust legal regime that clearlydelineates the legal responsibility and liability of proxy advisory firms

for the advice they provide.68 Currently, such a regime does not existin India. At most, firms may be responsible contractually for the

advice they provide to institutional investors with whom they have acontractual relationship. Responsibility for a wider audience in the

form of retail investors for public recommendations is even remote.The absence of such a regime for responsibility could potentially

threaten the full utilization of the proxy advisory industry as aneffective corporate governance intermediary.

At a broad level, some of the concerns raised may be addressed

either by market forces or by governmental regulation. A market-basedapproach would rely on a number of high quality players in the

industry to enhance standards through competitiveness. This wouldnecessitate the presence of a larger number of players in the industry

as opposed to the current oligopoly situation witnessed in the market, both in India and globally.69 The shortcoming of relying purely on a

67 Id . See also, N Sundaresha Subramanian & Raghu Balakrishnan, Small shareholders on collision course with PEs in Manappuram, BUSINESS

STANDARD, July 27, 2012.68 European Securities and Markets Authority, Discussion Paper: An Overview of

the Proxy Advisory Industry, Considerations on Possible Policy Options 22,

ESMA 2012/212 (Mar. 22, 2012) [hereinafter the ESMA Paper ].69 In India, as discussed earlier, there are only three players thus far. Even at aglobal scale, the industry has been subject to some criticism on account of thelack of competition. See, e.g., David F. Larcker, Allan L. McCall & GaizkaOrmazabal, Proxy Advisory Firms and Stock Option Exchanges: The Case of Institutional Shareholder Services 2-3, STANFORD GSB R ESEARCH PAPER NO.2077 (April 2011), available at https://gsbapps.stanford.edu/researchpapers/library/RP2077&100.pdf.


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market-based approach is evident from other sectors in the corporate

governance field, such as credit rating agencies and large accountingfirms, where a limited number of large players dominate the industry.70

On the other hand, proxy advisory firms are subject to virtually

no governmental regulation. Since the lack of a legal regime governingthe industry would exacerbate the issues such as conflicts of interest

and the inadequacies in transparency standards, leading economiesaround the world are actively considering reform efforts to rein in

proxy advisors. Proposals for regulating the proxy advisory industryare under active consideration in Europe,71 the United States72 and

Canada.73

In India, proxy advisory firms do not fall within any specificregulatory oversight mechanism. Given the industry’s nascence, SEBI,

70 Organisation for Economic Co-operation and Development (OECD), Hearings:Competition and Credit Rating Agencies 6 (2010), available at

http://www.oecd.org/regreform/liberalisationandcompetitioninterventioninregulatedsectors/46825342.pdf (discussing the oligopolistic situation in the credit rating

industry where the top 3 players command 90% market share); Bernard Ascher,The Audit Industry: World’s Weakest Oligopoly?, THE AMERICAN A NTITRUST

I NSTITUTE WORKING PAPER NO. 08-03 (Aug. 2008), available athttp://ssrn.com/abstract=1337105 (discussing the impact of the oligopolisticsituation with respect to auditors).

71 European Commission, Green Paper: The EU corporate governance framework (2011), available at http://ec.europa.eu/internal_market/company/docs/modern/com2011-164_en.pdf; ESMA Paper , supra note 68.

72 Mary L. Schapiro, Remarks to the CorporateCounsel.Net , Say-on-Pay WorkshopConference (Nov. 2, 2011), available at http://sec.gov/news/speech/2011/spch110211mls.htm; Joseph E. Bachelder III, Say on Pay: Who isWatching the Watchmen?, The Harvard Law School Forum on CorporateGovernance and Financial Regulation (Apr. 11, 2012).

73 Canadian Securities Administrators, Potential Regulation of Proxy Advisory Firms, Consultation Paper 25-401 (Jun. 21, 2012), available athttp://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20120621_25-401_proxy-advisory-firms.htm.

http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20120621_25-401_proxy-advisory-firms.htmhttp://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20120621_25-401_proxy-advisory-firms.htmhttp://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20120621_25-401_proxy-advisory-firms.htmhttp://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20120621_25-401_proxy-advisory-firms.htm


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which may have the closest domain relationship with such firms, hasnot yet taken any steps to regulate it. At the same time, there have been

calls for SEBI to initiate steps to regulate the industry and lay down

standards of service to be provided by proxy advisory firms.74

Thiswould require the establishment of a registration mechanism for suchfirms, which would ensure that only those firms with basic

qualifications and competence levels will be permitted to carry on the business, thereby instituting high entry-barriers. This would help

maintain high quality standards in the industry. Such a registrationmechanism would also help SEBI monitor the actions of the firms, and

also to impose sanctions in the event of non-compliance with servicesstandards. This would be similar to the regulation of credit rating

agencies, whereby SEBI has been effective in maintaining standardswithin the Indian industry, although the industry at the wider global

level had come under some criticism due to its role in the sub-primecrisis.75

C. Other Informational Intermediaries

Apart from proxy advisory firms, other types of intermediariesare beginning to cast their spell on Indian corporate governance. The

year 2012 has witnessed several analysts publishing reports regardingvarious Indian leading companies on matters that range from

accounting practices to governance standards to the role of controllingshareholders.76 By highlighting issues regarding governance of

companies, which extends beyond the traditional confines of financialanalysis, these intermediaries are imposing considerable pressure on

managements and controlling shareholders to re-examine their own

governance standards and practices.77 This will lend itself to greater

74

DALAL, supra note 56. 75 Vandana Gupta, R.K. Mittal & V.K. Bhalla, Role of the credit rating agencies inthe financial market crisis, 2 J. DEV. AGRIC. ECON. 286 (2010).

76 Lijee Philip & Kausik Datta, Analysts go beyond numbers to take on promoters:will corporates learn to live with criticism?, THE ECONOMIC TIMES, August 21,2012.

77 James Crabtree, Analysts toughen stance on corporate India, FINANCIAL TIMES,August 13, 2012.


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transparency, as the availability of more information and deeper

analysis will enable investors to take a more informed view of theirinvestments.

However, this phenomenon is very recent, and its impact on

overall governance standards is yet unknown. In any event, certainrecent reports issued by analysts have been surrounded by their own

share of controversies. Not only have these reports been stronglyrefuted by companies and their managements, in one case a criminal

complaint was even filed by the company concerned against theanalyst firm and the individuals who authored the report.78 For these

reasons, a more detailed consideration of the impact of these analystfirms as informational intermediaries on Indian corporate governance

must await another day.

VI. Feasibility of Interactive/Combative Strategies

After having considered the measures adopted by the regulatorsand the industry to enhance shareholder participation, it is now

appropriate to explore the trends and strategies that activist investors

may adopt by directly interacting with their investee companies inIndia and, if those result in failure, by undertaking more severemeasures such as bringing about a change in control of the companies

or even litigating against the companies, their directors andmanagement.

A. Interactive Strategy

Some types of investors, such as private equity funds, venture

capital funds and even hedge funds engage in relationship investing,which involves a long-term relationship between the investors and the

78 Nishant Vasudevan, Raising governance issues of Indiabulls, RCOM, othersbrings Veritas in the spotlight , THE ECONOMIC TIMES, August. 10, 2012.


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company.79 In this arrangement, investors are in close contact withmanagement and they also tend to provide strategic advice to

management that is beneficial not only to the company but also

indirectly preserves (or even enhances) value to the investors in thestock they hold. While it is likely that such interactive efforts are beingundertaken in the Indian context too, whereby institutional investors

influence corporate governance in companies, their effect is hard tomeasure.80As such interaction takes place in confidence, trends cannot

be discerned due to the absence of publicly available information.

While interactions between investors and companies are usefulin corporate governance, there are some limitations to this approach in

India. First , companies are under no legal obligation to engage withinvestors. Their obligations extend to providing information as

required by company law and securities regulation, which is uniformfor all investors. Specific investors are entitled to seek further

information regarding certain matters, such as inspection of the

register and index of members and debenture-holders81 and minutes of

shareholders’ meetings.82 Other details such as additional financialinformation and even minutes of board meetings need not be provided

to individual investors.83Second , companies could find themselves inviolation of the law if they selectively provide sensitive information to

specific investors. Under the SEBI (Prohibition of Insider Trading)Regulations, 1992, insiders such as directors and managerial personnel

are not permitted to “communicate or counsel or procure directly or

79 Gillan & Starks, supra note 9, at 31; N.K. Chidambaram & Kose John, Relationship investing: Large shareholder monitoring with managerialcooperation, NYU WORKING PAPER NO. FIN-98-044 (1998), available at

http://ssrn.com/abstract=1297123.80 Gillan & Starks, supra note 9, at 31.81 §163, Companies Act, 1956.82 §196, Companies Act, 1956.83 Only directors have the right to inspect the books of accounts of a company.

§209(4), Companies Act, 1956. Shareholders do not have a similar right or eventhe right to inspect the minutes of meetings of the board of directors. ARVIND

DATAR (ED.), A R AMAIYA: GUIDE TO THE COMPANIES ACT 2158 (17TH ED., 2010).

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297123##http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297123##http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297123##http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297123##http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297123##http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297123##http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297123##http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297123##http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297123##http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297123##http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297123##http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297123##


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indirectly any unpublished price sensitive information to any person

…”84 While the regulations on insider trading do not prohibitdiscussions with institutional investors, several constraints are imposed

on the conduct of such discussions. Listed companies are required tomaintain and adhere to a code on corporate disclosure practices. 85

Under such a code, listed companies can provide only publiclyavailable information to institutional investors or analysts.86 Any

specific information provided to such investors must besimultaneously made public.87 The regulations impose other checks

and balances to ensure that discussions with institutional investors donot provide them with an advantage unavailable to other investors in

the market.88

While interaction between investors and companies is possible,the significant constraints imposed on that process might limit its

effectiveness as a tool to influence governance in Indian companies.

B. Change of Control Strategy

Where mere interaction with management is found to be

inadequate or ineffective, it is common for activist investors toadvance to the next stage of confronting management with efforts todisplace them. In several jurisdictions, it is not unusual for investors in

such cases to initiate proxy wars and control fights to replaceincumbent managers with new ones who may be amenable to the

views of the activist investors regarding the business and strategy for

84 §3(ii), SEBI (Prohibition of Insider Trading) Regulations, 1992.85 §12(2), SEBI (Prohibition of Insider Trading) Regulations, 1992.86 §6.0(i), Schedule II, SEBI (Prohibition of Insider Trading) Regulations, 1992.87 Id .88 §6.0, Schedule II, SEBI (Prohibition of Insider Trading) Regulations, 1992. For

example, discussions with investors must be recorded.


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the company.89 Often, activist investors have indeed succeeded inreplacing managements that have resisted their efforts.90

However, in India, it is unlikely that such efforts towardschange in control are likely to succeed. Most public listed companiesin India continue to have controlling shareholders (or promoters),

barring a handful that has diffused shareholding.91 Given that thecontrolled company structure is predominant in the Indian corporate

landscape, any attempt by activist investors to seek control of Indiancompanies would encounter significant obstacles.92 The concept of

hostile takeovers, which is the common form of control seekingmechanism, is almost non-existent in India with only a few such

having been attempted and even fewer having succeeded.93

For these reasons, it is necessary to remain pessimistic aboutthe utility of hostile takeovers and proxy fights as weapons in the

arsenal of activist investors in Indian companies. While they may be

effective in other jurisdictions with diffused shareholding, the viability

of such mechanisms in controlled companies that are omnipresent inIndia remains doubtful. The situation might likely change in the future

with the growth of retail investment and reduction in controlledshareholder blocks because listed companies are now required to have

at least a minimum of 25% public shareholding (which is reduced to10% in the case of government companies).94

89 Briggs, supra note 15 at 686, 708-09.90 Id . at 686.91 Mathew, supra note 7 at 831-39.92 For a further discussion of controlling shareholders in Indian companies, see,

Varottil, supra note 3 at 18-20.93

Mathew, supra note 7 at 811-14. See also, Apoorva Paranjpe & KrishnaShorewala, Institutional investors, corporate governance and global standards: An Indian perspective, 22(4) I.C.C.L.R. 135, 142 (2011).

94 §19A , Securities Contracts (Regulation) Rules, 1957. Arguably, this rule too isunlikely to cause a significant dent in the controlling shareholders’ powers as theability of controlling shareholders to hold as high as 75% shares is a powerfulone in the backdrop of public shareholders such as institutional and retailinvestors whose holdings tend to be fragmented.


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C. Litigation Strategy95

Internationally, activist investors have also resorted to litigation

in extreme cases where boards and managements of companies haveacted in a manner that investors believe has caused loss either to the

companies or their shareholders. On occasions, they have evensucceeded. Whether such a litigation strategy would be effective in

achieving the activist investors’ goals of enhancing corporategovernance and shareholder value in Indian companies is a widely

open question. However, as this paper details further, the outlook is bleak.

Shareholder suits form a useful method of enforcing corporate

law and governance norms through private mechanisms. Theadvantage of this method is that the enforcement can be controlled by

an affected shareholder rather than to rely upon public enforcementthat is controlled by the state. Under corporate law, shareholder may

bring principally two types of actions. The first is a derivative action,whereby a shareholder may sue on behalf of the company in respect of

a loss caused to the company. The classic instance where derivative

action is an effective shareholder remedy is when the directors orofficers of a company have breached their duties to their company, butthe board decides not to initiate legal action against them.96 In such a

case, the derivative action enables the shareholder to bring a suit on behalf of the company against the offending party. If the suit is

successful, the company will enjoy the remedies. For instance, any

95 Parts of this section have been derived from the broader discussion onshareholder derivative actions in India contained in Vikramaditya Khanna &Umakanth Varottil, The rarity of derivative actions in India: reasons andconsequences, in DAN. W. PUCHNIAK , HARALD BAUM & MICHAEL EWING-CHOW, THE DERIVATIVE ACTION IN ASIA: A COMPARATIVE AND FUNCTIONAL

APPROACH (2012).96 It is understandable that the board members may not at all be motivated to initiate

legal action against one of their own.


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recoveries under the suit will inure to the benefit of the company ratherthan the shareholders. The second type is a direct action. Here, the

shareholder brings a suit against the company, its board, management

or other shareholders for the breach of a duty owed to the shareholder.In such case, the shareholder can bring a suit for its own benefit andthe remedies would inure to the benefit of the shareholder, who may

enjoy it directly. For instance, any recovery or benefit under a directshareholder suit will accrue to the shareholder, and generally not to the

company.

Company law in India provides shareholders with the optionsof bringing both a derivative suit and a direct suit if their interests are

adversely affected and a cause of action arises under law. However,these remedies are arguably not fully effective. The remainder of this

section deals briefly with each of these types of actions and why theymay or may not be viable options to activist shareholders.

1. Derivative Action

The derivative action mechanism has rarely been utilized in

India by shareholders. In another study, Professor VikramadityaKhanna and I found that “[o]ver the last sixty years only about ten

derivative actions have reached the high courts or the Supreme Court.Of these, only three were allowed to be pursued by shareholders, and

others were dismissed on various grounds.”97 The insignificance ofderivative actions becomes crystallized when its rarity is juxtaposed

against the fact that there are over 700,000 active companies in India98

and nearly 30 million cases pending before various Indian courts.99 A

number of reasons have been proffered for this state of affairs.

97 Khanna & Varottil, supra note 95 at 380.98 Ministry of Corporate Affairs, Government of India, Annual Report 2011-12

(2012) at 24.99 Pending litigations – 2010 tally from 3.1 crore to 3.2 crore cases, BAR & BENCH,

February 17, 2011; Jayanth K. Krishnan, Globetrotting Law Firms, 23 GEO. J.

LEGAL ETHICS 57, 70 (2010).


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First , the Companies Act, 1956 does not statutorily recognize

derivative actions. One has therefore to rely upon common law toinitiate such an action by establishing that one of the exceptions to the

rule in Foss v. Harbottle100 applies to the given case.101 Thedevelopment of common law in this regard has been unclear, making

the use of derivative actions cumbersome. For example, a shareholder bringing a derivative action must establish “fraud on the minority”102

and must also come with clean hands.103

Second , there are procedural difficulties as well. Derivativeactions are considered to be representative actions under Order I, Rule

8, of the Civil Procedure Code, which requires shareholders to obtain permission of the court before the suit can proceed.

Third , the costs of bringing a derivative action may be

prohibitive, especially if it involves a recovery suit. This is due to theexistence of court fees and stamp duties payable while initiating the

suit, which varies from state to state.104

100 (1843) 2 Har 461. Under this age-old rule, when an injury is caused to thecompany, it is only the company that can initiate legal action against thewrongdoer, and shareholders are barred from doing so.

101 Over the years, the rule has been subjected to several exceptions that permit ashareholder to initiate a legal action on behalf of the company that has suffered a

breach and loss. For a discussion of these exceptions, see, Khanna & Varottil , supra note 95 at 381-83.

102 Although not used in the technical sense, “fraud on the minority” requires theestablishment of some kind of unfair discrimination against the minority. See,ARAD R EISBERG, DERIVATIVE ACTIONS AND CORPORATE GOVERNANCE 70(2007).

103 This is because a derivative action under common law is considered an equitableremedy that imposes such an onus on the plaintiff shareholder. For an implicitacceptance of this approach by the Indian courts, see, M. Sreenivasulu Reddy v.Kishore R. Chhabria, (2002) 109 COMP. CAS. 18 (Bom.); Incable Net (Andhra)Limited v. Apaksh Broadband Limited, (2008) 142 COMP. CAS. 860 (CLB).

104 For some examples, see, Khanna & Varottil, supra note 95 at 379.


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Fourth, countries where shareholder actions have succeeded possess an active plaintiff bar, whereby plaintiff law firms initiate

actions on behalf of shareholders. Such an active plaintiff bar is non-

existent in India due to the prohibition against lawyers from chargingcontingency fees.105 The absence of a plaintiff bar offers a big blow toderivative actions because shareholders who incur costs in initiating

suits are unable to enjoy the benefits, which instead flow to thecompany.106

Finally, the institutional environment required for a vibrant

shareholder-friendly legal atmosphere is absent in India. For instance,litigation could prolong for years, and by the time a remedy is awarded

by the court it may have become redundant due to the lapse of time.Further, courts in India are unlikely to award significant damages,

which may make shareholder derivative litigation an uneconomical prospect.

Hence, while there does exist a legal mechanism for activist

shareholders to initiate derivative actions against errant managements,their effectiveness as a governance tool is circumspect in the Indian

context given the reasons discussed above.107

2. Direct Action

Unlike derivative actions, certain types of direct actions arestatutorily available. The Companies Act, 1956 enables minority

105 §20, Bar Council of India Rules, Part VI, Chapter II.106 SEBI has introduced litigation funding with a view to funding shareholder

action by recognized investor groups. SEBI (Investor Protection and EducationFund) Regulations, 2009; SEBI (Aid for Legal Proceedings) Guidelines, 2009.However, this mechanism is accompanied by several limitations that have thusfar hindered its effective utilization. Khanna & Varottil, supra note 95 at 394-95.

107 For a comparison of shareholder derivative litigation in India and China, see,Ann M. Scarlett, Investors Beware: Assessing Shareholder Derivative Litigationin India and China, 33 U. PA. J. I NT’L L. 172 (2011).


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shareholders to initiate actions for oppression108 and

mismanagement.109 These rights by way of personal actions areavailable to minority shareholders against the company and the

controlling shareholders. These remedies are quite wide in nature.110 Minority shareholders may bring the action before the Company Law

Board (CLB), which is a specialized body dealing with company lawdisputes.111 In actions for oppression and mismanagement, the CLB

has wide-ranging powers to pass various types of orders, including toregulate the conduct of the company, to order a buyout of the minority

by the majority, and to make any provision that it finds just andequitable in the circumstances.112

While the oppression and mismanagement remedies appear

attractive to minority shareholders, it is not easy to invoke theseremedies. An action is not admissible unless it carries enormous

support among minority shareholders.113 While substantial minorityshareholders in unlisted companies may be in a position to invoke

them, it is nearly impossible for minority shareholders in listedcompanies (who usually hold less than 10%) to satisfy the threshold

requirement. Moreover, even in terms of numerical aggregation of 100

108 §397, Companies Act, 1956.109 §398, Companies Act, 1956.110 While the oppression remedy is available in several common law countries, the

mismanagement remedy is unique in India as it has not been borrowed fromEnglish law. DATAR , supra note 83 at 4445.

111 The powers of the CLB will be taken over by the National Company LawTribunal, once it is constituted. This will have to await amendments to theCompanies Act, 1956 or the passage of the Companies Bill, 2012, which is

pending before the Rajya Sabha.112 §402, Companies Act, 1956.113 An action for oppression or mismanagement must carry the support of at least

100 shareholders in number or 1/10th of the total number of shareholders,whichever is less, or such number of shareholders as hold at least 10% of thetotal issued shares of the company in value. §399, Companies Act, 1956.


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shareholders, the collective action problems discussed earlier 114 will prevent shareholders from coordinating to support any direct action.

The threshold requirements are therefore prohibitive in nature.115 Even

if these are satisfied, the substantive law imposes onerousrequirements on plaintiff shareholders. For example, for the oppressionremedy, mere isolated instances of abuse may not be adequate, and

there may be a need to demonstrate continuous acts or conduct that justifies the invocation of the remedy.116

Therefore, while the remedies of oppression and

mismanagement are quite evolved in India and also confer wide powers to the CLB to mold a suitable remedy, their practical utility is

largely confined to companies with a limited number of shareholders,and not for large listed companies with thousands of shareholders

where even the threshold requirements of bringing an action may not be ordinarily satisfied.

3. The Availability of Alternate Remedies

Litigation by activist shareholders exercising private remedies

may not be admissible if that relates to aspects that are within thedomain of SEBI. Since SEBI is mandated to oversee matters of

corporate governance and securities regulation, any violation of thesenorms by listed companies or their boards and managements will

invite the exercise of SEBI’s remedial powers. SEBI may initiate aninvestigation into possible breaches either suo moto or upon a

complaint by an aggrieved shareholder.117 SEBI has progressively

acquired wide powers to make such orders “as may be appropriate in

114 See, supra note 6 and accompanying text.115 However, the Central Government has the power to authorize shareholders to

initiate an action for oppression or mismanagement even without the support ofthe requisite number of shareholders, if it finds just and equitable to do so in thecircumstances. §399(4), Companies Act, 1956.

116 Shanti Prasad Jain v. Kalinga Tubes Ltd, AIR 1965 SC 1535, ¶ 20.117 §11C, Securities and Exchange Board of India, 1992.


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the interests of investors in securities and the securities market.”118

However, SEBI’s mandate is the protection of investors generally, andnot necessarily to remediate the grievances of specific investors who

may have suffered due to actions of companies and theirmanagements.119 More importantly, in areas where SEBI is

empowered to act, the jurisdiction of civil courts is barred.120 This preclusion of civil actions has been interpreted quite widely,121 which

is likely to be to the detriment of activist investors who may intend to bring a private action rather than to rely on the regulator. Hence, on

matters relating to areas such as insider trading, corporate governanceand takeovers that fall within SEBI’s domain, India’s legal system

effectively relies upon public enforcement by SEBI and altogetherexcludes private enforcement by shareholders, thereby limiting the

remedies they can avail.

4. Exported Litigation

Due to the shortcomings of the Indian legal system in providing effective remedies to activist shareholders through litigation

strategies, recent high-profile corporate episodes have generated a new

trend that indicates a distinct preference of shareholders to litigateoutside India even though such litigation pertains to the affairs of anIndian company. Shareholders have either resorted to domestic legal

systems of other countries or even to certain international forums. Tworecent episodes illustrate this phenomenon.

The first relates to the corporate fraud and wrongdoing of

astounding proportions in the erstwhile Satyam Computers, which

118 §11B, Securities and Exchange Board of India, 1992.119 Khanna & Varottil, supra note 95, at 389.120 §§15Y, 20A, Securities and Exchange Board of India Act, 1992.121 Kesha Appliances P. Ltd v. Royal Holdings Services Ltd, (2006) 130 COMP.

CAS. 227 (Bom.).


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came into the public domain early 2009.122 This was followed byfrenetic regulatory action. The Government of India initiated

investigations and criminal charges against the wrongdoers, while at

the same time it also ensured that the company was preserved and thensold to a suitor, so as to protect the interests of various stakeholders tothe extent possible.123 While the regulatory response was quite

powerful, there were hardly any private shareholder actions in India,either by the institutional investors or retail investors. The only

exception was an action by a shareholder association on behalf ofSatyam’s shareholders, which too was dismissed by the court.124 On

the other hand, both the company as well as the audit firm facedshareholder suits in the US almost instantaneously as the scandal

unfolded.125 These suits were filed on behalf of holders of Americandepository receipts (ADRs) residing in the US.126 Both the company

and the audit firm settled the suits in the US resulting in payouts ofmillions of dollars to US investors.127 Appallingly, the Indian

shareholders of Satyam were unable to recover any compensation

whatsoever, while the US shareholders benefited from the settlement.

This is a glaring example of the disparity in private shareholderremedies in a developed jurisdiction such as the US and in India.

122 Afra Afsharipour, Corporate Governance Convergence: Lessons from the Indian Experience, 29 Nw. J. Int'l L. & Bus. 335 (2009); Vikramaditya Khanna,Corporate Governance in India: Past, Present and Future?, 1 JINDAL GLOBAL

LAW R EVIEW 171 (2009).123 Reactions to the Satyam Sale, I NDIAN CORPORATE LAW BLOG, April 15, 2009,

available at http://indiacorplaw.blogspot.com/2009/04/reactions-to-satyam-sale.html.

124

Press Trust of India, SC dismisses Midas Touch Investor Association pleaagainst Satyam, BUSINESS STANDARD (Aug. 10, 2009).

125 Shantanu Surpure, Satyam’s Class Action Law Suit , VCCIRCLE, January 19,2009.

126 Id. 127 Kenan Macado, Satyam Gets U.S. Court OK for Class-Action Settlement , THE

WALL STREET JOURNAL, September 15, 2011; Michael Rapoport, PWC in $25.5 Million Settlement , THE WALL STREET JOURNAL, May 2, 2011.


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The second instance relates to the corporate dispute that

unfolded early-2012 between Coal India Limited (CIL)

The Advent of Shareholder Activism in India

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