Are We Entering An Era Of Shareholder Activism In India?

Recent legislation enables minority shareholders to more actively voice their concerns and demonstrate their presence.

Top car-maker Maruti Suzuki responded to proxy advisor firm IiAS recently, rebutting its claims that the purchase of vehicles from related entity Suzuki Motor Company’s Gujarat plant would be detrimental to the interests of Maruti as it would lose control over its destiny. Maruti’s minority shareholders are voting on a proposal that would allow Suzuki of Japan to sell vehicles produced at its Gujarat plant at production price (the voting will end on 15 December).

Last year, Maruti cancelled the proposed minority shareholder vote after concerns were raised by a large section of investors and shareholders against the proposed transaction. Maruti had to change the terms of the proposed deal to make the procurement of vehicles at production price instead of a mark-up. And Maruti is not alone in facing problems from small-scale investors, proxy advisor firms and mutual fund managers.

In the past couple of years, at least four companies, including industry giants like Tata Motors and Siemens, have had their resolutions defeated by minority shareholders under the new norms introduced by the Companies Act, 2013. Analysts term these developments as ‘unprecedented’ in the history of Indian corporate governance and attribute it largely to key legislative and policy changes introduced by the government and the capital market regulator.

Corporate governance in India

Since most companies in India, including top listed companies, are governed and controlled by promoters and their families, retail investors are known for their lack of participation in the decision-making processes of the company since the outcome of resolutions would be a foregone conclusion given the brute shareholding majority of the promoters.

However, changes in the new Companies Act of 2013, and the increasingly investor friendly role played by Sebi, have helped increase shareholder activism and participation.

New Companies Act provisions and SEBI guidelines

There have been two key changes in the Companies Act that have resulted in increased awareness and participation by investors. The first critical change relates to norms pertaining to related party transactions (RPTs). As opposed to the provisions in the old Companies Act of 1956, where Central Government approval was required for certain types of RPTs in case the paid-up share capital of the company exceeded Rs 1 crore, the new Act defines RPTs broadly to include any sale or purchase of goods or services, sale or leasing of property, or utilisation of services, among other things.

A special resolution backed by three-quarters of the shareholders who have voted is required to be passed for approving RPTs and the promoters/directors interested in the transaction are ineligible to vote. Essentially, therefore, minority or public shareholders have to play a decisive role in approving or disapproving RPTs.

However, the law was amended in 2014 to require an ordinary resolution (51 percent of the votes cast) of non-interested shareholders instead of a special resolution. Notwithstanding this change, public shareholders are still expected to play a crucial role in voicing their disapproval of dubious RPTs aimed at siphoning or frittering away the funds of the company.

The second and crucial change in the Companies Act, 2013, is the introduction of electronic voting for certain classes of companies. The genesis of this provision lies in the introduction of certain rules by the Ministry of Corporate Affairs allowing e-voting in 2011 and a SEBI initiative of 2012 mandating compulsory e-voting in the top 500 listed companies.

Although postal ballots (including voting through electronic means) had been introduced by an amendment to the Companies Act, 1956, in 2001 in respect of certain matters, it was only in 2012 that the SEBI guidelines mandated e-voting for certain categories of resolutions.

However, this position has been strengthened in Section 108 of the 2013 legislation and rules framed thereunder. Currently, listed companies having 1,000 or more members are compulsorily required to provide e-voting facilities in respect of all resolutions in general meetings.

With the introduction of this provision, it is now possible for retail shareholders to vote easily and conveniently through the click of a mouse. No longer do shareholders have to undergo the tedious process of filing and sending postal ballots or of attending meetings in remote towns or cities.

Another important reformist measure is a 2010 circular issued by SEBI to mutual funds requiring their active participation in voting on resolutions of companies where they have invested. Allowing small shareholders to nominate a director on the boards of a certain class of companies helps bolster open, transparent and democratic conduct of business.

Further, mutual funds are also required to publicly list out, on a quarterly basis, the resolutions on which they have voted and their rationale for voting in a particular manner. Since institutional investors, particular equity and mutual funds, form a large part of public shareholders in listed companies, the proactive role played by SEBI is also likely to keep promoters on guard.

Road ahead for Indian investors

These changes indicate that the active participation of institutional as well as retail investors is going to increase steadily. Since investors can now vote on resolutions from the convenience of their homes, it is likely that some dubious or controversial proposals of promoters will face the shareholders’ disapproval.

However, mutual fund managers, proxy advisory and research firms and the financial media have to play a more proactive role in encouraging investors to participate in company affairs, at least through e-voting.

The onus also lies on the Ministry of Corporate Affairs and SEBI to create awareness about the flexibility in regulations for small investors. A few other changes – such as mandatorily allowing participation of shareholders in general meetings through video-conferencing and strengthening the investor grievance redressal mechanism – can go a long way in bolstering shareholder participation.

The author is a law graduate of WB National University of Juridical Sciences, Kolkata and can be contacted on jay@glaws.in