Corporate Governance

It is the system of practices, rules and regulations a company adopts to be controlled and directed
with a view to balance the interests of various stakeholders in the company including its
shareholders, community, financers, customers, management, government etc. Previously the
whole concept of corporate governance was aimed at the maximization of profits of the
shareholder. But recent development shows that the corporations these days are also aiming at
the concerns related to the relationships of many other stakeholders also. This includes
incorporation of corporate social responsibility in the companies’ vision which aims at balancing
the operation of the companies with the concerns of various internal and external stakeholders.
Every corporate entity has an impact on not only the internal shareholders and people who are
concerned with the internal governance and management of the company but also have an impact
on the environment and the society through their services, products, interactions and their
operations with the key stakeholder.1

Corporate Governance in India

In the English case of Foss v. Hardbottle 2it has been held by the court that “the Courts will not
intervene in the internal administration of a company at the instance of a shareholder and will not
interfere with the management of a company by its directors so long as they are acting within the
powers conferred on them under the Articles of the company.” This principle was reiterated in
Bagree Cereals v. Hanuman Prasad Bagri and Rajahmundry Electric Supply Corp. v. A.
Nageshwara Rao  thereby, reaffirming the principle that if a simple majority can ratify a wrong,
the court will not intervene.

“A Proper Balance of the Rights of Majority and Minority Shareholders Is Essential for the
Smooth Functioning of the Company” [6], and that’s exactly what the legislature intended to do
with Companies Act, 2013.

1
Ms. MadhuBala, ―Corporate Social Responsibility Initiatives and Practices Among Selected Indian Companies‖ 3
IJMIE 420 (2013).
2
Foss v. Hardbottle, (1843) 67 ER 189
Neither the Old nor the New Act lay down a statutory definition to the term minority
shareholders, one finds a legal definition of the term in the classic Black’s Law Dictionary where
it defines the term as “an Equity holder  with less than 50% ownership of the firm’s equity
capital and having no vote in the control of the firm.”

  Apart from the exceptions to Foss v. Hardbottle that are ultra vires acts, fraud on minority acts
requiring a special majority, wrongdoers in control and individual membership rights, the New
Act protects the rights of Minority Shareholders under the head Prevention of Oppression and
Mismanagement embodied in S.241-S.246 under Chapter XVI of the New Act.

By S.241, the oppressed minority shareholders are empowered to move the tribunal against the
company and its statutory appointee’s, an application stating the same can be made to the
Company Law Board. The requisite number of members who must sign the application is laid
down in S.244, where the company is with share capital than by at least 100 members of the
company or 1/10th of the total number of its members, whichever is less. If the company is
without share capital, then the application mentioned above has to be signed by 1/5 th of the total
number of its members.[7]

However, departing from the Old Act the tribunal rather than Central Government has the
discretion to allow any member or members to sue if in its opinion circumstances exist which
make it just and equitable, making it a speedy actionable remedy.

Certain pre-requisites laid down by the S.241 need to be satisfied before an oppressed

shareholder makes an application. The grounds for the application must either pertain to the
affairs of the company being conducted in an oppressive manner which is prejudicial or
oppressive to the interests of the company or when there a material change has taken place in the
management or control of the company which shall affect the members or class of members.

Lord Cooper explained the term Oppression as the conduct complained of should at the lowest
involve a visible departure from the standards of fair dealing, and a violation of the conditions of
fair play on which every shareholder who entrusts his money to the company is entitled to rely.
[8]
Although the legislation aims to protect the minority shareholders interest, in a fit case if the
court is satisfied with the acts of oppression and mismanagement, relief can even be granted if
the application is made by a majority rendered ineffective by the wrongful acts of a minority
group.[9]

While the powers granted to the competent authority under the Old Act were constrained to some
extent, under the New Act the tribunal has been given wider powers by S.242 placing it in a
better position to protect the interests of the minor.

The New Act introduces a novel concept of Class Action suit which owes its conception to the
Satyam scandal that broke out in 2009. The essential provisions to enforce the rights of minority
shareholders and investors were missing in the Old Act.

Under S.245 of the New Act, the provision above has been introduced thereby providing great
impetus to minority shareholders, investors and depositors as well. By virtue of this   provision a
suit may be filed against a company or its directors, auditor or expert advisor , in the case of a
company with share capital by not less than 100 members or not less than 10% of the total
number of its members or by any member or members singly or jointly holding less than 10% of
the issued share capital of the company. In the case of a company without share capital, a suit
may be filed by not less than 1/5th of the total number its members. Similar provisos are laid
down for the protection of depositors. By the said provisos the legislation intends to protect the
interests of the minority shareholders.

The New Act also infuses minority shareholding protective measures during mergers and
amalgamations. Such measures have been introduced in S.235 and S.236 of the New Act by
which transfer of shares or class of shares by a transferor to a transferee company requires the
approval of shareholders with a nine-tenth shareholding in value if any dissenting shareholder
then the transferee company has to serve a notice to the same.

Under S.236 of the New Act, minority shareholders have the option to make an offer to the
majority shareholders to purchase the minority equity shareholding of the company at a price as
fixed below. The acquirer, person or group of persons shall offer to the minority  shareholders of
the company for buying the equity shares held by such shareholders at a price determined by
valuation by a registered valuer.

In an event where the acquirer or person acting in concert thereon or a group of persons become
the registered holder of ninety percent or more of the issued share capital of a company by
amalgamation, share exchange and so on then they shall notify the company of their intention to
buy the remaining equity shares.

Under the 2013 Act, minority shareholders are also involved in corporate decision-making
whereby, in listed companies “small” shareholders that are having a nominal shareholding of
shares not more than Rs 20,000 have the right to appoint a director. [10]

Conclusion

On a careful examination of the provisions above, it is apparent that the legislators have tried to
protect the interests of the minority shareholders at every stage by filling the cavities/lacunas of
the Old Act. Like any legislation, the effective implementation of the provisions above plays a
key role in executing the intention of the legislator thereby enabling the protection of minority
shareholders interests.

Does the law back shareholders in India?

Various legislations in India provide for several rights and remedies to minority
shareholders in India. Some of the more commonly used ones under the Companies
Act 2013 ("Act") are as follows:
  Board involvement: Under the Act, small shareholders can seek the appointment
of a minority shareholder representative on the board of a listed company.
Similarly, through an ordinary resolution i.e., simple majority votes cast in favour,
directors can also be removed by shareholders.

 Class Action: The Act also grants shareholders the right to institute class action
suits if they believe that the company's management or affairs are being
conducted in a manner which is prejudicial to the interests of the company or its
shareholders. Such a petition against a company would require the support of at
least 100 shareholders or 10% of the total number of shareholders, whichever is
lower, or any shareholder holding at least 10% of the shareholding of that
company. Since the National Company Law Tribunal was only established in
June 2016 before which such class action suits are to be filed, there have not
been many instances of class action suits.

 Shareholder Approval: Further, under the Act, several statutory matters require
prior approval of majority of shareholders including, related party transactions (as
discussed in the JK House sale to the promoters of Raymond Ltd), payment of
non-compete fee (as discussed in the Max Financial instance), investments and
borrowings beyond specified thresholds (as discussed in the Religare instance),
executive remuneration beyond prescribed thresholds (as discussed in the Tata
Motors instance), sale of an undertaking of the company, amendment of the
constitutional documents of the company, and issue of new shares.

Another important right granted to shareholders under the Act but not commonly used
by shareholders is the right to call for general meetings. Shareholders who collectively
own 10% of the voting paid-up capital can require the board of directors to convene a
general meeting of the shareholders.

The SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 ("Listing
Regulations") is another legislation, which provides various rights and remedies to
shareholders of listed companies. Under these regulations, each listed company is
mandated to constitute a stakeholder's relationship committee whose role is to, inter
alia, consider and resolve grievances of security holders of listed companies including
complaints related to transfer of shares, non-receipt of annual report and non-receipt of
declared dividends. The Listing Regulations also require listed companies to, inter alia,
(i) provide electronic voting facility to shareholders to enable wider shareholder
engagement; and (ii) mandatorily disclose events such as outcome of board meetings,
revision in ratings, corporate acquisitions and re-structuring events / information, and
events which are material in the opinion of the board of directors. Another remedy
available to shareholders is the SEBI Complaints Redressal System ("SCORES").
SCORES is a platform that allows investors to file complaints against listed companies
or intermediaries which are registered with SEBI online or physically. However, this
complaint can be filed only when an investor has first approached the
company/intermediary and has not received a satisfactory response.
Apart from the commonly used legal rights and remedies, shareholders may also raise
concerns with their investee companies by way of open letters.

The way forward for shareholders

While shareholders in India have only seen a few triumphs in their proxy fights against
companies, we are hopeful that these instances will encourage other investors to take
an active role in the management of companies. A SEBI-appointed committee has
recently submitted a report on corporate governance in India which, inter alia,
recommends penalties for auditors in case of lapses, immunity to whistleblowers,
stricter regulations for independent directors, webcasting of shareholder meetings and
introduction of a stewardship code to monitor the engagement of the institutional
investors with their investee companies. These recommendations, once implemented,
will act as a catalyst in increasing the wave of investor activism in India.

The way forward for companies

With shareholder activism on the rise in India and globally, companies in India have the
opportunity to absorb and implement best practices used by companies around the
world to maintain credibility with their shareholders and stakeholders. The most vital
technique that companies must use is to engage in dialogue with investors not only at
the time a vote from the shareholder is required, but consistently to ensure the
effectiveness of their communication with investors. Secondly, board composition is
extremely essential to capture the trust of shareholders. For example, having at least
more than one director with industry experience on the board and ensuring continual
education and evaluation of directors are other methods companies across the world
believe are essential. Recruiting and retaining highly qualified directors who will remain
independent while at the same time balance the pressure of work loan and the heat
from shareholders is crucial. Thirdly, it is important for companies to have a strategic
plan for the long-term future since today's shareholders take a keen interest in how
companies plan to grow. Lastly, a professional and ethical "tone at the top" is crucial to
build the trust of shareholders. With the rising tide of shareholder activism, it is
incumbent on India Inc. to pick the global best practices in this regard and provide a
boost to the credibility of India Inc. as a preferred destination for investments.

Conclusion

The companies should respect the interests of, and be responsive towards all stakeholders,
including shareholders, employees, customers, suppliers, project affected people, society at large
etc. and create value for all of them. They should develop mechanism to actively engage with all
stakeholders, inform them of inherent risks and mitigate them where they occur. Their
governance systems should be underpinned by Ethics, Transparency and Accountability. They
should not engage in business practices that are abusive, unfair, corrupt or anti-competitive.

Respect for Workers' Rights and Welfare Companies should provide a workplace environment
that is safe, hygienic and humane and which upholds the dignity of employees. They should
provide all employees with access to training and development of necessary skills for career
advancement, on an equal and non-discriminatory basis. They should uphold the freedom of
association and the effective recognition of the right to collective bargaining of labour, have an
effective grievance redressal system, should not employ child or forced labour and provide and
maintain equality of opportunities without any discrimination on any grounds in recruitment and
during employment.

3.3.3.4 Respect for Human Rights Companies should respect human rights for all and avoid complicity
with human rights abuses by them or by third party. 3.3.3.5 Respect for Environment Companies should
take measures to check and prevent pollution; recycle, manage and reduce waste, should manage
natural resources in a sustainable manner and ensure optimal use of resources like land and water,
should proactively respond to the challenges of climate change by adopting cleaner production
methods, promoting efficient use of energy and environment friendly technologies. 3.3.3.6 Activities for
Social and Inclusive Development Depending upon their core competency and business interest,
companies should undertake activities for economic and social development of communities and
geographical areas, particularly in the vicinity of their operations. These could include education, skill
building for livelihood of people, health, cultural and social welfare etc., particularly targeting at
disadvantaged sections of society.