Shareholders Activism in India

SHAREHOLER ACTIVISM IN INDIA

==============================

Contributed by Shilpi Thapar

 ( FCS, ACIS(London) ,LLB(spl.)

 Practising Company Secretary

The Indian Economy has consciously shifted from a controlled one to a market driven one. Globalization has opened up vast opportunities for domestic players but is also fraught with various challenges. Foreign institutional investors too demand greater professionalism in corporate activities. All  these and many other related developments have brought the issue of corporate governance to centre stage. Corporate Governance, therefore, has become imperative for good corporate functioning and success.

Corporate governance is about commitment to values and about ethical business conduct. It is about how an organization is managed which includes its corporate and other structures, its culture, policies and the manner in which it deals with various stakeholders. It is primarily the responsibility of the Board as a group to perform its duties with the support of managerial staff.

Timely and accurate disclosure of information regarding the financial situation, performance, board constitution, ownership of the company , maintaining highest levels of transparency, accountability and equity,  in all areas of its operations and  in all interactions with its stakeholders, including shareholders, employees, government and other agencies is an important part of corporate governance.

It may be also be defined as a system of structuring, operating and controlling a company with the following specific aims:

1. Fulfilling long term strategic goals of owners.

2. Taking care of the interests of employees

3. A consideration for the environment and local community

4. Maintaining excellent relations with customers and suppliers

5. Proper compliance with all the applicable legal and regulatory requirements.

The Institute of Company Secretaries of India has defined the term corporate governance as under:

“ Corporate Governance is the application of best management practices, compliance of law in the true letter and spirit and adherence to ethical standards for effective management and distribution  of wealth and discharge of social responsibility of sustainable development of all stakeholders.”

 Shareholder Activism as an effective mechanism of Corporate Governance:

------------------------------------------------------------------------------------------------

The Indian economy liberalized in early 1990’s. India is the only country where industry rather than government took initiative for corporate governance reforms. The Confederation of Indian Industries (CII) published the voluntary code of corporate governance in 1998-one of first major codes in Asia. The Securities Exchange and Board of India (SEBI)  then setup the Kumar Mangalam Birla  committee on corporate governance, based on their recommendation in December,1999, basis of clause 49 of listing agreement was formed. Then, later in 2004, on recommendation of Narayan Murthi Committee on corporate governance, it got revised and revisions came into effect from January,2006.

An essential part of corporate governance are “Stakeholders”. It includes investors, employees, creditors, suppliers, outsiders groups like civil society and communities in which the company operates.

The formal role and rights of stakeholders arise from various sources: company law, lab our law, contract law, insolvency law, etc.  These rights creates an obligation on the part of the company and the management to ensure the company’s proper compliances.

The Supreme Court of India observed  “ By a share in a company is meant not any sum of money but an interest measured by a sum of money and made up of diverse rights conferred on its holders by the article of company which constitutes a contract between him and company.” Thus, it represents a “Bundle of rights and obligations.”

Regarding rights of shareholders the supreme court in a very important case LIC of India Vs. Escorts Ltd. AIR 1986 SC 1370 at 1412 held that  “ a shareholder has an undoubted interest in a company, an interest which is represented by his shareholding. Share is a movable property with in the attributes of such property. The rights of shareholders are :-

1. To elect director and thus to participate in the management through them,
2. To vote on the resolutions at meeting of the company. To enjoy the benefits of the company in the shape of dividends.
3. To apply to the court in the case of oppression
4. To apply to court for winding up of the company
5. To share in surplus on winding up.
6. To apply to the court for relief in case of mismanagement.

Shareholder Activism is a very important and effective mechanism of Corporate Governance.

Shareholders realizes that the active participation in the company’s operation ensures better management, less frauds and better governance. If management knows that it will be questioned for its actions, is always on its feet.

The active involvement of stakeholders in their organization is shareholders activism. Active participation in meeting of the company is a healthy practice for resolving issues.. Shareholder activists includes pension funds ,hedge funds, unions, religious institutions, universities foundations, environment activists and human rights groups. The law in each country gives shareholders rights . For eg. In India, shareholders have been granted certain rights under The Companies Act,1956.

Tools for Share Activism:

1.Direct Discussions with the company: This facility is typically available to large investors. They are in a position to discuss issues across the table with senior management to resolve differences.

   2.Proxy voting: The issues which cannot be resolved through discussions, can be covered in meeting through representatives.

3.Requisitions for meetings: Under Companies Act 1956, member/s representing at least one-tenth of the voting power in the company can requisition a meeting. If the company doesnot proceed to call the meeting, then the requisitionists  can  call a meeting at the expense of the company.

4. Company Law Board: Members can make application to Company Law Board if the affairs of the company are prejudicial to public interest or in a manner oppressive to any member/s. It can be made by 100 members or one tenth of total no. of member in a company whichever is less.

5. Court: Aggressive investors would approach to the court in extreme cases.

Position of Share Activism in India:-

The Market for shareholder activism in India is not taking off.  There is not even grassroots shareholder activism in India as compared to other global markets due to following reasons:

1. There  is a lack of active long term investors in companies such as pension funds and hedge funds which takes 5-7 years call on companies;
2. In India, most investors are focused on short term gains;
3. The Indian Market has had  a history of limited institutional ownership with promoters including government, holding majority stakes followed by retail investors and institutions;
4. India suffers from a problem of too many regulations. Investors are having little faith in the system as high cost is involved , manipulative ways are adopted by the promoters sometimes, which makes it tough for activist shareholders to survive;
5. There are no large shareholder associations that can monitor and exercise control over corporates.

Shareholder Activism can do wonders in implementing corporate governance in corporates. For eg: Shareholder activism plays a major role in eradicating apartheid in South Africa. They have also influenced the phasing out of polystyrene products of McDonalds. It was powerful shareholder activism that lead to buyout of ABN AMRO Bank, to be split among three investors who jointly staged a takeover on one of Europe’s largest Banks.

Shareholders activism can influence corporate culture, increase general awareness on social and human rights issues concerning organization, utilize corporate democracy provided by law to them.

To conclude, shareholder activism will be seen in India in the coming days, if company don’t adhere to corporate governance and as long investors are coming in play to a larger extent.