Professional Documents
Culture Documents
6, 2012
583
Journal on Governance
[Vol 1:583
2012]
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. While
some of this may be attributable to the globalization of governance
practices that have had their impact on Indian companies, regulatory
reforms 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 of
directors, 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 from
the 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
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Id., at 49.
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ADOLF
A. BERLE
PRIVATE PROPERTY
& GARDINER
47 (1932).
C.
MEANS,
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588
Collective action problems are the difficulties that arise in achieving consensus
among a diffused set of shareholders who do not play an active role in the
company. The heterogeneity of interests and differing levels of information
available with these shareholders exacerbate the problems. See, Stephen M.
Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97
NW. U.L. REV. 547, 557 (2003).
Shaun J. Mathew, Hostile Takeovers in India: New Prospects, Challenges, and
Regulatory Opportunities, 2007(3) COLUM. BUS. L. REV. 800; George S. Geis, Can
Independent Blockholding Play Much of a Role in Indian Corporate Governance?,
3 CORP. GOVERNANCE L. REV. 283 (2007).
See, Lee Harris, Missing in Activism: Retail Investor Abstinence in Corporate
Elections, 2010 COLUM. BUS. L. REV. 104, 166; Frank H. Easterbrook & Daniel R.
Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395 (1983). See also, Lucian
Bebchuk, The Case for Increasing Shareholder Power, 118 HARV. L. REV. 833,
877 (2005) (Noting some of the reasons why shareholders may have a tendency to
vote in favor of management proposals).
Stuart Gillan & Laura T. Starks, The Evolution of Shareholder Activism in the
United States (2007), available at http://ssrn.com/abstract=959670.
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11
12
13
See e.g., Bernard Black, Shareholder Activism and Corporate Governance in the
United 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 RESEARCH 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 REG. 174 (2001).
Black, supra note 10 at 3.
Gillan & Starks, supra note 9, at 5.
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
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14
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16
17
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19
20
John Armour & Priya Lele, Law, Finance, and Politics: The Case of India, 43
LAW & SOCY REV. 491, 496.
166(2), Companies Act, 1956, wherein annual general meetings can be held
only at the registered office of the company or at some other place within the
same city, town or village as the registered office, although there are no
geographical restrictions as far as other shareholders meetings are concerned.
Jayati Sarkar & Subrata Sarkar, Large Shareholder Activism in Corporate
Governance in Developing Countries: Evidence from India (2000), available at
http://www1.fee.uva.nl/fm/Conference/cifra2000/sarkar.pdf, at 8.
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22
23
24
25
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27
28
29
Reeba Zachariah & Partha Sinha, FII-PEs holdings set to change, TIMES OF
INDIA, September 24, 2009; S. Murlidharan, Encourage GDRs, Not FIIs, THE
HINDU BUSINESS LINE, January 18, 2012.
In the 1990s and 2000s, several Indian companies approached the international
capital markets to issue global depository receipts (GDRs) and American
depository 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.
Under various provisions of company legislation, only members registered in the
books of such a company are entitled to receive notices of meetings and to
exercise voting rights. See, e.g., 82, 172, Companies Act, 1956.
These are set out in some detail in a background paper issued by SEBI. Securities
and Exchange Board of India, Voting Rights of GDR / ADR Holders, available at
http://www.sebi.gov.in/boardmeetings/132/votingrights.pdf.
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31
32
33
34
These are matters that materially affect shareholder interest, such as alteration of
the 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.
Although not mandated by legislation, SEBI exhorted companies to undertake
shareholder voting through postal ballot even in other cases by imposing this as a
condition while granting specific dispensations to companies, such as in
exemptions from making an offer under SEBIs takeover regulations.
Welcome to the World of E-Voting, THE FIRM: CORPORATE LAW IN INDIA, July 2,
2012.
The law explicitly recognizes the possibility of shareholder voting through
electronic 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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35
36
37
38
Companies (Passing of the Resolution by Postal Ballot) Rules, 2011, with effect
from May 30, 2011, which expressly recognize voting by electronic mode.
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).
Id. These agencies are the Central Depository Services (India) Limited (CDSL)
and the National Securities Depository Limited (NSDL). Both these agencies
have established e-voting systems, available at http://www.evotingindia.com/
and https://www.evoting.nsdl.com/respectively.
Vinod Kothari, E-voting becomes mandatory for all listed companies,
MONEYLIFE, July 16, 2012; Tania Kishore, E-voting will make life easier for
investors, BUSINESS STANDARD, July 4, 2012.
It would not be far-fetched to expect persons holding shares in companies to have
access to computers and the Internet.
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39
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41
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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 corporate
decision-making through the exercise of voting power. In this
jurisprudential backdrop, any kind of obligation or responsibility to
exercise voting rights is antithetical to the rights or entitlement-based
understanding of share ownership. Hence, shareholders cannot
generally be compelled to exercise their voting rights in any manner,
or at all. This legal understanding of share ownership does not
facilitate greater shareholder participation in companies, the
consequence of which is shareholder passivity.
Although shareholders cannot be compelled to exercise their
votes, regulatory authorities have begun to adopt market-based
approaches to address passivity among institutional investors. In a
move that is somewhat unconventional in the Indian context, SEBI has
sought to exhort a specific type of institutional investor, i.e. mutual
funds, 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 corporate
governance of listed companies.43 Adopting a comply-or-explain
approach,44 SEBI requires asset management companies of mutual
42
43
44
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Paul Rose, On the Role and Regulation of Proxy Advisors, MICHIGAN LAW
REVIEW: FIRST IMPRESSIONS, available at http://www.michiganlawreview.org
/articles/on-the-role-and-regulation-of-proxy-advisors.
Id.
James R. Copland, Yevgeniy Feyman & Margaret OKeefe, Proxy Monitor 2012:
A Report on Corporate Governance and Shareholder Activism 22 (Fall 2012),
available at http://www.proxymonitor.org/pdf/pmr_04.pdf.
They are (i) InGovern (http://www.ingovern.com/); (ii) Institutional Investor
Advisory Services (IIAS) (http://www.iias.in/); and (iii) Stakeholders
Empowerment Services (SES) (http://www.sesgovernance.com/index.html).
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which may have the closest domain relationship with such firms, has
not 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 This
would require the establishment of a registration mechanism for such
firms, 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 registration
mechanism would also help SEBI monitor the actions of the firms, and
also to impose sanctions in the event of non-compliance with services
standards. This would be similar to the regulation of credit rating
agencies, whereby SEBI has been effective in maintaining standards
within the Indian industry, although the industry at the wider global
level had come under some criticism due to its role in the sub-prime
crisis. 75
C. Other Informational Intermediaries
Apart from proxy advisory firms, other types of intermediaries
are beginning to cast their spell on Indian corporate governance. The
year 2012 has witnessed several analysts publishing reports regarding
various Indian leading companies on matters that range from
accounting practices to governance standards to the role of controlling
shareholders.76 By highlighting issues regarding governance of
companies, which extends beyond the traditional confines of financial
analysis, 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
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81
82
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Gillan & Starks, supra note 9, at 31; N.K. Chidambaram & Kose John,
Relationship investing: Large shareholder monitoring with managerial
cooperation, NYU WORKING PAPER NO. FIN-98-044 (1998), available at
http://ssrn.com/abstract=1297123.
Gillan & Starks, supra note 9, at 31.
163, Companies Act, 1956.
196, Companies Act, 1956.
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 even
the right to inspect the minutes of meetings of the board of directors. ARVIND
DATAR (ED.), A RAMAIYA: GUIDE TO THE COMPANIES ACT 2158 (17TH ED., 2010).
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C. Litigation Strategy95
Internationally, activist investors have also resorted to litigation
in extreme cases where boards and managements of companies have
acted in a manner that investors believe has caused loss either to the
companies or their shareholders. On occasions, they have even
succeeded. Whether such a litigation strategy would be effective in
achieving the activist investors goals of enhancing corporate
governance 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. The
advantage of this method is that the enforcement can be controlled by
an affected shareholder rather than to rely upon public enforcement
that 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 or
officers of a company have breached their duties to their company, but
the 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
96
Parts of this section have been derived from the broader discussion on
shareholder derivative actions in India contained in Vikramaditya Khanna &
Umakanth Varottil, The rarity of derivative actions in India: reasons and
consequences, in DAN. W. PUCHNIAK, HARALD BAUM & MICHAEL EWINGCHOW, THE DERIVATIVE ACTION IN ASIA: A COMPARATIVE AND FUNCTIONAL
APPROACH (2012).
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 rather
than 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 and
the remedies would inure to the benefit of the shareholder, who may
enjoy it directly. For instance, any recovery or benefit under a direct
shareholder suit will accrue to the shareholder, and generally not to the
company.
Company law in India provides shareholders with the options
of 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 they
may 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 Vikramaditya
Khanna 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 of
derivative actions becomes crystallized when its rarity is juxtaposed
against the fact that there are over 700,000 active companies in India 98
and nearly 30 million cases pending before various Indian courts.99 A
number of reasons have been proffered for this state of affairs.
97
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99
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(1843) 2 Har 461. Under this age-old rule, when an injury is caused to the
company, it is only the company that can initiate legal action against the
wrongdoer, and shareholders are barred from doing so.
Over the years, the rule has been subjected to several exceptions that permit a
shareholder 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.
Although not used in the technical sense, fraud on the minority requires the
establishment of some kind of unfair discrimination against the minority. See,
ARAD REISBERG, DERIVATIVE ACTIONS AND CORPORATE GOVERNANCE 70
(2007).
This is because a derivative action under common law is considered an equitable
remedy that imposes such an onus on the plaintiff shareholder. For an implicit
acceptance 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).
For some examples, see, Khanna & Varottil, supra note 95 at 379.
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shareholders
to
initiate
actions
for
oppression108
and
109
mismanagement.
These rights by way of personal actions are
available 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 law
disputes.111 In actions for oppression and mismanagement, the CLB
has wide-ranging powers to pass various types of orders, including to
regulate the conduct of the company, to order a buyout of the minority
by the majority, and to make any provision that it finds just and
equitable in the circumstances.112
While the oppression and mismanagement remedies appear
attractive to minority shareholders, it is not easy to invoke these
remedies. An action is not admissible unless it carries enormous
support among minority shareholders. 113 While substantial minority
shareholders in unlisted companies may be in a position to invoke
them, it is nearly impossible for minority shareholders in listed
companies (who usually hold less than 10%) to satisfy the threshold
requirement. Moreover, even in terms of numerical aggregation of 100
108
109
110
111
112
113
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came into the public domain early 2009. 122 This was followed by
frenetic 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 then
sold to a suitor, so as to protect the interests of various stakeholders to
the 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 of
Satyams shareholders, which too was dismissed by the court. 124 On
the other hand, both the company as well as the audit firm faced
shareholder suits in the US almost instantaneously as the scandal
unfolded.125 These suits were filed on behalf of holders of American
depository receipts (ADRs) residing in the US. 126 Both the company
and the audit firm settled the suits in the US resulting in payouts of
millions 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 shareholder
remedies in a developed jurisdiction such as the US and in India.
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123
124
125
126
127
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133
Letter dated Mar. 12, 2012 addressed by The Childrens Investment Fund
Management (UK) LLP to the Board of Directors of Coal India Limited.
Id.
Shine Jacob & N. Sundaresha Subramanian, TCI sues CIL execs over losses,
BUSINESS STANDARD, October 13, 2012; James Crabtree, TCI turns up the heat
in Coal India dispute, THE FINANCIAL TIMES, Oct. 13, 2012.
Vidya Ram & Siddhartha P. Saikia, Coal India issue: Investment fund TCI firm
on action; Ministry sees no need for arbitration, THE HINDU BUSINESS LINE,
May 29, 2012.
Anuradha RV & Deepak Raju, BIT of a problem, INDIAN EXPRESS, Jun. 29,
2012.
Prabhash Ranjan, The White Industries Arbitration: Implications for Indias
Investment Treaty Programme, INVESTMENT TREATY NEWS, April 13, 2012.
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and limitations. 134 In any event, BIT actions are available only when
government action is involved (as in the CIL situation), but cannot be
resorted to in the context of listed companies that are owned by private
parties.
In both the above instances, while efforts to remain outside the
Indian legal system may result in some success (as the Satyam
settlements indicate), they are inherently discriminatory in as much as
they provide benefits to foreign investors only, while domestic
investors are confined to remedies within the Indian legal system,
which suffer from several inadequacies as we have seen.
In concluding this section, we find that the interactive and
combative strategies, while available to activist investors, are not
effective to be able to directly influence the governance practices of
listed companies in India. Recent reform efforts have taken this into
account and sought to arm shareholders with greater access to
remedies. The Companies Bill, 2012 contains a specific provision for
class actions by shareholders against errant companies,135 but this is
arguably too general in nature136 and is accompanied by severe
restrictions that may not significantly alter the status quo.137 Moreover,
the substantive legal provision is only one measure, and does not
address the broader issues of institutional environment in India that
effectively curbs shareholder actions against listed companies.
VII. Evaluating the Impact of Shareholder Activism
After considering the trends regarding shareholder activism
that are emanating from India, and assessing the possibilities and
134
135
136
137
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For a discussion of several empirical studies, see, Gillan & Starks, supra note 9;
Black, supra note 10.
Gillan & Starks, supra note 9, at 16-17.
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140
141
142
143
144
145
Id. at 17.
Black, supra note 10, at 15.
Gillan & Starks, supra note 9, at 35.
Bainbridge, supra note 10 at 13-14; Romano, supra note 10.
Gillan & Starks, supra note 9, at 34. See also, Henry T.C. Hu & Bernard Black,
The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 S.
CAL. L. REV. 811 (2006).
Briggs, supra note 15, at 722 (although empirical evidence to support this
continues to be mixed).
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147
Bainbridge, supra note 10, at 1; Iman Anabtawi & Lynn Stout, Fiduciary Duties
for Activist Shareholders, 60 STAN. L. REV. 1255 (2008) (arguing that activist
shareholders are susceptible to greed and self-interest, which must be
counterbalanced by foisting fiduciary duties upon them). See also, Iman
Anabtawi, Some Skepticism About Increasing Shareholder Power, 53 UCLA L.
REV. 561 (2006).
For an extensive discussion of the conflict issue in China, see Chao Xi,
Institutional Shareholder Activism in China: Law and Practice (Part 1), [2006]
I.C.C.L.R. 251, 258-62.
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