All questions
Overview
Shareholder activism in India has developed in unlikely circumstances. There is little separation of ownership and management, and many listed companies are controlled by ‘promoters’ (i.e., their original founders). Until recently, hostile takeovers have been rare. Also, in the past, institutional investors in India were more passive than those in western markets.
However, much has changed over the past decade. Legislative and regulatory changes have improved corporate governance standards, enhanced minority shareholder rights, created new shareholder remedies, codified directors’ duties and encouraged greater institutional shareholder engagement. Also, succession issues and overleveraged balance sheets have weakened the promoters of listed Indian companies, and international investors have been more willing to challenge management in such circumstances. The emergence of judicial support for shareholder rights, particularly in recent landmark judgments, has meant that they have had some success. Finally, proxy advisers are now active in the market. All of this has led to the rise of shareholder activism in India.
Legal and regulatory framework
i The ability of shareholders to appoint and remove directors
In India, directors of public companies are appointed by shareholders, just as they are in many other common law jurisdictions. However, there is no mandatory annual re-election requirement for directors of public companies (whether listed or otherwise). Independent directors are appointed for a term of up to five years,2 and at least two-thirds of all non-independent directors are subject to rotational retirement and re-election (unless the articles require this for all the non-independent directors).3 There have been some instances of investors being more active with regard to their rights in this regard (see Section IV.iii).
An investor can also seek board representation as a ‘small shareholder’ by acquiring a small number of shares and then petitioning the company with the support of the lower of 1,000 other small shareholders or 10 per cent of the total number of small shareholders,4 but this is hard to achieve in practice.5 Normally, in relation to unlisted companies, the pre-term removal of a director requires an ordinary shareholders’ resolution (i.e., approval by a simple majority), and the director must first have been given an opportunity to be heard.6 For listed companies, there are incremental special resolution requirements in relation to the appointment, reappointment and removal of independent directors.7 This power was used in May 2018, when institutional investors and certain funds were able to remove a director of Fortis Healthcare in this manner (see Section IV.iii).
Also, the removal of non-statutory responsibilities or designations conferred upon directors does not require shareholder approval. For instance, as discussed further in Section II.vi, the articles of Tata Sons did not require shareholder approval for the removal of Cyrus Mistry from his role as chair of the board (although the removal of his directorship required shareholder approval).
ii Control over executive remuneration
Shareholders have voiced their dissent in many instances by voting down executive remuneration packages. For example, Tata Motors (2014), Apollo Group (2018), Kinetic Engineering, Cyient and Balaji Telefilms (all in 2021) and PVR (2023). Further, in 2021, the shareholders of Lupin voted down changes to a stock option plan.
iii The ability to requisition shareholders’ meetings and postal ballots
Shareholders holding at least one-tenth of voting paid-up share capital can notify the board to requisition an extraordinary general meeting (EGM),8 and if the board does not call the EGM within 21 days of a ‘valid’ requisition notice, the shareholders may themselves call the EGM (to be held within three months).9 If the directors fail to convene an EGM following a valid requisition notice, they become liable for any requisition-related expenses.10 A recent judgment of the Bombay High Court,11 following earlier Indian case law, held that ‘validity’ is determined by reference to compliance with the relevant procedures rather than the object of the resolution. This is a departure from English and Australian law.12 Ultimately, other developments led to the investors withdrawing their requisition, but the case is seen as significant in the context of establishing judicial support for shareholder activism in India.
Indian company law does not provide for shareholder written resolutions, but postal ballots are permitted.13
iv Shareholders’ influence over corporate strategy
Under Indian company law, directors have the authority to manage company affairs. Public campaigns for a change of strategic direction are uncommon, but certain shareholder approval requirements do keep management and promoters in check.
Although there is no Indian equivalent as comprehensive as the ‘class tests’ under the UK Listing Authority’s Listing Rules, the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations 2015 (the Listing Regulations) require shareholders’ special resolutions (i.e., a 75 per cent approval threshold) for any disposal of a controlling interest in a ‘material subsidiary’ or any transfer of a significant portion of the subsidiary’s assets.
Also, regardless of listing status, as a result of statutory special resolution approval requirements, minority shareholders holding more than 25 per cent of a company’s voting power can influence certain key corporate actions, such as the issuance of new shares,14 on a non-pre-emptive basis (which will affect non-cash consideration in M&A transactions), any transfer of an undertaking by a public company15 (which is the most direct statutory control over M&As) and any borrowing by a public company in excess of certain thresholds (which will affect the financing of M&A transactions).16
In addition, qualifying related-party transactions require shareholder approval (simple majority) under both company law17 and the Listing Regulations18 with no related parties voting.19
Finally, the Listing Regulations provide for the rights of shareholders to ‘participate in, and to be sufficiently informed of, decisions concerning fundamental corporate changes’ and a principle requiring the ‘protection of minority shareholders from abusive actions by, or in the interest of, controlling shareholdings either directly or indirectly, and effective means of redress’. Boards of listed companies do need to be wary of potential investor complaints to SEBI in this regard.
v The position of shareholders and boards in public M&A situations
Indian law confers various protective rights to shareholders in public M&A situations. There are restrictions on the board taking frustrating action,20 and defences such as poison pills are difficult to implement. In addition, although there is no formal obligation under Indian takeover regulations to treat shareholders equally in a bid situation, equality of treatment is a guiding principle under the Listing Regulations, so it would be difficult for a target to provide selective information to certain bidders.21
Also, just as in England and Wales, M&A transactions can be structured through court schemes, which need to be approved by a majority of shareholders holding 75 per cent in value of the shares.22 Further, SEBI also requires the approval of a majority of public shareholders in certain schemes, which increases their influence. SEBI has recently amended this circular to include additional shareholder safeguards, including recommending independent directors so that schemes involving listed companies are not detrimental to the interests of shareholders and require greater audit committee scrutiny.23
However, hostile takeovers are uncommon and there have been only three contested public M&A transactions (Fortis Healthcare/IHH in 2018, Mindtree/Larsen and Toubro in 2019 and Adani Group/NDTV in 2022) in recent times. Hostile public M&A is likely to continue to be limited to distressed or unusual situations.
vi Legal remedies available to shareholders
The Companies Act 2013 (CA 2013) is perceived as having significantly improved shareholders’ legal remedies, although the litigation process in India can be lengthy.
Minority shareholders (comprising 100 members, or shareholders holding 10 per cent voting power) can claim relief against oppression and mismanagement under CA 2013 on the ground that the company’s affairs are being conducted in a prejudicial manner. Also, a similar threshold of shareholders can also, in certain circumstances, apply to the National Company Law Tribunal (NCLT) to investigate the company’s affairs.24
However, cases under the preceding company law (CA 1956) indicate that claimants historically found success difficult to achieve.25 More recently, the Supreme Court judgment in Tata Consultancy Services Limited v. Cyrus Mistry Limited26 illustrates the challenges with the use of some of these provisions. Following differences between Cyrus Mistry, then executive chair of Tata Sons, and Ratan Tata, the former chair, on 24 October 2016, Cyrus Mistry was removed from the executive chair of Tata Sons through a board resolution and was subsequently removed as a director of Tata Sons pursuant to an EGM held on 6 February 2017, and resolutions passed at other EGMs of group companies removed him from their boards. Mistry challenged his removal and questioned historical corporate actions and the use of affirmative voting rights in the articles of Tata Sons. The NCLT ruled against Cyrus Mistry, but the National Company Appellate Tribunal ordered his reinstatement. Ultimately, the Supreme Court ruled against Cyrus Mistry and upheld his removal. The Supreme Court acknowledged that CA 2013 had broadened the scope of an oppression and mismanagement regime. However, it cited Cyrus Mistry’s involvement in management in previous decisions, his past acceptance of the articles and the fact that Tata Sons is controlled by two charities in concluding that the NCLT was correct in rejecting Cyrus Mistry’s assertions.
Also, CA 2013 has introduced a ‘class action’ concept in Indian company law.27 Shareholders holding a threshold level of shareholding28 can institute class action suits if they believe that the company’s management or affairs are being conducted in a manner that is prejudicial to the interests of the company or its shareholders. The NCLT has the power to issue a broad range of directions and can also order damages. This moves Indian company law away from the restraints of the exceptions to the rule in Foss v. Harbottle.29 However, given the state of the litigation process in India, the effectiveness of this remedy remains to be seen.
vii Other issues activists may face
Similar to other jurisdictions, activist shareholders need to be aware of concert party and insider dealing concerns when engaging with a listed company, as well as the SEBI regulations restricting manipulative, fraudulent and unfair dealings in shares.
As far as disclosure of activist positions are concerned, although companies do not have a general obligation to provide investors with details of specific shareholders’ holdings, companies do need to maintain a register of members that is available for inspection.30 As far as listed public companies are concerned, certain significant acquisitions and disposals do need to be reported to the market, and there are periodic disclosures of promoter positions. Indian company law has also recently introduced the concept of a register of significant beneficial owners, which shareholders are able to inspect.31
