India: The Rise and Rise of Shareholder Activism

Introduction

Around the world, there has been a considerable increase in shareholder activism in recent years. October 2017 saw a win for shareholder activists, 40 North and White Tale, when they forced the management of Clariant AG to call off Clariant's merger with Huntsman Corporation, since they believed that the merger would expose Clariant to Hunstman's debt and volatility. This was followed by the widely publicised and deadlocked battle of Nelson Peltz, a hedge fund manager of Trian Partners, nominating himself for appointment as a director in Procter & Gamble ("P&G") in early November 2017.

Shareholder Activism – the Indian landscape

In line with global trends, India is also seeing a rise in shareholder activism. An early instance of shareholder activism in India was the rejection of an increase in remuneration of certain key executives of Tata Motors by its shareholders in July 2014. However, when put to vote for a second time in January 2015, shareholders voted in favour of the increase in remuneration.  More recently, in June 2017, shareholders of Raymond Ltd rejected the sale of JK House at an allegedly below market price to the promoters of Raymond Ltd.

The above-mentioned triumphs for investors have encouraged others to take an active part in the management of companies. In July 2017, Unifi Capital Private Limited ("Unifi") sought the appointment of a director representing small shareholders on the board of Alembic Limited. Similarly, in September 2017, certain shareholders of Religare Enterprises Ltd ("Religare") including India Horizon Fund filed a petition before the NCLT to prohibit Religare from making an investment of around INR 500 crore in its subsidiary. The shareholders of Religare also sought to oust the board of directors on the ground of frequent and unexplained write-offs by the company and its subsidiaries. The jury is still out on these matters!

There have also been a few notable instances when certain shareholders took an active interest in the management but failed to obtain majority vote of the shareholders. For instance, in September 2017, Florintree Advisors Private Limited ("Florintree") moved the proposal to appoint a nominee of 'small shareholders' on the board of directors of PTC India Limited. However, the majority shareholders did not support this proposal. Similarly, in the proposed merger of HDFC Standard Life Insurance Company Limited with Max Financial Services Limited, certain proxy firms (shareholders of Max Financial) had urged shareholders to vote against the payment of non-compete fee to the promoters since the rationale behind such payment was not clear. However, this plea did not go through and 65% of shareholders voted for the payment of the non-compete fee. The merger was eventually called off due to different reasons. Though the above two instances may appear to be a failure for institutional activist investors, it shows the beginning of a trend of shareholder activism, which, is on a rise.

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. 

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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