India: ‘Shareholder Activism': Recent Developments and the Evolving Landscape

Last Updated: 1 October 2019
Article by Iqbal Khan - Partner and Aparupa Saha

Introduction

India is witnessing a growing trend of shareholder activism, where investors are increasingly being viewed as positive participative forces. Past instances have shown that in the right circumstances, shareholder activism can contribute to unlocking value for all shareholders. Further, shareholder activism is not necessarily limited to isolated individual instances of demand for change. Rather, in a developing market, it assumes the role of being a catalyst in fostering an atmosphere of good corporate governance and structural stability.

Private companies, with sizeable investments from institutional investors, in the natural course of their growth cycle, may seek listing in the future. This, in addition to other macroeconomic factors, should result in a larger number of listed companies in India witnessing more dispersed shareholding (i.e., lesser concentration of promoter shareholding and larger share of public shareholding, both institutional and retail) in the future. The legal and financial infrastructure is also facing a push towards this direction. For instance, the government's proposal to increase public float in listed companies to 35% (thirty-five per cent), on the belief that, inter alia, a larger participation by the public in a traditionally promoter driven market such as India, would promote stronger corporate governance and transparency. While shareholder activism as a concept continues to evolve in the Indian context, there are two key recent developments worth noting that may have a role to play in shaping this phenomenon further.

Superior Voting Rights

In 2009, SEBI had barred listed entities from issuing shares with superior rights on the apprehension of possible misuse of superior voting rights and the detrimental impact on other shareholders. By a press release dated June 27, 2019, followed by amendments to the SEBI Listing Regulations[1] and ICDR Regulations[2] on July 29, 2019, SEBI decided to permit tech companies (intending to be listed) to have shares with superior voting rights ("SR Shares"), and set forth the framework to govern such SR Shares (the "DVR Framework").

As per the DVR Framework, to-be-listed companies in the 'tech sector'[3] are permitted to issue SR Shares to promoters who occupy an executive position with the issuer. The understandable intent appears to provide impetus to promoter dependent businesses, to be able to scale and go public. This flexibility aims at aiding promoters in retaining control while permitting dilution in shareholding to raise capital. Despite the well-meaning intent, the very concept of superior rights necessarily creates the existence of a disadvantaged class, in this case, the other shareholders. This concept itself, aggravated by the prevailing promoter dominated Indian corporate culture, could potentially: (a) deter and dissuade other shareholders who have until recently, and largely still today, been passive shareholders, from participating in the affairs of companies with SR Shares; and (b) counteract the thrust towards a more active investment environment driven by stronger corporate governance, transparency and active shareholder participation.

The regulators appear to have considered this and in order to address such concerns, included certain safeguards in the DVR Framework, in the form of, amongst others, sunset provisions for lapse of such superior rights. However, two prongs under the event based sunset provisions, in their current form, are likely to further complicate matters for the other shareholders due to lack of clarity.

To explain the issue further, per the event based sunset provisions, SR Shares must mandatorily be converted into ordinary shares, inter alia, on either: (i) merger or acquisition of the issuer of such SR Shares, if pursuant to such merger or acquisition, the holders of the SR Shares are no longer in control of the issuer; or (ii) the SR Shares being sold by their holder. It is unclear how these event-based sunset provisions will apply in companies having more than one promoter holding SR Shares. For example, if there is a merger or acquisition pursuant to which one of the promoters holding SR Shares cedes control of the issuer but the other promoter, along with the acquirer, continues to remain in control of the issuer – will the SR Shares held by such other promoter (who continues to retain control of the issuer) be converted into ordinary shares, or only the SR Shares held by the transferring promoter be converted?

This assumes significance in the context of exit opportunities and valuations for promoters and other shareholders. In a situation where there is more than one promoter holding SR Shares, and if such two (or more) promoters are unable to work together for any reason, the ability of any promoter to exit would be significantly curtailed as his superior rights cannot be transferred, and if the other promoter(s) continue to retain their superior rights, acquirers may not be willing to provide optimum value for such acquisition. The knock-on effect would be felt by other shareholders, where either the acquisition bid itself fails and an exit opportunity is lost, or the exit price is sub-optimal due to the inability of the exiting promoter to obtain what would otherwise be a fair price. Further, in such a scenario if the promoter opts to wait until the time-based lapsing of the SR Shares, operational challenges during the intervening period could lead to lost opportunities and ultimately, destruction in value for all shareholders. Furthermore, if one were to rewind and move up the timeline a bit further, this framework highlights certain complex issues to be considered regarding the acquisition of 'control' and the related requirement of making an open offer in the first place, in a scenario where an acquirer enters a company where there are existing promoters with SR Shares.

Structural overhangs (such as the above) on meaningful exit opportunities would dilute and erode the positive effects of activism by shareholders. Hence, it is important that appropriate clarifications are introduced by SEBI on the foregoing.

Regulation of Proxy Advisors

The second update in relation to shareholder activism is the SEBI working group's report on issues concerning proxy advisors dated May, 2019 (the "Report"). Proxy advisory firms play a very important role in shareholders' engagement with the management by bridging the gap between management proposals and strategies, very frequently enmeshed in accounting and financial jargons, and the company's shareholders.

These firms are relatively new in the Indian context. Given the thrust towards a broad based diversified corporate culture, proxy advisory firms will increasingly play the required role of facilitating a meaningful interaction between the shareholders and the management, and will play a key role in shareholder activism going forward. In this spirit, the SEBI working group has rightly adopted the stance that overregulation, particularly in the form of any restriction on scope of advice or role of proxy advisors, would thwart their positive impact on corporate governance.

In this regard, the one concept that is worth emphasis, and assumes center stage in any form of governance discussions is conflict of interest. Further, given the limited number of institutions in the field and their dual capacity role – one that of an advisor to the shareholders and the other as a consultant to corporates, conflicts are bound to arise. While such dual role is recognized to have the positive effect of a holistic redressal of issues, the working group's recommendations on enhanced procedures with respect to managing conflict of interest (to ensure objectivity and independence), and the manner in which they have to be disclosed by proxy advisory firms, should be in the mandatory compliance bucket rather than in the general 'comply or explain' bucket.

Conclusion

While shareholder activism as a concept evolves and gains traction in the Indian context, it would be interesting to see how changes in law, which are result of rational and justifiable intent actually pan out in practice. The accommodative approach adopted by the SEBI working group with respect to regulation of proxy advisory firms should be viewed as pragmatic and mature to let certain matters be guided by market forces and sentiments, particularly in a developing economy. On the other hand, measures like the DVR Framework, which are promoter oriented, are likely to dampen the spirit of shareholder activism. As such, the DVR Framework will be a good test to see whether the intent of long term value creation by promoters, which is the intent behind this new initiative, is welcomed as a value enhancing opportunity, or the practical implications of it result in investors becoming wary of investing in such structures for the fear of locking in value and compromising on exit opportunities in an already restrictive and promoter influenced market (thereby curtailing the shareholder activism trend).


[1] Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015

[2] Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018

[3] Defined to mean companies, which are "intensive in the use of technology, information technology, intellectual property, data analytics, bio-technology or nano-technology to provide products, services or business platforms with substantial value addition."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions