The Dynamics of Shareholders Democracy: An Indian Perspective on Corporate Governance

In the landscape of corporate enterprises, it is widely accepted that shareholders are the owners of the company. However, the reality often tells a different story. Despite their ownership status, shareholders frequently find themselves sidelined, with limited opportunities to exercise their rights. Beyond the occasional casting of votes at General Meetings, they are mostly passive investors rather than active participants in the governance of the company. This disconnection between ownership and governance raises critical questions about the role of shareholders in corporate management and the effectiveness of the mechanisms designed to protect their interests.

Shareholders as Passive Investors

Theoretically, shareholders are the ultimate authority in a corporation. They have the right to appoint directors, approve major corporate decisions, and hold the board accountable for its actions. However, in practice, these rights are seldom fully exercised. The reality is that shareholders are often distant from the day-to-day affairs of the company, lacking both the time and the necessary information to engage meaningfully in corporate governance. Consequently, they are reduced to passive investors whose involvement is limited to attending General Meetings, if at all.

Despite this passivity, directors remain answerable to shareholders for two primary reasons. First, the economic viability of the company is crucial to ensure the safety of shareholders' investments. Shareholders, as the owners, need to be confident that the company is being managed effectively and efficiently to protect their financial interests. Second, when the company enters into contractual relationships with third parties, it does so as a recognized entity owned by the shareholders. Therefore, the actions of the company reflect on the shareholders, necessitating some level of accountability from the directors.

The Role of Shareholders' Democracy in Corporate Governance

Shareholders' democracy is a concept that underscores the importance of shareholder participation in the governance of a corporation. It is through this democratic process that shareholders can influence the composition of the Board of Directors, enhance company performance, and ensure that the broader community takes a vested interest in the company’s progress. Recognizing the supreme authority of shareholders, the Companies Act, 2013, empowers them to appoint directors during Annual General Meetings (AGMs). These directors are entrusted with the responsibility to direct, control, conduct, and manage the business and affairs of the company.

However, the practical implementation of shareholders' democracy is fraught with challenges. Despite the powerful tools provided by the Companies Act, 2013, such as the right to appoint directors and vote on critical issues, the reality is that only a small fraction of shareholders exercise these rights. In many companies, the Board of Directors is elected by a select group of shareholders who attend AGMs, often those who hold enough proxies to demonstrate their voting power. This limited participation results in a governance structure that does not fully reflect the will of the broader shareholder base.

The Practical Challenges of Shareholders' Democracy

One of the primary reasons for the underutilization of shareholders' rights is the lack of time and awareness among shareholders. Many shareholders, particularly retail investors, are busy with their own lives and do not have the time to engage in the affairs of the company in which they have invested. Moreover, they may not be adequately educated about their rights and the importance of their participation in corporate governance. This lack of awareness and engagement leads to a situation where the actual exercise of shareholders' democracy is minimal, and the governance of the company remains in the hands of a few influential shareholders.

This scenario raises concerns about the effectiveness of corporate governance in India. If only a small group of shareholders is actively involved in the governance process, the interests of the majority may not be adequately represented. This can lead to decisions that benefit a select few at the expense of the broader shareholder base, undermining the principles of fairness and transparency that are essential to good corporate governance.

The Rise of Shareholder Activism

Despite these challenges, there has been a significant rise in shareholder activism in India in recent years. This activism is driven by several factors, including changes in corporate laws, regulatory interventions, and advancements in technology that have made it easier for shareholders to participate in corporate governance.

1. Electronic Voting: A Game Changer

One of the most significant developments in promoting shareholder activism has been the introduction of electronic voting (e-voting). Section 108 of the Companies Act, 2013, read with Rule 20 of the Companies (Management and Administration) Rules, 2014, mandates that every listed company and every unlisted public company with more than 1,000 shareholders, debenture holders, or other security holders must provide the right to e-vote. This provision has revolutionized the way shareholders can participate in corporate governance.

E-voting allows shareholders to cast their votes on resolutions without being physically present at AGMs. This is particularly beneficial for retail investors who may not have the time or resources to attend meetings in person. By enabling remote participation, e-voting ensures that a larger number of shareholders can exercise their voting rights, leading to a more representative and democratic decision-making process.

2. SEBI Regulations: Enhancing Transparency

The Securities and Exchange Board of India (SEBI) has also played a crucial role in strengthening shareholder activism. Regulation 44 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, requires listed entities to provide remote e-voting facilities to their shareholders for all resolutions. Additionally, companies must submit the details of voting results to the stock exchange within 48 hours of the conclusion of the General Meeting in a prescribed format.

These regulations have enhanced transparency in the voting process and ensured that shareholders are informed about the outcomes of their votes. By mandating the disclosure of voting results, SEBI has made it easier for shareholders to hold the Board of Directors accountable and to challenge decisions that do not align with their interests.

3. Approval of Related Party Transactions: Protecting Minority Interests

Another critical area where shareholder activism has gained traction is in the approval of related party transactions. Section 188 of the Companies Act, 2013, read with Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, imposes stringent requirements on companies entering into contracts or arrangements with related parties.

According to these provisions, companies must disclose the name of the related party, the nature of the relationship, the duration and particulars of the contract, and the material terms, including pricing and commercial terms. If a director has an interest in the transaction, they are prohibited from participating in discussions on the matter.

Moreover, for significant transactions, companies must obtain prior approval from shareholders through a resolution. These provisions ensure that related party transactions are conducted transparently and that the interests of minority shareholders are protected. By empowering shareholders to scrutinize these transactions, the law prevents the majority shareholders or directors from taking advantage of their positions at the expense of the company or minority shareholders.

Case Study: Minority Shareholders Challenging Majority Decisions

A notable example of successful shareholder activism in India occurred in 2016, involving the Aditya Birla Group. The management proposed a merger between two of its listed entities, Aditya Birla Nuvo and Grasim Industries. The proposed merger was perceived as unfavorable to the interests of minority shareholders and disproportionately benefited the Birla family, who were the majority shareholders.

Minority shareholders raised formal objections and voiced their concerns through public forums. They demanded a fairer deal and greater transparency in the merger process. The management, initially dismissive of these concerns, was compelled to revisit and revise the merger terms in response to the mounting pressure from minority shareholders.

This case illustrates the power of shareholder activism. It demonstrates that even minority shareholders can influence significant corporate decisions and ensure that the interests of all shareholders are fairly represented. The success of the minority shareholders in the Aditya Birla case has set a precedent for other shareholders to challenge decisions that they believe are unjust or detrimental to their interests.

Conclusion

The evolution of corporate governance in India has seen significant strides towards empowering shareholders and enhancing their role in the governance of companies. The Companies Act, 2013, and subsequent regulatory changes have provided shareholders with powerful tools to assert their rights and influence corporate decisions. However, the practical challenges of limited shareholder participation and awareness continue to hinder the full realization of shareholders' democracy.

The rise of shareholder activism, fueled by advancements such as electronic voting, SEBI regulations, and stringent requirements for related party transactions, represents a positive step towards enhancing corporate governance in India. These developments have made it easier for shareholders to engage with the companies they own and to hold directors accountable for their actions.

While there is still a long way to go, the increasing involvement of shareholders in corporate governance is a promising trend that could lead to more transparent, accountable, and equitable management of Indian companies. As shareholders become more aware of their rights and more willing to assert them, the dynamics of shareholders' democracy in India are likely to evolve further, paving the way for a more participatory and inclusive corporate governance framework.

"Unlock the Potential of Legal Expertise with LegalMantra.net - Your Trusted Legal Consultancy Partner”

Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.