Is Companies Act of 2013 Better Than Erstwhile Acts?
Companies must uphold excellent corporate governance standards and guarantee a high degree of shareholder participation in light of India’s growing shareholder activism. Maintaining shareholder credibility will be facilitated by increased shareholder engagement and the adoption of best practices by businesses. Shareholder Activism can serve as a great means to ensure democratic corporate governance leading to corporate democracy provided it is used by the shareholders in a good faith, honesty, and integrity. Shareholder activism as a phenomenon is desirable and must be promoted.[1] Companies must inform institutional investors of their ambitions and objectives. The management of a business must also justify its choices and relate them to the organization’s objectives. The courts must be circumspect while passing any injunctions to ensure that shareholders are allowed to set the affairs of the company right.[2] The strategies used by activist shareholders include the following[3]:
- In accordance with the Companies Act of 2013, shareholders acquire shares of the firm that grant them voting rights in order to have a say in business operations and to actively participate in business activities.[4]
- Effective and frequent communications with the management by the owner ensures that the management is known of the various issues faced by the owners which in turn aids in the board’s decision-making.[5]
- In companies that are required to have a Stakeholders Relationship Committee, the shareholders actively participate in such committees to voice their concerns and grievances.
- If companies are not proactively addressing shareholder concerns, the shareholders make public announcements to voice their opinions.
- Approaching the National Company Law Tribunal to initiate proceedings for oppression and/or mismanagement on the ground that the company’s affairs are not aligned towards the greater good of the company or its stakeholders.[6]
- Application to the Serious Fraud Investigation Office (SFIO).[7]
- The Securities and Exchange Board of India (SEBI) can initiate action suo moto or after a complaint by an aggrieved shareholder if governance norms for listed entities (prescribed by the SEBI) are breached, etc[8]
The option for remote engagement in corporate governance must promote owner involvement in the presentation of executive suggestions. The SEBI and Company law have both recognized this technical requirement and helped to increase shareholder engagement by promoting online board meetings and online voting. Perks of employing technology as a corporate governance tool include access to actual activities, the potential removal of the proxy brokers, enhanced transparency and reliability, and a decrease in agency expenses during shareholder voting.
After the failure of governance structure in various firms like Satyam Computer Services, Enron, etc, globally, corporate governance reforms have attracted a lot of attention, particularly with regard to enhancing corporate behaviour and responsibility.[9] Time and again the legislative policies have been amended with the intent to make the roots of corporate governance better than before. If the directors and corporate officers were fulfilling their duties as provided in the legislative provisions with utmost good faith, integrity and honesty then there would have been no requirement for the number of committees to be formed and conduct the research to make the structure of corporate governance stronger hitherto. Even the lawmakers realized the unreplaceable role and importance of independent directors in the function of the company. For a long, the position of Independent Directors in Indian companies has been baffling. Over the years, various changes in the Companies Act and Rules have only increased the confusion as on one hand the legislations have aimed at increasing the importance of Independent Directors in the Company; at the same time, various limitations and restrictions result in projecting Independent Directors as a fifth wheeler on the Board of Directors.[10] In 2017, Uday Kotak Committee was formulated having the primary objective to improve the standards concerning corporate governance of listed companies in India. This committee was asked to make suggestions on a variety of topics, including guaranteeing independent directors’ freedom and their greater engagement in the operation of the firm, as well as enhancing protections and declarations regarding transactions between related parties. Additionally, it was called to provide advice on board assessment procedures, reporting, open and honest communication matters, the accounting and auditing procedures used by listed businesses, and shareholder concerns regarding voting and general meeting attendance, etc.[11] The importance of e-voting has been deeply recognized and acknowledged by the amended Companies Act 2013. It has been observed that since the independent directors are often chosen by the promoters, they do not consider it their responsibility to oversee or supervise the operations of the promoters and management elected by the promoters. Instead, they see themselves as strategic consultants to the promoters. Due to this, independent directors frequently fail to speak out loudly enough to defend the interests of non-controlling owners. Accordingly, it is essential to make sure that minority shareholders have a big say in the selection and ousting of independent directors in order to limit the power of the dominating owners.[12]
A turn in the slope toward the direction of “Corporate Democracy” is essential. Corporate governance is the process by which businesses are administered and regulated. By enhancing company governance a firm seeks to promote an environment of confidence and trust among various stakeholders with different and contradictory goals in order to maximize the owner’s value and protect the needs of other stakeholders. Corporate democracy is a crucial aspect of corporate governance. A publicly listed company’s stockholders are anticipated to be more active in its management. To aid owners in exercising their voting privileges, administrators should provide them with greater info.[13] Shareholders must be given an environment where their freedom of speech is not hampered because of any fear or pressure. The majority of shareholders in large corporations have potentially hostile voting rights, and these rights are largely managed by a small bunch of company managers. The shareholders are prevented from speaking their minds by the firm’s powerful board, promoters, sponsors, etc. An investor’s power is actually somewhat constrained. Most of the time, the business design only permits official shareholder participation in corporate governance. At last, listed firms push the concept of corporate democracy to the periphery.
Regarding corporate governance, the Companies Act of 2013’s requirements is very positive. Company democracy is not as heavily emphasized in Indian corporate legislation. Additionally, the Act talked about corporate governance rather than democracy. When shareholders are allowed to exercise their rights democratically, the legislative goal is achieved. To provide a “check and balance” mechanism, the management of the company is responsible for involving shareholders in the decision-making process. This would guarantee transparency in every action taken by the business or the shareholders. It’s also crucial to remember that not all regulatory issues can be covered in an annual general meeting. Since the Companies Act was reframed and amended after the consideration of suggestions made by the committees, the company’s democratic culture has received less attention.
AUTHOR: ADVOCATE VIDHI JAIN
NOTE: 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.
[1] Harshvardhan Korada and Vasanth Rajasekaran, Rising shareholder activism in India available at: https://www.thehindubusinessline.com/business-laws published on 23 January, 2022
[2] Ibid
[3] Sakate Khaitan, Sangeeta Jhunjhunwala, et.al., Shareholder Activism in India: Overview available at: https://uk.practicallaw.thomsonreuters.com/ published on 1 December, 2021
[4] What is shareholder activism? available at: https://g-srm.dixiesewing.com/what-is-shareholder-activism published on 15 October, 2022
[5] Sakate Khaitan, Sangeeta Jhunjhunwala, et.al., Shareholder Activism in India: Overview available at: https://ca.practicallaw.thomsonreuters.com/w-013-9526 published on 1 December, 2021
[6] Sakate Khaitan, Sangeeta Jhunjhunwala, et.al., Shareholder Activism in India: Overview available at: https://uk.practicallaw.thomsonreuters.com/ published on 1 December, 2021
[7] Ibid
[8] Ibid
[9] Debanshu Mukherjee and Astha Pandey, The Liability Regime For Non-Executive and Independent Directors in India: A Case for Reform, Vidhi Centre for Legal Policy available at: https://vidhilegalpolicy.in/wp-content/uploads/2019/09/Final-Director-Liability-Report-September-19-2019.pdf published on September 2019
[10] Bhumesh Verma, Independent Directors – Recent Changes And Trends available at: https://www.linkedin.com/pulse/independent-directors-recent-changes published on 8 May, 2020
[11] Uday Kotak Committee on Corporate Governance, Journals of India available at: https://journalsofindia.com/uday-kotak-committee-on-corporate-governance published on 26 March, 2021
[12] Ibid
[13] Auxano Consulting, Need Attention: Corporate Democracy Is The Essence Of Corporate Governance! available at: https://www.linkedin.com/pulse/need-attention-corporate-democracy-essence-governance-consulting/ published on 5 September, 2022
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