Dynamics of Shareholder Democracy: Indian Perspective on Corporate Governance

It is a widely acclaimed fact that in any corporate enterprise, the shareholders are the owners. But in fact, they are seldom able to exercise any ownership rights except to sometimes cast votes at General Meetings. The members therefore, are only passive investors rather than active participants in the governance of the corporate process. Still the directors are answerable to the shareholders at least for 2 reasons,

a) Economic viability of the company so to feel sure about the safety of shareholder’s investment

b) When the company enters into contractual relationship with third persons, being the recognised owner of the company.

Thus, the shareholders democracy can play an important role in composing the Board of directors, raising company performance and ensuring that the community at large takes a greater interest in industrial progress. Recognising the supreme authority of the shareholders, the Companies Act has given authority to them to appoint directors at the Annual General Meetings to direct, control, conduct and manage the business and affairs of the company.

PRACTICAL SCENARIO:

Despite the powerful weapons handed over to the shareholders by the Companies Act, 2013 the shareholders have not been able to use them. The Board of directors of a large number of companies is elected only by a few shareholders who attend the Annual General Meetings and those who can have sufficient number of proxies and can demonstrate their voting power.

Most of the shareholders do not have enough time to spare from their busy schedules to take part in the affairs of the company in which they have invested. Additionally, they are not always educated enough about their rights. As a result the actual shareholders democracy does not reflect in the affairs of the company or composition of Board of Directors.

SHAREHOLDER’S ACTIVISM

Due to recent changes in Corporate Laws, shareholder’s activism has been strengthened; the following factors have played an important role in encouraging shareholder activism in India.

1. ELECTRONIC VOTING:

• • Section 108 of Companies Act, 2013 read with Rule 20 of the Companies (Management and Administration) Rules, 2014 provides that every listed company and every unlisted public company having more than 1000 shareholders, debenture holders or any other security holder has to give mandatory right to e-vote.

2. SEBI REGULATIONS:

• • Regulation 44 of SEBI (LODR) Regulations, 2015, provides that a listed entity shall provide the facility of remote e-voting to its shareholders, in respect of all shareholders, resolutions and shall submit to the stock exchange, within 48 hours of conclusion of its General Meeting the details regarding the voting results in the prescribed format.

3. APPROVAL OF RELATED PARTY TRANSACTION BY SHAREHOLDERS:

• • According to the section 188 of the Companies act, 2013 read with rule 15 of the Companies (Meetings of Board and its Power) Rules, 2014, a company shall enter into any contract or arrangement with a related party subject to the following conditions:
• The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose {Rule 15 (1)}

1. The name of the related party and nature of relationship;

2. The nature, duration of the contract and particulars of the contract or arrangement;

3. The material terms of the contract or arrangement including the value, if any;

4. Any advance paid or received for the contract or arrangement, if any;

5. The manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;

6. Whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and

7. Any other information relevant or important for the Board to take a decision on the proposed transaction.

*If any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement. {Rule 15 (2)}

*A company shall not enter into a transaction or transactions, without the prior approval of company by a resolution where the transaction or transactions to be entered into {Rule 15 (3) of the Companies (Meetings of Board and its Power) Rules, 2014}:

1. as contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of section 188, with criteria as mention below

a) Sale, purchase or supply of any goods or material amounting to 10 % or more of the turnover of the company,

b) Selling or dispose of property amounting to 10 % or more of net worth of the company

c) leasing of property amounting to 10 % or more of the turnover of the company

d) availing any services amounting to 10 % or more of the turnover of the company

2. Appointment of any person in place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding 2.5 lakh rupees

3. Remuneration for underwriting the subscription of any securities or derivatives exceeding 1 % of the net worth of the company

EXAMPLE OF MINORITY SHAREHOLDERS SUCCESSFULLY CHALLENGING THE ACTIONS OF MAJORITY SHAREHOLDERS IN AN INDIAN COMPANY:

• In 2016, the Aditya Birla Group’s management proposed a merger between its 2 listed entities, Aditya Birla Nuvo and Grasim Industries. This proposed merger was unfavourable to the interests of the minority shareholders and disproportionately benefitted the Birla family (the majority shareholders).
• The minority shareholders raised their concerns through formal objections and public forums & demanded a better deal and more transparency.
• The management got worried because of the complaints from smaller shareholders & they had to change the merger deal to make it fair for everyone. This shows that even small shareholders can make a big difference and stop the big ones from being unfair.

In conclusion, while the Companies Act, 2013 and recent regulatory changes have empowered shareholders with significant rights and tools but there are still practical issues that prevent full shareholder democracy in India. However, advancements like electronic voting, SEBI regulations and stringent requirements for related party transactions represent positive steps toward enhancing shareholder activism.