INTRODUCTION
Shareholder activism refers to the range of strategies employed by shareholders individually or collectively to bring about change in a corporation’s governance, strategy, or operations. It can take various forms, such as influencing decisions about the composition of the board, management remuneration, investment policies, or compliance with environmental, social, and governance (ESG) standards. Agency theory forms the foundational framework of shareholder activism by focusing on the inherent conflict in the relationship where the owners are the principals while managers are agents, and there exists a possibility that managers will act according to their own interests and neglect shareholders’ interests1.
Shareholder activism on a global scale has its origins in the activist initiatives by institutional investors during the 1980s and 1990s in America, where the prominent example is the campaigns by pension funds such as CalPERS for reforming governance2. The Cadbury Report (1992) in the UK enshrined principles of accountability and transparency on the part of boards. Hedge fund activism, on the other hand, emerged as a more militant form of activism in the 2000s where activists bought into stocks of companies for quick value generation3.
For India, shareholder activism in the post-1991 liberalization phase can no more be divorced from the country’s economy than the other way around. Liberalization of the capital market through the introduction of foreign institutional investors (FIIs), the creation of SEBI as a statutory body in 1992, and subsequent reforms in corporate governance paved the way for shareholders to exercise their rights. However, the corporate structure of India is different from other countries due to the presence of family promoters.
The objective of this research paper is to find answers to two primary questions: first, what is the law of shareholder activism in India; and second, how has shareholder activism affected corporate governance in India? The research approach used in this paper is doctrinal. Secondary sources like statutes, SEBI guidelines, and judicial precedents have been used extensively, and case studies of four major corporate controversies have been considered. The scope of this paper is limited to corporations regulated by SEBI.
CONCEPTUAL FRAMEWORK
A. Meaning and Types of Shareholder Activism
Shareholder activism is not a monolithic concept. Institutional activism is associated with asset managers, mutual funds, and pension funds interacting with portfolio firms via private negotiations or voting. Hedge fund activism is characterized by the acquisition of a minority stake followed by a public campaign to alter strategy, effectuate asset sales, or change management. Retail shareholder activism, though historically diffuse and ineffective, has gained salience in India through the use of social media and shareholder associations. The shareholder activism history in India is inextricably linked with the economic liberalization process initiated post 1991 in the country. Introduction of FIIs, enactment of SEBI as an independent body in 1992 and further corporate governance reforms allowed shareholders to use their rights in this regard.
B. Theoretical Underpinnings
Agency Theory, proposed by Berle and Means and developed by Jensen and Meckling, provides the theoretical basis for such activism since the shareholders need to regulate the manager in order to curb rent-seeking and misappropriation of resources. The stakeholder theory, introduced by Freeman, holds that the corporate governance framework needs to expand beyond that of the shareholder-centric one to account for employees, creditors, customers, and the community as a whole4. Stewardship Theory, on the other hand, holds that the managers are naturally motivated to serve the interests of the firm and activism works best when complementing such motivation5.
C. Corporate Governance: Foundational Pillars
Corporate governance, in line with the principles stated by OECD and formulated by the Kumar Mangalam Birla Committee (1999) in the Indian context, is based upon four basic pillars, namely, transparency (accurate and timely disclosure of material information), accountability (responsibility of board members to the stockholders), fairness (equality among minority stockholders) and responsibility (ethics and regulation). These foundational tenets have shareholder activism as the means through which they are maintained.
THE HISTORY OF SHAREHOLDER ACTIVISM IN INDIA
Until 1991, the Indian shareholders maintained a passive stance towards corporate governance. Before the liberalisation process started in India, the economy had state-controlled companies and family firms as the majority stakeholders, with thin equity market volumes and low institutional presence. The decision-making process of corporations was protected from interference by shareholders due to the predominance of promoters and inadequate disclosure rules6 .
However, significant changes were made by the post-1991 reforms. Additionally, the appearance of foreign institutional investors led to the emergence of an analytical culture and required governance standards comparable to those abroad. Gradually, the governance initiatives from SEBI, starting from Clause 49 of the Listing Agreement (2000) and ending with SEBI LODR Regulations (2015), ensured the presence of independent board members and increased disclosure standards.
Proxy advisory firms came into being in the early 2000s, offering independent analysis of management initiatives and voting recommendations to institutional investors. The proxy advisors through SEBI regulations in 2014 formalised this intermediary role in what had been till then a loose advisory system7. These foundational tenets have shareholder activism as the means through which they are maintained8.
LEGAL AND REGULATORY FRAMEWORK IN INDIA
A. Companies Act, 2013
The Companies Act, 2013 has made important progress towards empowering minority shareholders. Sections 241 and 242 permit any member possessing a minimum of ten percent of the share capital (or one hundred members, whichever is lesser) to file a case in NCLT against acts of oppression and mismanagement. Section 245 brings about class action, whereby members/depositors can bring a suit against the company and its directors, auditors, and advisors for acts of fraud or misconduct9.
Participation in the affairs of shareholders is enhanced by mandating the use of postal balloting or electronic voting in some specific types of resolutions to provide a level playing field for shareholders living outside corporate headquarters. Approval of such proposals by a special majority and, in some cases, even a majority of minority shareholders (excluding promoters) for related-party transactions of a prescribed amount has proved to be quite a powerful weapon in tackling the tunnelling of firm resources, which has always remained the primary concern of minority shareholders.
B. SEBI Regulations
SEBI (LODR) Regulations, 2015 form the basic governance regulation regime for listed companies in India10. These require that boards must include a certain minimum number of independent directors (at least one-third), establish four mandatory committees (audit committee, nomination and remuneration committee, stakeholders’ relationship committee, and risk management committee), and make specific disclosures of related party transactions, material events, and corporate governance reports.
SEBI’s mandatory continuous disclosure framework of timely disclosure of price sensitive information and quarterly financial performance serves as the basis of information gathering by activist investors. The strict definition of the term ‘independent director’ in conjunction with cooling off periods prevents promoter nomination capture.
C. Proxy Advisory Firms’ Role
Proxy advisory firms play a structurally important intermediary role. IiAS (Institutional Investor Advisory Services) and SES (Stakeholder Empowerment Services) are the two major firms registered with SEBI. These firms analyze shareholder resolutions presented in AGMs and EGMs, issuing voting recommendations for consideration by institutional investors who must comply with the ‘comply or explain’ principle in the Stewardship Code11.
Proxy advisors have gained significant clout with their recommendations: a negative report from IiAS or SES can result in considerable weakening of support for management proposals, such as compensation plans and related party deals. On the other hand, critics highlight conflicts of interests in relation to proxy advisor firms, risk of mechanical decision-making by institutional clients, and imbalance of power owing to differences in the flow of information to be the shortcomings.
D. SEBI Stewardship Code, 2020
SEBI Stewardship Code was put forward by SEBI in January, 2020 in relation to their stewardship responsibility of mutual funds and alternative investment fund (AIFs) regarding listed equity investments12. The Code requires these institutions to formulate and publish a stewardship policy, monitor their investee firms, hold discussions with the management on corporate governance issues, exercise voting responsibly, and report periodically on stewardship efforts. The SEBI Stewardship Code has been based on UK Stewardship Code of 2020 and Japanese Stewardship Code of 2014.
MECHANISMS OF SHAREHOLDER ACTIVISM
Various mechanisms are used by Indian shareholder activists. Voting and proxy fights include attempts by activists to marshal institutional and individual investors in rejecting management motions or passing shareholder motions. The e-voting system prescribed by SEBI has made the process more accessible to investors without imposing any additional logistics burden which earlier favoured promoters who managed to physically dominate the annual general meetings. Shareholder resolutions, both ordinary and special, allow a group of shareholders above a threshold percentage to call for extraordinary general meetings or to put agenda items up for discussion at AGMs. Though the Companies Act prescribes a high threshold for retail shareholders (at least ten percent) and it is quite possible to coordinate among institutional investors and satisfy this condition. Litigation continues to be a very important but not so extensively used tool. The procedure to seek redressal through class action as per Section 245 of the Companies Act is not often resorted to due to the stringent process and the heavy caseload of the Indian Judiciary which makes such litigation financially disadvantageous. Nonetheless, the NCLT cases for oppression and mismanagement have been successful in high-profile cases, such as the Tata-Mistry dispute.
Media and activist campaigns, which nowadays largely happen on social media, through analyst reports, and NGO research studies, are strong extralegal mechanisms. In particular, the Hindenburg Research report about the Adani Group, published in 2023, although an example of international short-selling, shows that public campaigns can lead to regulation enforcement and revaluation of stocks in markets. Lastly, management engagement by private means, which is the preferred route adopted by long-term institutional investors, provides an alternative which is less confrontational and has led to governance improvement in many instances.
INDIAN CASE STUDY ANALYSIS
A. The Tata-Mistry Controversy (2016–2021)
The ouster of Cyrus Mistry from his position as Executive Chairman at Tata Sons in October 2016 was one of the largest instances of corporate governance issue in India. The Mistry group’s holding firms, namely Cyrus Investments and Sterling Investments, petitioned the National Company Law Tribunal (NCLT) for oppression and mismanagement by the Tata Sons board and the majority owner, the Tata Trusts13.
In March 2021, the Supreme Court overturned the decision by the National Company Law Appellate Tribunal (NCLAT) that reinstated Mistry and reaffirmed the board’s decision as valid under the Articles of Association14. Despite this, the incident raised many corporate governance concerns like common interest between the controlling entity and the subsidiaries, ineffective monitoring by the independent directors and no clear succession plans for the top position of the company. It provided impetus for SEBI to discuss the matter regarding related parties and minorities’ rights in unlisted companies.
B. Infosys Governance Crisis (2017 and 2019)
Infosys, the second biggest Indian IT services company, saw two separate instances of governance shocks. In 2017, the company founder N.R. Narayana Murthy openly criticized the board for approving what he termed as exorbitant compensation packages, resulting in the resignation of CEO Vishal Sikka. The instance shows that a famous former insider can also act as an activist in reality, making use of his reputational influence to make changes in corporate governance15.
During 2019, Infosys was hit by anonymous complaints made to SEBI alleging financial manipulation in terms of revenue recognition policies16. An independent law firm hired by the board was unable to find any evidence of fraud, after which SEBI closed the investigation. The instance clearly highlights the effectiveness of SEBI’s whistleblowing program in bringing about investigations from the board as well as the vulnerability of the firms toward being the target of a short-sell campaign based on false allegations.
C. Fortis Healthcare Case (2018)
The Fortis Healthcare scandal was based on the claims that the founders of the firm, Malvinder and Shivinder Singh, had siphoned off about Rs 400 crore from the publicly traded company through related party lending to affiliated firms suffering financial problems. This was corroborated by SEBI, resulting in attachment notices for the promoters17.
Domestic mutual funds and foreign portfolio investors spearheaded the agitation for an extra-ordinary general meeting (EGM), demanded a fresh board composition, and managed to oust the promoters from the board, allowing for the entrance of a strategic investor (IHH Healthcare). It also highlights the effectiveness of institutional activism in ousting people who were pushing entities that had abused their positions. It emphasizes the significance of regulatory actions in allowing institutional activism.
D. Yes Bank Crisis (2019–2020)
Yes Bank faced problems due to concentrated control by its founder CEO, overaggressive lending, and lack of proper provisioning. Issues with governance were flagged as far back as 2018, but unfortunately, nothing was done about them by the management and the board18.
In March 2020, the RBI assumed control and placed the bank under moratorium before arranging a takeover of the company by the State Bank of India. This example shows what shareholder activism could not achieve; where the promoter is the CEO of the firm and the board lacks independence, traditional means of activism will not suffice. The Yes Bank episode was instrumental in bolstering the argument in favor of preemptive regulatory measures as an add-on to market activism, particularly concerning the governance of systemic financial companies.
IMPACT OF SHAREHOLDER ACTIVISM ON CORPORATE GOVERNANCE
A. Positive Impacts
From the collective standpoint, the impact of shareholder activism on corporate governance in India has been largely positive. Board accountability has improved greatly: the number of independent directors sitting on BSE 500 boards has seen a considerable increase thanks to the mandatory requirement introduced by the Companies Act, 2013, and the quality of their oversight has improved. Disclosure standards have been improved as far as the amount and timeliness of information are concerned, owing both to regulations and activism. Shareholders’ rights have been enhanced, specifically those stemming from the majority-of-minority rule applied to related party transactions. The mechanism is specific to the corporate governance environment in India and solves the key issue of promoter-dominated businesses. Empirical research into the effects of activism on Indian firms, post-targeting, reveals some benefits for their future performance, as seen elsewhere internationally.
B. Negative Impacts and Limitations
The principal negative consequence associated with shareholder activism is most prominently with hedge fund activism which is short-termism: the prioritisation of immediate share price appreciation through dividends, buybacks, or asset sales at the expense of long-term investment and value creation19. Indian activism, as compared to that of the United States, has been less vulnerable to such a phenomenon as it includes mostly institutional long-term investors; moreover, because of the limitations of liquidity for many Indian shareholders, an exit option is not available as a solution.
Another risk associated with activist investing is connected with the possibility of its being misused for the purpose of competing interests within corporations. This has been illustrated through the recent case involving Tata Group and Ratan Mistry, where a contestation regarding the validity of the activist’s claims emerged.
C. ESG and Sustainable Governance
The most exciting area of contemporary shareholder activism in India is undoubtedly ESG-related activism. SEBI has taken two important initiatives in the last couple of years, the Business Responsibility and Sustainability Reporting (BRSR) and the ESG disclosures and ratings consultation paper, 202320. Both initiatives recognize the increasing importance of environmental and social risk factors for investment decision-making. In response to increasing mandates from their stakeholders, institutional investors are adopting ESG criteria into their engagement processes.
CHALLENGES TO SHAREHOLDER ACTIVISM IN INDIA
The most significant structural challenge is promoter dominance. In most of the BSE 500 companies, promoters and promoter group entities have more than fifty percent of shares, making them dominant for ordinary resolutions and having a blocking minority when it comes to special resolutions. This situation is bound to curtail the influence of minority shareholders21.
The shareholder awareness is still weak, especially amongst the retail category of investors. Even after an increased trend in the number of demat accounts, fueled by the coronavirus outbreak and discount brokers, there is low participation in voting on corporate matters, and the literacy level for governance issues is not uniform.
Limitations under the law still apply. The Section 245 of the Companies Act allows for class action suits, but the same has not seen much legal recourse owing to its cumbersome certification process and lack of clarity on the damages part. A significant deterrent factor of India activism is related to the huge backlog of cases at NCLT hearing oppression and mismanagement actions; moreover, cultural and institutional impediments exist that include traditional respect towards founding families, cross holdings between different subsidiaries, as well as the lack of board representation from truly independent individuals.
COMPARATIVE ANALYSIS: INDIA, THE US, AND THE UK
The US has the most advanced shareholder activism system in the world.Activist hedge funds routinely acquire minority positions and wage public campaigns for strategic change, supported by a highly liquid market, a plaintiff-friendly securities litigation regime, and institutional investors that are both large and willing to co-operate with activists. Another well-developed system is that in the UK, which has the UK Stewardship Code (2020), which sets a new global benchmark in terms of investor stewardship22.
India scores poorly in relation to many factors: the maturity of its proxy advisory industry, the tendency of institutional shareholders to vote against the advice of company management, and the feasibility of class-action lawsuits. Nonetheless, there is much that India can learn from the United States experience. For instance, unlimited hedge fund activism may prove damaging, resulting in lay-offs, cutting back on R&D activities and increasing leverage. Perhaps, the SEBI Stewardship Code, with its emphasis on stewardship rather than activism, represents a better business model for a market with information asymmetry and weak institutions.
SUGGESTIONS AND REFORMS
Firstly, the criteria for initiating class-action suits under Section 245 of the Companies Act should be liberalised, with less stringent procedural requirements for initiation. International experience suggests that lowering the minimum shareholding requirement, along with an effective court procedure for securities class actions, is essential in making legal action significantly more effective.
Secondly, SEBI needs to regulate proxy advisors more strictly. It should mandate disclosure of conflict of interests among proxy advisors and minimum standards for methodology of voting recommendations, encouraging competition within the industry23. Standardisation of proxy advisors’ approach would also lead to higher-quality institutional decision-making.
Third, the Stewardship Code should move beyond a ‘comply or explain’ system to one with substantive disclosure obligations about how the voting has been done and how engagements have been conducted. Institutional investors publishing their votes at a resolution level, like in the US and the UK, would provide greater transparency and valuable information on corporate governance practices.
Fourth, SEBI must capitalize on the experience gained from BRSR and formulate an ESG reporting taxonomy that will facilitate meaningful benchmarking across companies, thereby reducing the prospect of greenwashing. Assurance of ESG information must be required as a phased process.
Fifth, educational campaigns designed to increase the level of retail shareholders’ awareness about ESG issues can be pursued by SEBI in collaboration with IEPF. Digital voting mechanisms, which have been made mandatory under SEBI regulations, should be further streamlined for ease of use by smaller stakeholders24.
CONCLUSION
Thus, over the last three decades, since India opened up its economy, shareholder activism has transformed from a marginal practice into a significant factor in Indian corporate governance. Within the existing legal framework consisting of the Companies Act 2013, SEBI LODR regulations, and the Stewardship Code, activist campaigns are able to gain traction, proceed smoothly, and yield tangible outcomes. This paper has provided some examples of case studies, all of which suggest that activism can be successful in dealing with the issue of promoter malpractice, better board composition, and minority protection.
However, the above analysis makes clear that there are some challenges that come with the opportunities created through ESG-based activism, particularly in a market dominated by promoters, poor participation by retail shareholders, and underutilized class action lawsuits. Shareholder activism works best when it is a supplement and not a replacement for the underlying regulatory system and court processes. Over the coming years, the Indian economy faces the task of enhancing its capabilities for constructive dialogue based on activism. Should such efforts succeed, shareholder activism could well emerge as a viable tool for promoting sustainability throughout corporate governance practices in India.
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Footnotes
1. Adolf Berle & Gardiner Means, The Modern Corporation and Private Property (1932).
2. See generally, Robert A.G. Monks & Nell Minow, Corporate Governance (5th ed., 2011).
3. Lucian Bebchuk, Alon Brav & Wei Jiang, ‘The Long-Term Effects of Hedge Fund Activism’ (2015) 115 Columbia Law Review 1085.
4. R. Edward Freeman, Strategic Management: A Stakeholder Approach (1984).
5. James Davis, F. David Schoorman & Lex Donaldson, ‘Toward a Stewardship Theory of Management’ (1997) 22(1) Academy of Management Review 20.
6. Securities and Exchange Board of India, Report of the Kumar Mangalam Birla Committee on Corporate Governance (1999).
7. Institutional Investor Advisory Services (IiAS) and Stakeholder Empowerment Services (SES) are the two prominent proxy advisory firms registered with SEBI in India.
8. Companies Act, No. 18 of 2013, §§ 241–242
9. Companies Act, No. 18 of 2013, § 245
10. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Reg. 17–27 (board composition, committees, disclosures).
11. SEBI (Research Analysts) Regulations, 2014, as amended by the SEBI (Proxy Advisers) Regulations, 2019.
12. SEBI Circular No. SEBI/HO/CFD/CMD/CIR/P/2020/12 dated January 22, 2020 .
13. Cyrus Investments Pvt. Ltd. v. Tata Sons Pvt. Ltd., [2021] 9 SCC 1
14. Tata Consultancy Services Ltd. v. Cyrus Invs. Pvt. Ltd., Civil Appeal Nos. 440–441 of 2020, (India Sup. Ct. Mar. 26, 2021).
15. Infosys Ltd., Press Release, ‘Infosys Board Responds to Anonymous Complaints’ (22 October 2019).
16. The Hindenburg Research report and subsequent SEBI investigations into Adani Group (2023) represent a newer genre of activist short-selling in India, though Infosys (2019) remains the defining institutional-investor activism case.
17. Securities and Exchange Board of India v. Fortis Healthcare Ltd., SEBI Order WTM/MPB/IVD-ID4/22/2019 (SEBI, 2019).
18. Yes Bank Ltd., Annual Report 2018–19; RBI Press Release: ‘Yes Bank: RBI Imposes Moratorium’ (5 March 2020).
19. Lucian Bebchuk & Jesse Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation (2004). Short-termism is a recurring critique of hedge fund activism.
20. SEBI Consultation Paper on ESG Disclosures, Ratings and Investing (February 2023); Business Responsibility and Sustainability Reporting (BRSR) framework introduced in 2021.
21. Asian Corporate Governance Association (ACGA), ‘CG Watch 2020: Future Promise’ (2020), 42–47.
22. Martin Lipton & Steven Rosenblum, ‘A New System of Corporate Governance: The Quinquennial Election of Directors’ (1991) 58 University of Chicago Law Review 187.
23. Law Commission of India, 58th Report on ‘Trading in and Administration of Securities’ (1974); SEBI, Discussion Paper on Review of Regulatory Framework for Proxy Advisors (2021).
24. Companies Act, No. 18 of 2013, § 151; SEBI LODR Regulations, 2015, Reg. 25(6).