This article has been written by Parijat Banchhor, final year law student. Pursuing B.A,LL.B(H) from Amity University Raipur Chhattisgarh.
ABSTRACT
The reason we push for transparency is because it’s the best disinfectant.” –Anne Simpson
This paper examines how shareholder activism and corporate governance have changed in India after economic liberalization. It examines the journey from a highly regulated economy with poor corporate governance to a more free-market one with more activist shareholders. Important developments include the formation of SEBI, the 2013 Companies Act, and other committees aimed at enhancing corporate governance norms. A variety of shareholder activism strategies are discussed in the text, such as election fights, shareholder resolutions, management involvement, lawsuits, and media campaigns. The reasons for activism are also covered, including monetary gains, better corporate governance, and environmental and social issues.
The document outlines important obstacles that corporate governance activists in India must overcome, such as roadblocks arising from complex regulatory frameworks, historical and cultural barriers, and practical difficulties. The committees aimed at enhancing corporate governance norm it This paper examines the development of corporate governance and provides case studies of significant committees and projects that have influenced the corporate governance environment in India.
The article concludes by examining the prospects for corporate governance activism in India going forward and highlighting the necessity of structural changes, capacity building, and striking a balance between advancing the required governance changes and honoring India’s distinctive business culture.
KEYWORDS – Corporate governance , Shareholder activism ,Media campaign , law suits ,structural change , business culture
INTRODUCTION
In the wake of Indian economic liberalization There has been a significant contribution to the Globalization of governance practice that have influenced companies. In India, this has been evolving within the context of the country’s Corporate governance landscape and legal frame work. Since the early 2000s, the country has witnessed a slow shift but dynamic changes in corporate governance. Growing and influences in global business practices an changes in shareholder rights reshaping the landscape of Indian corporate management and accountability, increasing regulation and compliances that effect global influence of other countries like UK and EU adopted to improve board independence ,transparency and accountability. At the same time, shareholder activism merged with institutional investors pushing for governance reform, increased board accountability and more transparent corporate strategies. Overall, the 2000s were marked by a shift towards accountability transparency, and engagement between corporations and their stakeholders, laying the foundation of many of today’s governance practices.
The broad field of corporate governance is covered by shareholder activism. The shareholder of the company play important role in functioning and managing the firm. It guarantees that the boards of accountability to share holder. Moreover, it ensures the board’s accountability to shareholders and promotes the idea that firms should prioritize the interests of society on their own. While a firm can profit from stakeholder conflicts in the short term, long-term stability and profitability require balancing all stakeholders’ interests. While shareholders are normally passive owners of the companies in which they invest, shareholder activism occurs when such passive players decide to modify the company’s governance.[1] The probability of fraud and scams is increasing as the economy grows. Several committees have regularly suggested ways to prevent and address fraud.
Significance in India
India experiences an everyday rise in shareholders for many different kinds of reasons. Over the past two decades, legal reforms, the development of institutional investors, and an increasing understanding of corporate governance issues have all contributed to an important evolution of shareholder activism in India. Corporate activism is expected to rise as a result of India’s developed capital market and growing investor empowerment. This will improve corporate responsibility, accountability, and transparency within businesses, which is expected to enhance governance and long-term value generation.
In the 19th century ( Pre-liberalization Era ) this period was marked as heavy government control over the economy. Shareholder activism was almost non existent in India. In the India companies were largely family owned or government controlled, and the few institutional investors. Corporate governance was weak and shareholder as limited power or inclination to challenges management Their were limited competition because of government’s control this led to the underdeveloped capital market.
After the end of Pre liberalization era there was a significant shift. foreign investment was encouraged and large number of multinational corporation enter in the Indian market that increase the competition and adopt better corporate governance practices to attract and retail investor . The privatization of state owned enterprise led to increase as well change in the corporate sector. Regulatory developments take place “Securities and Exchange Board of India’’ (SEBI) established in 1988 and given statutory power in 1992. SEBI emerged as strong regulator for capital market, playing a pivotal role in enforcing corporate governance standard. The introduction “Companies Act of 2013”, and the strengthening for corporate governance norms laid to the foundation for shareholder activism to take shape in India.
In the moder era “The Companies Act of 2013”[2] and subsequently amendment have played a significant role in empowering and protections for minority shareholder ,class action suit ,and mandate independent director to improve corporate governance, while SEBI’s enhanced transparency for listed companies 2015.the introduction of e-voting has also empowered shareholder to participate in decision making remotely. institutional investor, including mutual fund, insurance companies and file led to shareholder activism, proxy advisor firms and “SEBI’s stewardship code( 2020)” , which mandates transparency in their voting practice.
Landmark cases like “ Infosys (2017)’’ [3],where corporate governance concern led to the resignation of CEO Vishal Sikka and the “Tata-Mistry conflict (2016 )” ,highlights the issue of board governance ,demonstrate the influence of activist shareholder. Retail investor are also becoming financial more assertive due to increased financial literacy, Market access and investor education programs by NSE and BSE, allowing them to better understand and exercise right.
TYPES OF SHARE HOLDER ACTIVISM
With the aim to effect change, an individual or a group of shareholder activists may use a variety of strategies. These strategies can differ depending on the numerous shapes, because shareholder activism is not rigid in nature and as per this the desired change can take. But some of the important points are listed below:
- Shareholder Resolution
can propose changes during yearly meetings, and if majority approval is Shareholders obtained, the company must implement these changes[4] and addressing topics from environmental policies to governance reform.
- Proxy contests
Even if they are unable to attend the meeting, certain shareholders can request other shareholders to vote on their behalf if they disagree with the company’s actions. It is like voting battles in companies. Some shareholder who want big changes try to convince other shareholder to vote with them. They might want to choose new bosses or make the company do thing differently. if they got enough votes, they can change who’s in charge or how the company in run. it’s way for shareholder to have a say in important company is run.
- Litigation
If the firm or its management is found to have violated securities laws or breached contractual obligations, shareholders may bring legal action. Use legal action to enforce change in corporate governance or financial practices. filing law suits or legal threats to compel changes in polices or management practices.
- Engagement with management
Through letters, meetings, or other forms of communication, shareholders can interact with the company’s management to voice any issues or recommendations.
- Media Campaigns
Activist shareholders can use the media to publicize their concerns and issues or to put pressure on the management and board to take action[5]. These campaign can leverage different forms of media, Including print, digital, broadcast, and social media to create a unified message and maximize reach.
MOTIVATION FOR ACTIVISM
This study looks at the reasons young individuals join youth activism groups, with a particular emphasis on relationships with peers and adults, social justice work, and safety. It emphasizes the value of sanctuary, which fosters psychological stability and celebrates individuality, as well as the relationship between social justice activism and sanctuary, which empowers young people to take chances and make a difference.
Financial return
Substantial pension systems seek to play a very active part in the company’s governance, mostly with submitting shareholder recommendations. These recommendations call for modifications that range from removing takeover defenses to changing the composition of the board of directors or management incentives. Numerous studies come to the conclusion that shareholder proposals are usually unsuccessful. Some contend that considering the agency issues with the monies itself, this is hardly shocking.
Financial return is one of the primary motivation behind many forms of shareholder activism. Activist investor often seek to improve the financial performance of the company in oreder to increase the value of their shares. Their goals is typically to driven changes in corporate strategy or change in corporate strategy or governance that they believe will enhance profitability ,raise stock prices, or unlock shareholder value and maximizing shareholder value. Efficiency Improving operational correcting under performance.
The motivation and impact of pension fund strategies by identifying and incorporating heterogeneity in the fund’s activism objectives and investment strategies. It aims to determine if these objectives align with their own success measures and the normative goal of fund value maximization. The study also explores the impact of shareholder proposals on target firms, providing evidence on short-term and long-term event studies. The findings are compared to other studies and the wealth maximization hypothesis. Alternative hypotheses to fund value maximization are discussed, but the funds’ target selection and trading behavior do not align with these.
Corporate governance
This practice aim to improve the oversight of company management ensure ethical behavior and promote long term value creation ,benefiting both shareholder and other stakeholders the type of activism often focuses on improving board independence executive compensation, transparency risk management and ESG performance and while reducing risk of mismanagement corruption ethical behavior.[6]
Social and Environmental Concerns
The conduct of environmental activists can be explained by two distinct types of environmental identity: politicized environmental identity such as., perceiving oneself as a component of a group effort to preserve the environment and identification with nature that is., considering oneself as a part of nature, more commonly known as connectedness to nature. We build on earlier research that revealed that self-reports of environmental activism and affinity with nature are mediated by politicized environmental identity.
becoming more and more important in determining how investors, consumers, and regulators assess businesses. These issues are frequently covered by more comprehensive Environmental, Social, and Governance (ESG) frameworks, which evaluate how well a business controls its governance procedures to mitigate its effects on society and the environment.
Participating in Community and Philanthropy: Corporate Social Responsibility (CSR) is the practice of taking part in community-enhancing activities such as disaster assistance, educational initiatives, and charitable donations .Local Economic Development: Ensuring that the company’s operations benefit the local population, fostering local business growth, and creating jobs all contribute to the economic development of the communities in which it works.
CHALLENGES FACED BY ACTIVIST
The story of corporate governance activism in India is deeply rooted in the country’s historical and economic development. During the colonial era, business houses emerged under the managing agency system, leading to a concentrated power structure that would influence corporate governance for decades to come. After independence, the License Raj era 1947-1991further entrenched family-owned business groups, creating a environment where professional management and outside oversight were limited.
The economic liberalization of 1991 marked a significant turning point, opening the economy to foreign investment and introducing new concepts of corporate governance. However, the legacy of family-controlled businesses remained strong, creating a unique challenge for modern corporate governance activists. The establishment of SEBI and introduction of various regulatory reforms, including Clause 49 and the Companies Act 2013, provided new tools for activism but also highlighted the complexity of implementing change in such an established system.
Cultural and Social Dynamics
The family-centric nature of Indian business creates one of the most significant barriers to corporate governance activism. Traditional values emphasizing hereditary succession and family honor often clash with modern corporate governance principles. Business decisions are frequently made through informal structures based on personal relationships rather than professional management practices. This cultural framework is further reinforced by a deeply patriarchal business environment, where boardrooms remain predominantly male-dominated and leadership succession typically follows generational lines.
The respect for authority and age-based hierarchy embedded in Indian culture can make it particularly challenging for activists to question or challenge established business practices. This cultural dynamic often leads to conflict avoidance, making it difficult to address governance issues directly. The emphasis on maintaining harmony and avoiding public confrontation can significantly hamper activist efforts to bring about meaningful change.
Regulatory and Legal Environment
The regulatory landscape in India presents a complex maze for corporate governance activists to navigate. Multiple regulators, including SEBI, the Ministry of Corporate Affairs, RBI, and stock exchanges, create a multi-layered system of oversight that can be both beneficial and challenging. While this framework provides multiple avenues for addressing governance issues, it also creates procedural complexities that can slow down activist efforts.
Enforcement of corporate governance standards remains a significant challenge. The legal system’s delays, resource constraints, and jurisdictional overlaps often result in prolonged resolution periods for governance disputes. The effectiveness of regulatory actions is sometimes limited by inadequate penalties and enforcement capacity, reducing their deterrent effect on corporate misbehavior.
Shareholder Coordination and Resource Challenges
One of the most practical challenges facing corporate governance activists is the coordination of shareholders across India’s vast geography. Different time zones, communication barriers, and varying levels of technical knowledge make it difficult to build consensus and organize collective action. The diversity of investor objectives and risk appetites further complicates the process of aligning interests for coordinated activism.
The free-rider problem presents another significant hurdle. While the benefits of successful activism are shared by all shareholders, the costs are typically borne by the activists themselves. This imbalance can discourage individual investors from taking an active role in governance issues, preferring instead to benefit from others’ efforts without contributing resources or support.
Operational and Reputational Considerations
Access to quality information remains a persistent challenge for activists. Despite regulatory requirements for disclosure, many companies provide limited or selective information, making it difficult to identify and address governance issues effectively. The complex corporate structures and related party transactions common in Indian businesses require significant expertise and resources to analyze properly.
Activists also face considerable personal and professional risks. These include potential damage to their careers, social standing, and professional relationships. Legal exposure through defamation suits or counter-claims can create significant personal liability, while regulatory compliance requirements add another layer of complexity to activist efforts.
Judicial pronouncement
Kumar Mangalam Birla
“The Kumar Mangalam Birla Committee was formed in 1999 by SEBI to develop recommendations for corporate governance practices in India from an investor perspective. The committee divided recommendations into mandatory and non-mandatory [7]categories and to promote and raise the standard of good governance.
The Committee’s terms of the reference were to:
- suggest suitable amendments to the listing agreement executed by the stock exchanges with the companies and any other measures to improve the standards of corporate governance in the listed companies, in areas such as continuous disclosure of material [8]information, both financial and non-financial, manner and frequency of such disclosures, responsibilities of independent and outside directors.
- draft a code of corporate best practices; and
- suggest safeguards to be instituted within the companies to deal with insider information and insider trading.”
The main goals of the committee were to draft a “Code” appropriate for the Indian corporate environment and to consider corporate governance from the investors’ and shareholders’ point of view. The committee sought to determine each of the three primary elements of corporate governance—the shareholders, the board of directors, and management—as well as their specific positions, responsibilities, and rights within the framework of effective corporate governance. Shareholders and other stakeholders, including as suppliers, consumers, creditors, bankers, firm employees, the government, and the general public, are among the many parties with a stake in corporate governance. The committee prepared the report primarily with the interests of a particular category of stakeholders in mind.’’
RBI ADVISORY GROUP ON CORPORATE GOVERNANCE
The RBI established the “Standing Committee on International Financial Standards” and Code to act as advisory group, with a mandate to examine and compare the status of corporate governance worldwide in general and to compare corporate governance in India with internationally recognized standards in particular.
RBI established the ‘Advisory Group on Corporate Governance’ in 2001; R.H. Patil served as the group’s chair. This panel presented proposals that cover each aspect of corporate governance and evaluated Indian corporate governance frameworks with global best practices. The proposals covered the duties of directors, the accountability of shareholders, the requirements for choosing independent directors, the structure and content of the board, the composition of the committees, the involvement of stakeholders, and relevant disclosures.
RBI CONSULTATIVE GROUP OF DIRECTORS OF FINANCIAL INSTITUTIONS
The RBI established the “Ganguly Committee”, chaired by Shri A.S. Ganguly, to review board supervisory roles. In 2002, they provided guidelines on director’s responsibilities, committee composition, and fit criteria for private sector banks.
The Naresh Chandra Committee
The Naresh Chandra committee [9]is the third major corporate governance initiative launched in India since the mid-1990s, after the first voluntary code of corporate governance by the Confederation of Indian Industry (CII) in 1998, followed by Clause 49 of the Listing Agreement by SEBI in 2000[10]. The committee presented its report on Corporate Governance and Audit in November 2002.
Outlook and Recommendations
Despite these challenges, corporate governance activism in India continues to evolve and strengthen. Increased media coverage and investor education have raised awareness of governance issues, while regulatory support and digital platforms have made it easier to engage in activist efforts. However, the changing business environment, particularly with respect to technology disruption and global integration, presents new challenges that activists must adapt to.
Moving forward, structural reforms in both regulatory frameworks and market infrastructure will be crucial for supporting effective activism. This includes streamlining procedures, ensuring clear accountability, and developing better digital platforms for information sharing and voting. Capacity building through stakeholder education and resource development will also be essential for creating a more robust ecosystem for corporate governance activism.
The path forward requires a delicate balance between respecting India’s unique business culture while promoting necessary governance reforms. Success will depend on the ability of activists to navigate these complex challenges while building support for meaningful change in corporate governance practices.
Conclusion
Since economic liberalization, shareholder activism and corporate governance in India have changed the country’s business climate from one that was heavily regulated and controlled by families to one that is more open, accountable, and driven by investors. Significant changes such as the establishment of SEBI and the Companies Act of 2013 have reinforced corporate governance structures, facilitating increased shareholder participation and improved supervision. Driven by financial gains, social and environmental concerns, and legal action, shareholder activism has taken many forms, including proxy wars, media campaigns, and legal actions. The highly established family-centric corporate culture and the complex nature of regulations are only two examples of the historical, cultural, and regulatory obstacles that still need to be overcome. Future advancements will come from promoting governance reforms, engaging stakeholders, and striking a balance between India’s distinctive business practices and reforms to the system. enhancing capacity, protecting shareholder rights, and Establishing a climate that is conducive to activism and governance reforms would require bolstering shareholder rights, increasing capacity, and making use of digital channels.
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[2] The Companies Act of 2013
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[4]Securities, K. (2023, November 10). What is Shareholder Activism? Kotak Securities. https://www.kotaksecurities.com/investing-guide/share-market/what-is-shareholder-activism/
[5] Ak legal. (2024, April 1). Corporate governance and shareholder activism in India. A.K. Legal & Associates. https://aklegal.in/corporate-governance-and-shareholder-activism-in-india/
[6] Biswas, S., & Chakraborty, S. (n.d.). The existence of shareholder activism in India: A factual occurrence or a deceptive perception? Lawjournals.org. Retrieved October 21, 2024, from https://www.lawjournals.org/assets/archives/2024/vol10issue3/10140.pdf
[7] Report of Kumara Mangalam Birla committee. (n.d.). Scribd. Retrieved October 21, 2024, from https://www.scribd.com/document/489916144/Report-of-Kumara-Mangalam-Birla-committee
[8] (N.d.). Nfcg.In. Retrieved October 21, 2024, from https://www.nfcg.in/UserFiles/kumarmbirla1999.pdf
[9] Naresh Chandra Committee Report: Objectives & recommendations. (2023, August 26). Testbook. https://testbook.com/ias-preparation/naresh-chandra-committee
[10] Mba Notes World. (2011, August 1). Kumara Mangalam Birla committee report. MBA Notes world. https://mbanotesworld.com/kumara-mangalam-birla-committee-report/
