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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED

FOR SHAREHOLDER ACTIVISM


CHAPTER I:
INTRODUCTION
Corporate Governance entails conducting the affairs of the companies in such a manner that the
corporate entity is accountable and fairness would be assured to all the stakeholders. It may be
defined as a set of systems, processes and principles which ensure that a company is governed in
the best interest of all stakeholders. The elements of good corporate governance include
maintenance of transparency, accountability, disclosures, compliance with the legal framework,
shareholders value, etc.
The legal and regulatory framework of corporate governance should aim at protection of
investors. Since maintenance of transparency in dealings of the company is the most important
facet of corporate governance in India, the same shall be ensured in order to provide a
mechanism for protection of the investors. The need to protect the investors arises because the
companies indulge in unfair trade practices and corporate frauds. When such corporate frauds are
committed, the investors are the class of stake holders who are most adversely affected. The
companies shall also consider that in case they go beyond the corporate governance norms, the
confidence of the shareholders in the company would be instilled; which is indirectly beneficial
for the company. Hence, the corporate governance mechanism shall be viewed as a mode by
which the companies can gain the confidence of the shareholders.
The need for making adequate disclosures rises because only adequate disclosures enable the
shareholders in taking an informed decision. Also, the Companies Act, 2013 has for the first time
included various aspects relating to corporate governance. This would further ensure that the
companies follow good corporate governance practices.
Investor Protection is the most significant facet of corporate governance. However, it is
neglected. In the wake of various corporate scams and accounting scandals, insider trading, nondisclosure by companies, vanishing companies and other such practices of corporate; the
relevance of investor protection has increased. On account of such corporate frauds, the investors
are the segment of the stakeholders who are most gravely affected. Hence, the framework of
Corporate Governance in India should aim at protection of the investors. Shareholder Activism
is a modern trend which triggers the corporates to follow good corporate governance practices
and ensure investor protection. The Securities and Exchange Board of India plays a pivotal role
in protecting the investors in India. The Kumar Mangalam Birla Committee recommendations
led to introduction of Clause 49 in the Listing Agreement which is the bedrock of Corporate
Governance in India.
A mandatory requirement under Clause 49 of the Listing Agreement is formulation of the
Investors Grievance Committee, which shall entertain the complaints of the investors and ensure
that such grievances are redressed. Later the Narayana Murthy Committee made
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recommendations to enhance investor protection by improving the disclosure requirements and
widening the roles of the directors in Corporate Governance.
However, there seems to be a vacuum in the requirement of the unlisted companies to follow
corporate governance practices. The Corporate Governance Voluntary Guidelines, 2009 can be
followed by the unlisted companies, while since the guidelines are not mandatory, the purpose
remains unserved.
Corporate Governance plays a significant role in investor protection. The researcher seeks to
analyse whether good corporate practices have the potential of safeguarding the investors.
The researcher would trace the evolution of corporate governance in India and the changing face
of investor protection. In the past, India has witnessed various corporate frauds, which reflect
loopholes in the current framework of the corporate governance. The researcher would analyse
whether good corporate governance practices have the potential to curb corporate frauds and
thereby lead to protection of investors.
The researcher would also throw some light on the corporate governance provisions in India
under the Companies Bill, 2012.
Clause 49 of the Listing Agreement is the basis of corporate governance framework in India and
it focuses majorly on the aspect of disclosure by the Company. Apart from the Clause 49 of the
Listing Agreement, the Companies Act, 1956 and various regulations of the SEBI reflect the
importance of disclosures to the shareholders. The researcher shall examine the relation between
corporate governance and investor protection. The manner in which Clause 49 of the Listing
Agreement furthers corporate governance in India shall be highlighted. The Corporate
Governance Voluntary Guidelines, 2009 provides a set of disclosures that shall be made to the
shareholders. The researcher would analyze the role that these guidelines would play in
protecting the interests of the investors.
Investor protection may be seen as a manifestation of good Corporate Governance. If the
company concerned makes the adequate disclosures to the Shareholders and ensures that the
investors interest is protected, it would imply that the Company follows good governance
practices encompassing investor protection. The Satyam Fiasco displayed that a companys
inadequate corporate governance framework may defeat the interests of the investors. The
Reebok Fraud Case brought the issue of the requirement of adequate corporate governance
measures in the unlisted companies. The unlisted companies do not have any mandate to follow
corporate governance practices and this may defy the interests of the investors. The researcher
would scrutinize the Reebok Fraud case and the Satyam Fiasco in order to analyze the failure of
corporate governance mechanisms.
In unlisted companies, the shareholders have various rights such as proceeding against the
company for oppression or mismanagement and proceeding towards winding up of the company,
while they do not have any statutory right to mandate the company to make disclosures to them
as required under the Corporate Governance mechanism. Thus, the inadequacy of the rights to
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the shareholders in unlisted companies shall be addressed only by formulating a legal framework
in order to provide that the corporate governance shall be mandatorily followed by the unlisted
companies. The issue of rights of minority shareholders shall also be examined with respect to
the corporate governance mechanism in India. The Companies Act, 2013 has provided for class
action suits and thus has taken a leap in protecting the interests of minority shareholders.
The role of institutional investors in mandating the company to follow corporate governance
practices has come to the fore in recent past. The institutional investors can play a significant role
in influencing the company to follow good corporate governance practices. The concept of
shareholder activism is also a significant issue in terms of corporate governance practices.
Shareholder Activism entails that the shareholders shall take a proactive role in formulating a
dialogue with the management of the company on a regular basis. The reforms in India which
highlighted the aspect of shareholder activism have also been discussed.
Corporate Governance in India is based on the maintenance of transparency in the company and
the same leads to the protection of investors. The researcher would also bring out the need of
shareholder activism in India in terms of corporate governance.
The essence of the research shall be examining the adequacy of the legal and regulatory
framework in India with regard to corporate governance in protecting the interest of the
investors.

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CHAPTER II
LEGAL AND REGULATORY FRAMEWORK OF CORPORATE GOVERNANCE IN
INDIA
CORPORATE GOVERNANCE
Corporations receive huge pool of capital from an investor base in domestic as well as
international markets. Investment by the shareholders may thus be termed as an act reflecting
faith of the investors in the ability of the management. The investors expect the management to
act as trustees of the investment and earn a higher rate of return as compared to the cost of
capital. Hence, the investors expect the management to adopt good corporate governance
practices and act in the best interests of the investors. The Narayana Murthy Committee defined
Corporate Governance as the acceptance by the corporation's management of the inalienable
rights of the shareholders as the owners of the corporate entity and the role of the management as
trustees of the investment of the shareholders. Hence, corporate governance is about conducting
the business in an ethical manner, commitment towards values and drawing a distinction between
personal and corporate funds in the management of a company.1
Corporate Governance may be defined in terms of bringing the interests of the investors and
managers into line and ensuring that the corporate entity functions in the best interests of the
investors.2 It deals with the interrelationship of the internal governance of the corporation and
corporate accountability towards the society.3 It lays down the procedures and processes in
accordance with which a corporate entity may be directed and controlled. The structure of
corporate governance defines the distribution of rights and responsibilities of the managers,
stakeholders, shareholders and other participants and specifies the rules and procedure of
decision making.4
1

Consultative

Paper

on

Review

of

Corporate

Governance

Norms

in

India,

available

at

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf

2 Colin Mayer, Corporate Governance, Competition, and Performance, Journal of Law and Society
Volume 24, Issue 1, March 1997 available at http://onlinelibrary.wiley.com/doi/10.1111/1467-6478.00041
3 Simon Deakin, Alan Hughes, Comparative Corporate Governance: An Interdisciplinary Agenda,
Journal of Law and Society Volume 24, Issue 1, March 1997, available at
http://heinonline.org/HOL/Page?handle=hein.journals/jlsocty24&div=2&g_sent=1&collection=journals
4 ibid
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Promotion of corporate fairness, accountability and transparency is the aim of corporate
governance.5 In simple terms Corporate Governance can be defined as a set of laws, rules,
regulations, systems, principles, process by which a company is governed.6
The need for corporate governance lies in the fact that every corporation should be fair and
transparent in its dealings. Maintenance of transparency and an ethical conduct is essential for
attracting and retaining capital investment from the stakeholders.7
EVOLUTION OF CORPORATE GOVERNANCE IN INDIA
The Securities and Exchange Board of India (SEBI) had set up a Committee in 2000 under the
Chairmanship of Kumar Mangalam Birla to promote and raise standards of corporate
governance. The Kumar Mangalam Birla Report was the first formal and comprehensive
attempt to evolve a Code of Corporate Governance, considering the governance in Indian
companies, as well as the state of capital markets at that time. The recommendations of the report
led to the inclusion of Clause 49 in the Listing Agreement in the year 2000. These
recommendations had the aim of improving the standards of corporate governance in India and
were classified as mandatory and non-mandatory recommendations. These recommendations
were made applicable to listed companies with paid up capital of Rs 3 crores and above or
companies having a networth of Rs. 25 crores at any time. The responsibility of brining the
recommendations into force lied with the Board of Directors of the Company8.
According to the report, the Board should have an optimum combination Executive and NonExecutive Directors and not less than 50 per cent of the Board should comprise of NonExecutive Directors. In case of the Chairman is a Non-Executive Director, one-third of the Board
should compose of non-executive directors. The companies shall conduct Board Meetings at
least four times in a year and a time gap of four months should exist between two meetings. A
5 World Bank, Managing Development - The Governance Dimension, 1991, Washington available at
http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2006/03/07/000090341_20
060307104630/Rendered/PDF/34899.pdf
6 Prabhash Dalei, Paridhi Tulsyan and Shikhar Maravi, Corporate Governance in India: A Legal
Analysis, International Conference on Humanities, Economics and Geography (ICHEG'2012) March 1718, 2012 Bangkok, available at http://psrcentre.org/images/extraimages/312018.pdf
7 ibid
8 Prabhash Dalei, Paridhi Tulsyan and Shikhar Maravi, Corporate Governance in India: A legal Analysis,
available at http://psrcentre.org/images/extraimages/312018.pdf
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director should not be the member of more than 10 Committees or act as a Chairman of more
than 10 Committees..9
The Report also recommended that the Companies shall set up an Audit Committee. The Report
discussed the composition of the Committee, other aspects such as quorum, frequency of
meeting, powers of audit committee and functions of the Committee. The Committee was to be
composed of atleast three members, all being non-executive directors, and atleast one director
shall have knowledge in finance and accounting. Also, the Committee shall be headed by an
independent director. The functions of the audit committee include oversight of the companys
financial reporting process and the disclosure of its financial information in order to ensure that
the financial statements are credible and accurate. The committee can also recommend on
aspects such as appointment and removal of external auditor, fixation of audit fee and approval
for payment for any other services. The committee can also review the annual financial
statements before submitting to the Board.
The Remuneration Committee was another body which the Report recommended to be set up by
the Company. This was a non-mandatory recommendation. The Committee was assigned the task
of determining the remuneration of the non-executive director and the Annual Report shall make
disclosures about the remuneration paid to the Directors. The Report also recommended that the
Company should set up a Shareholders Grievance Committee to redress the issues of the
shareholders10.
The Report also made recommendations pertaining to Disclosures. The details on noncompliances with regard to capital market related issues in the past three years and the penalties
imposed shall be disclosed. Also, half-yearly report shall be sent to the shareholders and
quarterly report shall be sent to the institutional investors. Various details which are vital for
awareness of the shareholders shall be disclosed in the Annual Report. Auditors certificate on
Corporate Governance shall also be annexed with the Annual Report. Companies shall also
disclose the consolidated accounts of their subsidiary companies in which they hold atleast 51
per cent or more capital. Shareholders should use the General Meetings as a platform to ensure
that the affairs of the company are being conducted in the best interests of the investors 11. The
Half-yearly declaration of financial performance including the summary of important events in
the past six months shall be disclosed to the shareholders. The Report also threw light on the role
9 Santosh Pande and Kshama V Kaushik, Study on the State of Corporate Governance in India,
http://www.iica.in/images/Evolution_of_Corporate_Governance_in_India.pdf
10 ibid
11 Report of the Kumar Mangalam Birla Committee on Corporate Governance, available at
http://www.sebi.gov.in/commreport/corpgov.html
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institutional investors in corporate governance. It was recommended that the institutional
shareholders shall take active interests in composition of the Board; they shall be vigilant and
maintain systematic and regular contact with the management to examine the performance and
quality of management and also to ensure that the voting intentions are translated into practice12.
In May 2000, the Department of Company Affairs formed a broad based study group under the
Chairmanship of Dr. PL Sanjeev Reddy. The group was given the task of examining ways to
operationalise the concept of corporate excellence on a sustainable basis so as to sharpen Indias
Global competitive edge and to further develop corporate culture in the country. In November
2000, a Task Force on Corporate Excellence13 set up by the group came out with a report
comprising of various recommendations for raising governance standards among all companies
in India. It also suggested the setting up of a Centre for Corporate Excellence. One of the
recommendations of the report was that there shall be higher delineation of independence criteria
and the probability of conflict of interest shall be minimized. The commitment and
accountability of the Directors shall be ensured by fewer and more focused board and committee
membership. There shall be a meaningful and transparent accounting and reporting by disclosing
various details in order to ensure informed participation by shareholders. Introduction of formal
recognition of Corporate Social Responsibility was also recommended in the report. 14 It was also
recommended that there shall be a clear demarcation between policy making and oversight
responsibilities. The Task Force on Corporate Excellence recommended that there shall be
highest standards of corporate governance that shall be followed by the companies.
The Naresh Chandra Committee was established in 2002. It is believed that the Committee was
established by the Indian Government in response to the Enron debacle in 2000, various scams in
the US involving the fall of various corporates like Xerox, WorldCom etc and the subsequent
enactment of the Sarbanes Oxley Act, which is regarded as a stringent legislation. The Naresh
Chandra Committee made various recommendations in line with international best practices 15.
The recommendations stipulated that the audit assignments should be carried out in a transparent
manner and thus there should not be any financial interest of the auditor in the company nor
12 ibid
13 Report on Corporate Excellence on A Sustained Basis to Sharpen Indias Global Competitive Edge and to
Further

Develop

Corporate

Culture

in

the

asia.org/public/files/IndiaReddyreport2000.doc.

14 ibid
15 http://finmin.nic.in/reports/chandra.pdf
Corporate Governance DissertationPage 7

Country,

available

at

http://www.acga-

INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED


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should the auditor and company have any personal relationship. Various aspects such as
appointment of auditor, auditors disclosure of qualifications and of contingent liabilities,
auditors annual certification of independence etc were discussed in the report; the focus of
which was to ensure that the process of auditing is transparent. The report also recommended the
setting up of Independent Quality Review Board, appointment of an independent director, the
percentage of independent directors in the Board, minimum board size of listed companies etc. 16
The aspect of disclosure of duration of board meetings, additional disclosure to directors, and
appointment of independent director on the audit committee was also emphasized. Remuneration
to the independent directors, exemption of independent directors from certain liabilities, training
of independent directors were amongst some other recommendations.
In 2002, SEBI analyzed the statistics of compliance with the clause 49 of Listing Agreement by
the listed companies and realized that there was a need to look beyond the mere systems and
procedures if corporate governance was to be made effective in protecting the interests of the
investors. Hence, SEBI constituted a Committee under the chairmanship of NR Narayana
Murthy. The Narayana Murthy Committee was assigned the task of reviewing the
implementation of corporate governance code by listed companies and for issue of revised clause
49 based on its recommendations. Clause 49 of the Listing Agreement forms the bedrock of
corporate governance in India.
OECD PRINCIPLES ON CORPORATE GOVERNANCE
In its endeavors to improve the governance practices, the Organization for Economic Cooperation and Development (OECD) had published its principles of corporate governance in
2002. The OECD principles on corporate governance are considered as a benchmark by policy
makers, stakeholders, investors and corporations round the globe. These principles have
advanced corporate governance agenda and act as guidelines for member and non-member
countries with respect to legislative and regulatory framework on corporate governance 17.
Following is an overview of the OECD principles on corporate governance:
Principle I of the OECD Principles on Corporate Governance stipulates that
effective corporate governance framework shall be ensured. The framework
promotion of transparent and efficient markets. It should be consistent with the
shall articulate the division of responsibilities amongst the supervisory,
enforcement authorities.

the basis of an
should lead to
rule of law and
regulatory and

16 ibid
17

Consultative

Paper

on

Review

of

Corporate

Governance

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf

Corporate Governance DissertationPage 8

Norms

in

India,

available

at

INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED


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Principle II of the OECD Principles on Corporate Governance provides that the rights of the
shareholders should be protected and exercise of shareholders rights should be facilitated.
Principle III lays down that there should be equitable treatment of the shareholders and the
shareholders should be given an opportunity to redress their grievances in terms of violation of
shareholder's rights.
Principle IV stipulates that the role of the stakeholders in corporate governance shall be
recognized and co-operation between the stakeholders and corporations shall be encouraged.
Principle V provides a mandate to the corporate entities to maintain disclosure and transparency.
Timely and accurate disclosure shall be made with respect to governance of the company,
financial position of the entity, performance of the corporate entity and particulars of ownership.
Principle VI enumerates the responsibilities of the Board and accountability to the shareholders.
The Board should ensure strategic guidance of the company, the Board shall ensure effective
monitoring of the management and the Board shall remain accountable to the company and
shareholders.
It may be observed that the Indian Corporate Governance Framework is in compliance with the
Corporate Governance principles of OECD.
LEGISLATIVE FRAMEWORK OF CORPORATE GOVERNANCE IN INDIA
The Listing Agreement
Clause 19 of the Listing Agreement provides that a prior intimation shall be made to the Stock
Exchange about the conducting the meeting in which the proposal for buy back of securities or
declaration regarding rights issue shall be made. Under clause 20 of the Listing Agreement, the
Board shall disclose matters such as payment of dividend, total turnover of the company,
declaration regarding buyback of securities within 15 minutes of closure of the Board meeting.
According to Clause 22 of the Listing Agreement, the particulars regarding increase of share
capital by issue of bonus shares, reissue of forfeited shares, alteration of share capital and any
such matter shall be disclosed to the stock exchange within 15 minutes of the closure of the
Board Meeting. Clause 29 provides that any decision relating to change in nature of the business
shall be disclosed to the stock exchange. Clause 30 of the Listing Agreement provides that the
Board shall disclose issues relating to change in the director, auditor or secretary of a company to
the Stock Exchange promptly. Clause 31 of the Listing Agreement provides that various
documents such as the proceedings of the Annual or Extraordinary General meetings. 18 Clause 32
provides that the Company shall circulate the Balance sheet, Profit and Loss Account, and
18 http://www.sebi.gov.in/cms/sebi_data/pdffiles/21168_t.pdf
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Directors report to each shareholder. Clause 36 of the Listing Agreement provides that the
Company shall keep the Exchange informed about strike, lockout and closure of accounts.
Clause 41 of the Listing Agreement provides that the Company shall submit the quarterly and
financial reports within 45 days from the end of each quarter.19
SEBI appointed the Committee on Corporate Governance under the Chairmanship of Kumar
Mangalam Birla, to enhance the corporate governance standards in India. The objectives of
establishing the Committee were to propose amendments to the Listing agreement, to draft a
code containing the corporate governance international best practices and suggest safeguards
against the insider trading practices. The Committee recognized that the major aspects of
Corporate Governance include Transparency, Accountability and Equal Treatment of all
stakeholders. The disclosure requirements under Clause 49 of the Listing Agreement include
mandatory and non mandatory requirements. The mandatory and non mandatory disclosure
requirements facilitate transparency in conduct of affairs of the management.
Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009
The SEBI (ICDR) Regulations, 2009 provide that the issuer cannot make a public issue or rights
issue unless a draft offer document with the requisite fee is submitted to the SEBI through a lead
merchant banker, thirty day prior to registration of the prospectus. The Regulations also provide
that the copies of the offer documents shall be at the disposal of the public. The offer documents
shall contain all material disclosures that are true and adequate and enable the potential investors
to make an informed decision. The Company shall make a pre-issue advertisement for public
issue in one English daily, one Hindi national daily and one regional language newspaper. The
issuer shall make advertisements in relation to the issue opening and closing for public issue. The
lead merchant banker is responsible for submitting post issue reports to the SEBI.
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
The SEBI recently came out with the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 201120, also known as the Takeover Code. Shareholders acquiring shares in the
company are required to publicise their acquisitions so that their shareholding becomes
transparent to the public21. The Takeover Code requires persons crossing certain shareholding
threshold limits to make a mandatory public offer to also acquire the shares from all public
19 ibid
20http://www.takeovercode.com/uploads/regulations/New%20Takeovercode_23092011.pdf
21 Regulations 28-31 of the SEBI Takeover Code
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shareholders of the company on similar terms and conditions. Any acquirer crossing 25% shares
(with voting rights) in the company must make a public offer; and any acquirer holding between
25% and the maximum permissible nonpublic shareholding in the company must make a public
offer if it acquires more than 5% shares (with voting rights) in any financial year. Apart from
mandatory offers, an acquirer may also make a voluntary or unsolicited offer to other
shareholders through the procedure under the Takeover Code.
SEBI (Prohibition of Insider Trading Regulations) 1992
The SEBI (Prohibition of Insider Trading Regulations), 1992 were amended in the year 2002.
The Insider trading regulations facilitate the maintenance of transparency within the company;
which is the basis of corporate governance.22 These Regulations provide for disclosure interest or
holdings by the directors and officers and substantial shareholders in listing companies. These
regulations also provide for disclosures on a continual basis and also emphasize on the disclosure
by the company to the stock exchange.
The Companies Act, 2013
The new Companies Bill has received President's assent that will make it into a law replacing the
nearly six-decade old regulations that govern corporates in the country.23 The Companies Act,
2013 provides a framework of corporate governance in India. Under the Companies Act, 1956
there was no specific provision in relation to independent directors. Clause 49 of the listing
agreement was considered as the basis of legal provision with respect to appointment of
independent director in a Company. However, the Companies Act, 2013 deals extensively with
the aspect of independent directors. Independent director is defined under Section 2(47) of the
Companies Act, 2013. The Companies Act, 2013 makes a provision that every company to
mandatorily appoint one-third of the total strength of the directors as independent directors. 24 The
qualities of an independent director are also laid down under the Act and such qualities include
being a person of integrity, such person shall not be related to the promoters or directors of the
Company, the independent director should not have any pecuniary interest in the Company, he
should not have held the position of a key managerial in the company and many such qualities
are enumerated under the Companies Act, 2013. The Act also lays down the manner of selection
of independent directors in the Company. The Companies Act, 2013 specifically provides that the
Board of Director's Report shall consist of separate section titled Corporate Governance,
which shall be attached to the financial statement and include various aspects such elements of
22 http://www.sebi.gov.in/acts/insideregu.pdf
23 http://www.indianexpress.com/news/companies-bill-2013-receives-presidents-assent/1162742/
24 Section 149 of the Companies Act, 2013
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remuneration package such as salary, benefits, bonuses etc shall be disclosed. Details of
performance linked incentives, stock option details and service contracts etc shall be included in
this section. This is the first time that company legislation has included the aspect of Corporate
Governance explicitly. The Companies Act, 2013 provides that related party transactions shall be
approved by the Board of Directors and the Director's report shall contain justifications regarding
the related party transactions. The shareholders are now empowered under the Companies Act,
2013 because various proposals that impact the shareholders such as issue of securities, granting
if loans, taking over another company shall be approved by the shareholders. A special resolution
needs to be passed in order to approve a loan to a director or associated parties. The
Remuneration Committee shall be responsible for overseeing the remuneration policy of the
company and the remuneration shall be disclosed to the shareholders. Under Section 177 of the
Companies Act, 2013 the Company shall set up an audit committee to recommend the
appointment of the auditor, review the independence of the auditors and examine the financial
statements and reports of the auditors, review the inter corporate loans etc. Hence, it may be
concluded that the Companies Act, 2013 has taken a great leap towards setting up a corporate
governance framework in India.25

CHAPTER III
ROLE OF CORPORATE GOVERNANCE IN PROTECTION OF INVESTORS
THE INTERRELATION BETWEEN CORPORATE GOVERNANCE AND INVESTOR
PROTECTION
A strong investor protection is associated with effective corporate governance. According to
Fernando AC when an investor invests his hard earned money in the securities of a corporate
entity, he has certain expectations of it performance of the organization and the corporate
benefits that would accrue to him and the prospects of capital growth of securities he holds in the
organization.26 Recent research has reflected that an essential feature of good corporate
25 http://articles.economictimes.indiatimes.com/2013-02-01/news/36684552_1_independent-directorscorporate-governance-shareholders
26 AC Fernando, Corporate Governance: Principles, Policies and Practices, available at
http://books.google.co.in/books?
id=al6zP7foCSEC&pg=PT172&lpg=PT172&dq=fernando+ac+investor+protection&source=bl&ots=6A
Ht2RJZkP&sig=vCRHNZp8CqhXvfpJ5FbkgFJB4c8&hl=en&sa=X&ei=O8zUqbvG4uzrgeu0YH4Aw&ved=0CFIQ6AEwCQ#v=onepage&q=fernando%20ac%20investor
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governance is strong investor protection.27 According to Rafael La Porta, corporate governance
may be referred as a set of mechanisms through which the shareholders protect themselves
against expropriation by insiders28. Hence, the Management of an organization is entrusted with
the duty of protecting the investors. There is a probability of a mismatch between the objectives
of the shareholders and investors. However, the shareholders may use the mechanism of
corporate governance to ensure that their interests are protected and the management of the
organization does not indulge in abuse of their power. Corporate Governance can thus be termed
as an instrument in the hands of the shareholders of a company to ensure checks and balances.
Investor confidence can be achieved only in the basis of the standards of transparency and
fairness maintained by the company and the organizations willingness to implement effective
corporate governance mechanisms29. The core substance of corporate governance lies in
designing and putting in place the mechanism such as Disclosure, Monitoring, Oversight and
Corrective action. Investor Protection is crucial because the expropriation of minority
shareholders and creditors may take place at the hands of controlling shareholders. The
phenomenon of insider trading poses greater threats to the interests of the shareholders30.
The investors confidence shall be rebuilt based on better transparency in the organization,
market integrity and market efficiency, and undertaking measures to enhance investor
protection.31 Corporate Governance mechanism depends on the general legal, contractual and
enforcement processes in any jurisdiction and investor protection is directly affected by the
%20protection&f=false
27 ibid
28 Rafael La Porta, Florencio Lopez-de Silanes, Andrei Shleifer and Robert Vishny, Investor Protection and
Corporate

Governance,

Journal

of

Financial

Economics

58

(2000)

http://leedsfaculty.colorado.edu/bhagat/InvestorProtectionCorporateGovernance.pdf

29 Pratip Kar, Corporate Governance and the Empowerment of the Investors ADB/OECD/WORLD
BANK 2nd ASIAN CORPORATE GOVERNANCE ROUND TABLE,
http://www.oecd.org/daf/ca/corporategovernanceprinciples/1930766.pdf
30 ibid
31 Recommendations on Capital Markets Governance & Investor Protection, available at
http://www.icsi.edu/WebModules/LinksOfWeeks/CAPITAL%20MARKETS%20WEEK
%20SUGGESTIONS.pdf
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quality of enforcement environment.32 The Committee opined that a separate legislation was not
essential for the protection of investors and it was necessary to ensure safeguarding the interests
of the investors through proper articulation of corporate governance in such a manner that
transparency and accountability is ensured.33
It is also pertinent to examine the extent of relevance the Birla Committee Recommendations
placed on the importance of corporate governance and investor protection in India. The
Committee in its report observed that the strong Corporate Governance is indispensable to
resilient and vibrant capital markets and is an important instrument of investor protection. It is
the blood that fills the veins of transparent corporate disclosure and high quality accounting
practices. It is the muscle that moves a viable and accessible financial reporting structure.34
It may thus be inferred that the aspect of protection of investors in terms of corporate governance
is indispensible. Hence, investor protection is essentially the reflection of strong corporate
governance practices in an organization.
SHAREHOLDERS RIGHTS UNDER THE COMPANY LAW
The Companies Act, 1956 had granted various rights to the shareholders. The following rights
are available to the shareholders:
(1) Right to receive copies of the following documents from the company:
(a) Abridged balance sheet and profit and loss account in the case of listed company and
balance sheet and profit and loss account of the company otherwise.35
(b) Report of the Cost Auditor, if so directed by the Government.
(c) Contract for the appointment of managing director or manager.36
32 Kshama Kaushik and Rewa Kamboj, Study on the State of Corporate Governnace in IndiaGatekeepers of Coprorate Governance, http://www.iica.in/images/Prologue_Gatekeepers.pdf
33 Investor Education and Protection, Report of the Expert Committee on Company Law, 2005, available
at http://www.mca.gov.in/Ministry/chapter7.html
34 C. Udaya Kumar Raju; M. Subramanyam; Himachalam Dasaraju, Emergence of Corporate Governance in India,
International Journal of Multidisciplinary Management Studies Vol. 2 Issue 5, May 2012, ISSN 2249 8834
http://zenithresearch.org.in/images/stories/pdf/2012/May/EIJMMS/7_EIJMMS_MAY12_VOL2_ISSUE5..pdf

35 Section 219 of the Companies Act, 1956


36 Section 302 of the Companies Act, 1956
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(d) Notices of the general meetings of the Company37
(2) Right to inspect statutory registers/returns and get copies thereof on the payment of
prescribed fee. The members have been given the right to inspect documents such as
Debenture Trust Deed, Register of charges, shareholder Minutes Book etc.
(3) The members have a right to attend the meetings of the shareholders and exercise voting
rights of these meetings either personally or through proxy.
(4) Apart from the aforementioned rights, the shareholders have the right to:
Receive share certificates as title of their holdings.
To transfer shares
To resist and safeguard against increase in his liability without the written consent
To have rights shares etc
Annual General Meeting
In terms of Section 166, every company shall in each and every year hold in addition to any
other meetings a general meeting as its annual general meeting and shall specify the meeting as
such in the notices calling it, and not more than fifteen months shall elapse between the date of
one annual general meeting and that of the next. The shareholders have the right to participate in
the annual general meeting and cast their vote.
Power and duty to acquire shares and shareholders dissenting from the scheme or contract
approved by majority
Where a scheme or contract involving the transfer of shares or its class, in a company has, within
four months from after the making of the offer in that behalf by the transferee company, been
approved by the holders of not less than nine-tenths in value of the shares whose transfer is
involved, the transferee company may, at any time within two months after the expiry of the said
four months, give notice to any dissenting shareholder that it desires to acquire his shares; and
when such a notice is given, the transferee company shall, unless on an application made by the
dissenting shareholder within one month from the date on which the notice was given, unless the
Company Law Boardthinks fit to order otherwise, be entitled and bound to acquire those shares.
Application to Company Law Board for relief in case of oppression
Any member of a company who complain that the affairs of the company are being conducted in
a manner prejudicial to public interest or in a manner oppressive to any member or members may
apply to the Company Law Board for an order 38. Lack of probity and fair dealing on the part of
37 Sections 171 to 175 of the Companies Act
38 Section 397 of the Companies Act, 1956
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the Company which causes prejudice to the members or which may be against public interest
may amount to oppression39.
If the Company Law Board is of the opinion that the companys affairs are conducted in a
manner prejudicial to public interest and or in any manner oppressive to any member or
members; and that to wind up the company would unfairly prejudice such member or members
but that otherwise the facts would justify the making of a winding up order on the ground that it
was just and equitable that the company should be wound up; Company Law Board may, with a
view to bring to an end the matters complained of, make such orders as it thinks fit.
Application to the Company Law Board for relief in cases of mismanagement
Any member of a company who complains that the affairs of the company are being conducted
in a manner prejudicial to the public interest of the company; or that a material change has taken
place in the company, whether by alteration in its Board of Directors or managers or in the
ownership of the companys shares, and that by reason of such a change it is likely that the
affairs of the Company will be conducted in a manner prejudicial to the public interest or
prejudicial to the interest of the company.
Courts have also ruled that erosion of a companys substratum 40, abuse of fiduciary duties41, and
misuse of funds42 are all instances of mismanagement that come within the ambit of 398.In
case the Company Law Board is satisfies about the existence of such circumstances, it may make
an order as deem fit.
Winding up
Shareholders have the right to pass a resolution, resolving that the company would be wound up
by the Tribunal.
According to Section 484 of the Companies Act, 1956 the circumstances in which the company
may be wound up voluntarily are as follows:

39 Scottish Co-operative Whole Sale Society Ltd. v. Meyer(1958) 3 All ER 66 (HL)


40Asiatic Ltd. Re (1994) 3 Comp LJ 294 (CLB
41 Hemant D. Vakil v. RDI Print and Publishing P. Ltd. (1995) 84 Com Cases 838
42 Narain Das (K.) v. Bristol Grill (P.) Ltd. (1997) 90 Com Cases 79
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When the period, if any fixed for the duration of the company by the articles of
association has expired, or in the event, if any, has occurred, on the occurrence of which
the articles provide that the company is to be dissolved, and the shareholders in general
meeting pass a general resolution requiring the company to be wound up voluntarily.
If the shareholder passes a special resolution that the company be wound up voluntarily.

INVESTOR PROTECTION
GUIDELINES, 2009: THE
UNLISTED COMPANIES

AND CORPORATE GOVERNANCE VOLUTARY


CORPORATEGOVERNANCE FRAMEWORK FOR

The Corporate Governance framework in India has been derived from its Anglo-American
counterpart. However, in Anglo-American regime, the focus is disciplining the management,
while in India; the focus of the corporate governance framework is protection of minority
shareholders.43
Good corporate governance practices are a sine qua non for sustainable business that aims at
generating long term value to all its shareholders and other stakeholders. 44 Sound and efficient
corporate governance practices are the basis for stimulating the performance of companies,
maximizing their operational efficiency, achieving sustained productivity as well as ensuring
protection of shareholders interests.45 Good Corporate Governance practices enhance
companies value and stakeholders trust resulting into robust development of capital market, the
economy and also help in the evolution of a vibrant and constructive shareholders activism. 46
The Corporate Governance Voluntary Guidelines 2009 apply to Companies in India and may also
be interpreted as being applicable to unlisted companies.
As per the Corporate Governance Voluntary Guidelines, the Companies shall disclose the reasons
for not adopting the Corporate Governance Voluntary Guidelines, 2009 either wholly or partially.
43 Corporate Governance Voluntary Guidelines: A New Beginning, February 3, 2011 available at
http://www.business-standard.com/article/companies/corporate-governance-voluntary-guidelines-a-new-beginning111020300106_1.html

44 Salman Khurshid, Foreword to Corporate Governance Voluntary Guidelines, available at


http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf
45 R. Bandyopadhyay, Preface to Corporate Governance Volunatry Guidelines, available at ibid
46 Preamble of the Corporate Governance Voluntary Guidelines, 2009 available at
http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf
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The Companies should issue formal letters of appointment to Non Executive Directors
specifying the term of appointment and expectations of the Board from the Non Executive
Director, the fiduciary duty, remuneration including sitting fee etc. Such formal letter of
appointment shall be disclosed to the shareholders at the time of ratification of his/her
appointment or reappointment.
The Board of Directors shall formulate a policy reflecting the attributes expected of an
independent director. Such attributes may include integrity, experience, expertise, foresight,
managerial qualities and ability to read and understand financial statement etc. Such a policy
shall be mandatorily approved by the shareholders. The policy so formulated shall be disclosed
in the Board's Report and shall be circulated to the shareholders. The remuneration based on
performance form significant portion of the total remuneration package to the directors and the
same shall be decided in alignment with the shareholder's interests.
The elements of remuneration payable to the Non Executive Directors may include Fixed
Component, Variable Component and Additional Variable payments. The structure of
compensation payable to the Non Executive directors shall be disclosed to the shareholders in the
Annual Report.
The Remuneration Committee has the duty to determine the principles, criteria and the basis of
remuneration policy of the company. The remuneration policy of the company shall be disclosed
to the shareholders and their suggestions shall be considered. In case there is any deviation from
the remuneration policy, the same shall be adequately disclosed. The Remuneration Committee
shall adequately disclose its role, authority delegated by the Board and terms of reference for the
perusal of the shareholders. So as to protect the investors investment and companys assets, the
Board shall conduct a review of the company's system and internal controls. The Board shall also
intimate the shareholders about the conduct of such review. The review shall peruse all material
controls and scrutinize the financial, operational and compliance controls and risk management
systems
Whenever the Company conducts a Board meeting, the agenda of the Board meeting should be
accompanied by an Impact Analysis on Minority Shareholders whereby it shall be proactively
state the impact that the agenda of the Board meeting may have on the interests of the minority
shareholders. The Independent directors shall also discuss the impact of the agenda of the Board
meeting on the minority shareholders. The Company shall also conduct a secretarial audit in
order to facilitate examination of the transparency, ethical and responsible governance of the
company. The Board shall come out with a report and give its comments on the Secretarial audit,
which shall be disclosed to the shareholders. The Corporate Governance-Voluntary Guidelines
2009 provides for partial participatory approach to address the contemporary corporate

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governance issues in India.47 The Guidelines provide a set of good governance practices, which
would facilitate the companies to enhance their internal governance processes and may be
voluntarily adopted by the Indian Public Companies.48
It is however, evident that the Corporate Governance Voluntary Guidelines are not mandatory to
be adopted by the Companies, thus hindering the efficiency of the guidelines in the very first
place. Moreover, a scrutiny of the Voluntary Guidelines places emphasis on the aspect of
disclosure to the shareholders so as to ensure their protection.
INVESTOR PROTECTION UNDER CLAUSE 49 OF THE LISTING AGREEMENT
The Emergence of Code of Best Corporate Governance practices all over the country were
considered and in 1999 SEBI constituted a Committee on Corporate Governance under the
chairmanship of Shri Kumar Mangalam Birla, with the aim of raising the standards of Corporate
Governance in India with regard to the listed companies. SEBI's Board, held a meeting on
February, 2000 for considering the recommendations of the Kumar Mangalam Birla Committee
and incorporating them by inserting Clause 49 of the Listing Agreement. Subsequent to the
Enron, WorldCom and other governance catastrophes, the SEBI realized the need to enhance the
level of corporate governance standards in India and thus constituted another committee for
reviewing the corporate governance in India chaired by Narayan Murthy. Clause 49 of the
Listing Agreement was revised after considering the recommendations of Narayana Murthy
Committee.49
The objectives of the Listing agreement are to provide liquidity to securities, mobilize savings
for economic development and protect the investors by ensuring disclosures by the organization.
As per Clause 49 of Listing Agreement the following disclosures shall be made to the
shareholders:

Significant Related Party Transactions that may be in potential conflict with the interests
of the company at large and the basis of the related party transaction shall be disclosed50.

47 ibid
48 Consultative Paper on Review of Corporate Governance Norms in India, available at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf
49

Consultative

Paper

on

Review

of

Corporate

Governance

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf

Corporate Governance DissertationPage 19

Norms

in

India,

available

at

INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED


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Details of non-compliance by the company; penalties imposed by the SEBI or any


statutory authority with respect to capital market matters.
Whistle Blower Policy and an affirmation that no person has been denied access to the
audit committee of the company.
Details of compliance with mandatory requirements under Clause 49 of the Listing
Agreement and implementation of the non-mandatory requirements.51

The disclosures that are to be made shall be discussed in detail.


Disclosure regarding compensation to Non Executive Director
The fees or compensation payable to the Non-Executive Directors including the independent
directors shall be determined after the previous approval of the shareholders in general meeting.
The resolution of the shareholders should ascertain the maximum number of stock options that
the Company can grant to the Non-Executive Director. The Chairman of the Audit committee
shall be present in all the General Meetings to address the issues of shareholders.52 The pecuniary
relationship of the independent director with the company shall be shall be disclosed in the
Annual report of the Company.53 The disclosure of the remuneration should include all the
elements of the remuneration should include all elements such as payment of fixed component
and performance linked incentives, bonuses, benefits etc.
Disclosure of Basis of Related Party Transactions
Transactions with the related party in the ordinary course of business shall be disclosed to the
Audit Committee for reviews54. The details of the transactions with the related parties which are
not in the ordinary course of business shall also be disclosed to the audit committee for review.
The Audit Committee has the discretion to decide the frequency of disclosure of the information
relating to the related party transactions. Also, the Board shall be disclosed about the personal
interest of any members of senior management in any particular transaction. 55There shall also be

50 Clause 49IV(A)) of Listing Agreement


51 ibid
52 http://www.nseindia.com/getting_listed/content/clause_49.pdf
53 Clause 49-IV(E) of the Listing Agreement
54 Clause 49 IV (A) of Listing Agreement
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a disclosure to the Board regarding the relationships between the Board in the annual report of
the Company, prospectus etc56
Disclosure of Accounting Treatment
In case an accounting treatment followed for preparation of financial statements is distinct from
the prescribed accounting standards, the same shall be duly disclosed and it shall contain an
explanation of the directors for following a different accounting standard.57
Certification of the CEO/CFO
The CEO, i.e the Managing Director of the Company shall be under an obligation to certify to
the Board that they have undertaken a review of the financial statements of the company and the
financial statements do not contain any materially untrue statement and depict a fair view of the
company. They shall also mention that the transactions undertaken by the company are not
fraudulent or illegal.
Circulation of Directors Report
A Directors report shall be circulated amongst the shareholders and it shall also comprise of a
Management Discussion and Analysis report encompassing various aspects such as industry
structure and developments, risks and concerns, opportunities and threat, performance in terms
of segment and products, internal control system and its adequacy, discussion of financial
performance etc. In case a new director is appointed or a director is reappointed, the shareholders
shall be given information with regard to resume of the director, nature of his expertise,
shareholding of non-executive director, names of the company in which he holds directorship. 58
The Report on Corporate Governance shall also include details of the Shareholder Grievance
Committee such as name of the non-executive director, name and designation of the compliance
officer, number of shareholder complaints received, number of shareholder complaints that are
pending and those complaints which have not been resolved to the satisfaction of shareholders.59
55 Clause 49 IV (F)(ii) of the Listing Agreement
56 Clause 49 IV (G) (ia) of the Listing Agreement
57 Clause 49 IV (B) of the Listing Agreement
58 ibid
59 http://www.nseindia.com/getting_listed/content/clause_49.pdf
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Disclosure to Shareholders
The disclosures to shareholders shall include the information relating to the appointment of the
directors or reappointment of the director in terms a brief resume of the Director, nature of the
directors experience, names of the companies in which he held directorship and the extent of
shareholding of the director.60
Disclosure of proceeds from public issue, rights issue and preferential issue
When the company raises funds through the public issue, rights issue and preferential issue; the
particulars of application of these funds shall be disclosed to the audit committee for its review
on a quarterly basis. A statement of the utilization of funds shall be disclosed in the offer
document or the prospectus and such a statement shall receive the approval of the auditor.61
Compliance with the Corporate Governance Norms in India
The Companies shall obtain a certificate regarding the compliances and the state of corporate
governance in the Company. The certificate shall be obtained from an auditor or a practicing
company secretary. The certificate shall be annexed with the directors report and circulated
amongst the shareholders annually.62
The Shareholders should also be intimated the General Shareholder information such as the date,
time and venue of the Annual General Meeting, financial year, date of book closure, market price
data, listing of stock exchanges etc. A non-mandatory requirement of the Listing agreement is
that a remuneration committee shall be set up to determine the company's policy of remuneration
packages for executive directors. As per this non-mandatory requirement, the shareholders shall
approve the said remuneration policy. Another non-mandatory requirement under Clause 49 of
the Listing Agreement is that a half-yearly declaration of financial performance including an
overview of the significant events in the past six months shall be sent to each shareholder.63
Setting up of the Shareholder Grievance Committee

60 Clause 49 IV (G)(i) of the Listing Agreement


61 Clause 49 IV (D) of Listing Agreement
62 N K Jain, New Corporate Governance Norms: An Analysis of Revised Clause 49 of The Listing
Agreement, available at:
http://www.icsi.edu/docs/webmodules/Programmes/31NC/NEWCORPORATEGOVERNANCENORMSNKJAIN.doc.
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Clause 49 of the Listing Agreement provides for constitution of a board committee under the
chairmanship of a non-executive director. The Committee shall be entrusted with the duty of
redressing the shareholder grievances. The Committee would be required to look into complaints
such as transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc.
This Committee shall be designated as the Shareholders/Investor Grievance Committee. The
provision for setting up of Shareholder Grievance Committee is the most significant feature of
Clause 49 of the Listing Agreement in direction of protection of the investors.
Apart from Clause 49 of the Listing Agreement, the Listing Agreement provides for other vital
disclosures that shall be made in order to protect the interests of the minority shareholders. These
disclosures include disclosure of shareholding pattern, maintenance of minimum public
shareholding, disclosure and publication of periodical results. Disclosure of price sensitive
information; and open offer requirements under SEBI (Substantial Acquisition of Shares and
Takeover) Regulations, 2011
PROTECTION OF MINORITY SHAREHOLDERS RIGHTS
The corporate are characterized by the separation of ownership and control and this gives rise to
the conflict of interest between the managers and the shareholders. In such context, it is
important that the corporate governance mechanism shall lead to maximization of the
shareholder's wealth by monitoring the management. However, in the Indian context, the issue of
protection of the interests of the minority shareholders is also significant because the minority
shareholders are prone to be expropriated by the majority shareholders.
The law in India with regard to protection of the minority shareholders is inadequate as its
effectiveness and enforcement is an issue. The corporate governance regulatory framework does
not adequately address the issue of protection of interests of minority shareholders. The efficacy
of corporate governance depends on how the shareholders in an organization are protected.
According to an estimate shareholder and investors have lost not less than $2.8billion in the
Satyam fiasco64. In India, the conflict arises between the controlling shareholders and minority
shareholders.65
In India, the minority shareholders may be expropriated by the dominant shareholders by
diverting the resources of the firm through self-dealing transactions. The Satyam case is a typical
63 Bhanumurthy, I. and Sawant Dessai, Dr. Sanjay, Corporate Governance in India Clause 49 of Listing
Agreement (August 17, 2010). Available at SSRN: http://ssrn.com/abstract=1660285 or
http://dx.doi.org/10.2139/ssrn.1660285
64 Varottil, Umakant., A Cautionary Tale of the Transplant Effect on Indian Corporate Governance, National Law
School of India Review, Vol. 21, No. 1, 2010 available at papers.ssrn.com/sol3/papers.cfm?abstract_id=1331581

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example of the fact that the firms resources were attempted to be expropriated for the private
benefits of the promoters. SEBI cancelled the IPOs of various firms for specifying misleading
and untrue material in the offer document.66 Following is an account of various provisions of the
Companies Act, 1956 which may not address the needs of the minority shareholders.
Issue of Equitable Treatment of the Shareholders
Minority shareholders have been proffered protection under Section 397 and 398 of the
Companies Act, 1956. However the minority shareholders can approach the Company Law
Board only if 100 shareholders or atleast holders of 10% of the shareholding of the Company are
aggrieved and seek redressal. They may file an appeal to the High Court in case they are
aggrieved by the decision of the Company Law Board. The protection of the minority
shareholders is however not efficacious and adequate.67 The provisions of the Companies Act,
1956 come to the aid of the minority shareholders only in the event on extreme mismanagement
or winding up.68 The redressal mechanism in India is also very time taking; this furthers hinders
the protection of the minority shareholders. Clause 49 of the Listing Agreement provides for the
Shareholder Grievance Committee. However, the efficacy of the Shareholder Grievance
Committee may not be treated as efficacious enough because it may be hindered by the
allegiance of the independent director. SEBI also is not prompt to take actions against companies
which do not provide for effective grievance redressal.69
Insider Trading and Self Abusive Dealings
65 Kumar Naveen and Singh JP, Corporate Governance in India: Case for Safeguarding Minority
Shareholders Rights, International Journal of Management & Business Studies Vol. 2, Issue, June 2012,
available at http://www.ijmbs.com/22/naveen.pdf
66 SEBIs Tough Stand Against IPO Cheats Sends Out Right Signals, Economic Times (2012), January 2, Available:
http://articles.economictimes.indiatimes.com/2012-01-02/news/30587433_1_ipo-market-ipoprocess-merchantbankers

67 Varottil, Umakant.,A Cautionary Tale of the Transplant Effect on Indian Corporate Governance,
National Law School of India Review, Vol. 21, No. 1, 2010, referred in Kumar Naveen and Singh JP,
Corporate Governance in India: Case for Safeguarding Minority Shareholders Rights, International
Journal of Management & Business Studies Vol. 2, Issue, June 2012, available at
http://www.ijmbs.com/22/naveen.pdf
68 Varma, J.R.,Corporate Governance in India: Disciplining the Dominant Shareholder, IIMB
Management Review, Vol. 9, No. 4, 1997 referred in Kumar Naveen and Singh JP, Corporate Governance
in India: Case for Safeguarding Minority Shareholders Rights, International Journal of Management &
Business Studies Vol. 2, Issue, June 2012, available at http://www.ijmbs.com/22/naveen.pdf
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The SEBI (Prohibition of Insider Trading) Regulations, 2002 deal with the aspect of insider
trading in India.
Clause 49 of the Listing Agreement provides that disclosures shall be made by the Board
regarding all the material information in relation to related party transactions. Also, the directors
are under an obligation to disclose their shareholdings in case it exceeds the threshold limit. In
cases of takeovers, the dominant shareholders are involved in the practice of insider trading.70
Disclosure of information relating to related party transactions
Section 297, 299 and 300 of the Companies Act, 1956 deals with the aspect of related party
transaction, although these provisions have no teeth in terms of the protection of investors.
Clause 49 of the Listing Agreement provides that the Audit Committee shall review the related
party transactions. However, the Satyam-Maytas failed deal reflects that the related party
transactions are still prevalent.71
An assessment of the Companies Act, 1956 provides that the minority shareholder protection is
not adequate enough. However, the Corporate Governance mechanism attempts to fill the gap
and safeguard the interests of the minority shareholders.
ROLE OF INSTITUTIONAL INVESTORS IN CORPORATE GOVERNNACE
The institutional oversight by the institutional investors is necessary because the product, labor
and corporate control market constraints shall be imposed on the management discretion.72
The Kumar Mangalam Birla Committee observed that the institutional investors have acquired a
large stake in equity share capital of listed companies. In some of the listed companies they form
the major shareholders and own shares on behalf of the retail investors. They have a significant
responsibility as the retail investors expect the institutional investors to make positive use of their

69 World Bank, Report on the Observance of Standards and Codes (ROSC), Corporate Governance
Country Assessment: India, World Bank-IMF, Washington, DC, USA, 2004.
70 Supra, footnote number 44
71 Sharma, J.P, Corporate Governance, Business Ethics and Corporate Social Responsibility, Ane
Books, New Delhi, India, 2011
72 Bernard S. Black, Shareholder Passivity Reexamined, 89 Mich. L. Rev. 520, 575-91 (1990) referred in
lawreview.law.ucdavis.edu/issues/41/2/.../DavisVol41No2_Velasco.pdf

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voting rights. As per the Committee recommendations, the institutional investors shall be at an
arms length distance with the management of the Company73.
The institutional investors have a major influence on the management of the corporation as they
are entitled to exercise their voting rights. The institutional investors can hugely impact the
manner in which the company may function74. The committee therefore recommended that the
institutional investors shall play the following role in corporate governance:

Take active interest in the aspect of composition of the Board of Directors,


Act vigilantly
Maintain contact at senior level for exchange of views on management, strategy
performance and quality of management
Ensure that the voting rights are exercised
Evaluate Corporate Governance performance of the company

The institutional investors should enter into a dialogue with the companies based on mutual
understanding of objectives. In course of evaluating the corporate governance performance of the
company, the institutional investors shall give due weightage to the aspects such as composition
of Board Structures and other such aspects. The institutional investors are expected to make
considerable use of their voting rights.
The ICSI Recommendation 22 is that it should be made mandatory for the equity based mutual
funds to make disclosure with respect to the corporate governance and voting policies and such
disclosures shall be made in the websites of the mutual funds. They shall also disclose the
procedure in deciding the voting rights. The records of their voting shall also be disclosed in the
websites.75 The ICSI recommendation 24 is that a directive shall be issued to clarify the nature of
the information that is can be exchanged at meetings between the institutional investors and
companies in compliance with the Insider Trading Regulations of 1992 and its amendment in
2002. The directives shall specify that it does not condone the selective disclosure of information
by companies to institutions and clearly set the principles of equality of treatment of all
shareholders by corporations76.
73 Report of the Kumar Mangalam Birla Committee on Corporate Governance,
http://www.sebi.gov.in/commreport/corpgov.html
74 ibid
75 ICSI Recommendations to Strengthen Corporate Governance Framework,
http://www.icsi.edu/docs/webmodules/LinksOfWeeks/Recommendations%20Book-MCA.pdf
76 ibid
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Thus, the role of institutional investors has been recognized by the Kumar Mangalam Birla
Committee India. The institutional investors role in terms of shareholder activism has also
gained prominence. The institutional investors form a mechanism to oversee the corporate
governance norms in India.
INVESTOR PROTECTION UNDER THE COMPANIES ACT, 2013
The Companies Act, 2013 provides for enhanced corporate governance norms, improved
disclosures and transparency, facilitates responsible entrepreneurship, increases the
accountability of a company management and auditors, protection of investors, provides for
better shareholder democracy, Corporate Social Responsibility and stringent enforcement
processes.77 The Companies Act, 2013 provides for a mechanism of protection of the investors.
Following is an account of the important provisions which aim at protection of investors.
According to Section 24 of the Companies Act, 2013 the SEBI is empowered to make
regulations with regard to issue and transfer of securities and non-payment of dividend by listed
company. Section 36 of the Companies Act, 2013 provides that the act of fraudulently inducing a
person to make investment is punishable with imprisonment for a term which may extend to ten
years and with fine which shall not be less than three times the amount involved in fraud.
Section 37 of the Companies Act, 2013 provides that a suit may be filed by a person who was
fraudulently induced to make investment in a corporate entity on account of the misleading
statement in a prospectus or inclusion or omission of any material fact. The Companies Act also
provides for class action suit. Such a provision has been included for the very first time. As per
this provision, a specified number of members or depositors or any class of them may file an
application before the Tribunal on behalf of the members or depositors on the basis that the
management or control of the affairs of the company are prejudicial to the interests of the
company or its members. In case the investors were defrauded on account of improper or
misleading particulars of the company in the audit report, the liability would vest on the audit
firm and class action suit can be brought against the audit firm. The Companies Act, 2013
defines fraud under Section 447 and provides that any person engaged in fraud shall be
punishable with imprisonment for a term which shall not be less than six months but which may
extend to ten years and shall also be liable to fine which shall not be less than the amount
involved in the fraud, but which may extend to three times the amount involved in the fraud.
Where the fraud in question involves public interest, the term of imprisonment shall not be less
than three years.78

77 ICSI welcomes passage of Companies Bill, 2012 by Parliament, Aug 9,


http://www.aninews.in/newsdetail3/story124934/icsi-welcomes-passage-of-companies-bill-2012-byparliament.html
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Section 211 of the Companies Act provides for Serious Fraud Investigation Office (SFIO) and
stipulates that the SFIOs report shall be treated as a report filed by a police officer and the SFIO
has the power to arrest a person who is guilty of the offence of fraud as defined in the Companies
Act, 2013. Section 195 of the Companies Act, 2013 deals with the prohibition of insider trading
and Section 194 of the Companies Act, 2013 stipulates that the Directors and key managerial
personnel of a company are prohibited from forward dealings in securities of the company.79
Further, the Companies Act, 2013 also provides for protection of whistle blowers who may bring
the activities of the companies to the fore and ensuring that the whistle blowers are not
victimized. In certain exceptional circumstances the whistle blower may be permitted to directly
contact the Chairperson or Audit Committee. The promoters have an obligation to provide the
dissenting shareholders with an exit opportunity in the event the Company proposes to change
the terms of contract or objects of the prospectus. The Companies Act, 2013 provides for a
mechanism wherein the shares of minority shareholders may be purchased in the event of
acquisition of the Company in which the shares are held. 80 Section 236 of the Companies Act,
2013 provides an option to the acquirers or the persons acting in concert holding 90% or more of
the issued equity share capital to notify the company of their intention to squeeze out the
remaining equity shareholders. It thus obligates the majority shareholders to notify their intention
to purchase the shares of the company thereby preserving the right of the minority shareholders.
The Companies Act, 2013 substantially empowers the investors and protects their interests.81
A bare perusal of the aforementioned provisions of the Companies Act, 2013 reflects that
investor protection has been given a specific emphasis under the new legislation. The rights of
the minority shareholders have also been recognized under the Act. Hence, it may be inferred
that the Companies Act, 2013 embodies various provisions which may go a long way in the
protection of the investors.

78 Highlights of the Companies Bill (as passed by the Lok Sabha on 18.12.12 and by the Rajya Sabha on
08.08.13), available at http://www.icsi.edu/WebModules/Linksofweeks/Cos%20bill%20highlights.pdf
79 ibid
80 Investor protection will get a big boost under new company law, December 19, 2012,
http://www.business-standard.com/article/companies/investor-protection-will-get-a-big-boost-under-newcompany-law-112121900046_1.html
81 The Impact Areas of the new Companies Bill: A Primer, 10 August, 2013, http://www.livelaw.in/theimpact-areas-of-the-new-companies-bill-a-primer/
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CHAPTER IV
ANALYSIS OF CORPORATE FRAUDS AND UNFAIR PRACTICES IN INDIA:
FROM THE PERSPECTIVE OF CORPORATE GOVERNANCE
REEBOK INDIA FRAUD CASE: INDICATION OF THE NEED OF CORPORATE
GOVERNANCE IN UNLISTED COMPANIES
In India, the unlisted companies are prone to corporate frauds and malpractices; further leading
to exploitation of the investors. Reebok Fraud case is a glaring example of corporate fraud in
India. The Reebok Fraud came to the fore in course of merger between Adidas India and Reebok
India. Under Section 234 of the Companies Act, investigation was conducted by the Registrar of
Companies and alleged irregularities were observed in the books of accounts of Reebok. An
approximate of more that Rs 870 crores is estimated to have been involved in the scam. On
account of the irregularities in the books of accounts, the Managing Director Subhinder Singh
Prem and the Chief Operating Officer Vishnu Bhagat had been arrested and the matter was taken
up by the Serious Fraud Investigation Officer. This corporate fraud would affect the shareholders
of the Adidas India, the parent company of Reebok.82
It was alleged that the Company was indulged in over invoicing to the tune of Rs 147 Crore, it
maintained four secret warehouses, to which the company's goods were diverted. It raised fake
invoices to the tune of Rs 98 Crores83.
The authorities probing into the Reebok India Fraud case have observed that a systematic
mismanagement paved way for the corporate fraud. There was mismanagement of the
governance and operations of the company. The bills were not recorded correctly and were
inflated; the Company falsified sales receipts, faked storage facilities, and circular trading. The
guidelines laid down in the companies act were not followed properly and this also led to tax
82 Sahil Arora and Utkarsh Soni, Investor Protection In The Aftermath of The Reebok Fraud Case: An Appraisal of
the need for corporate governance in Non-Listed Companies, XI Capital Markets Conference (December 21 - 22,
2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263081

83 An Update of Adidas India Euro 125 Million Fraud Story, 28 May, 2012,
http://soniajaspal.wordpress.com/2012/05/28/an-update-of-adidas-india-euro-125-million-fraud-story/

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evasion84. The SFIO played a significant role in dealing with the Reebok India Fraud case. The
SFIO reported that Reebok India lacked corporate governance and has weak internal processes
that facilitated the MD and COO of the Company to commit such a corporate fraud. The report
confirmed that the company had falsified the accounts and inflated the sales.85
A perusal of the Reebok Fraud case reflects that there is a need for corporate governance
mechanism in India so as to protect the investors.86
An effective legal protection is necessary for good corporate governance. 87 Various Committees
were set up in India for making recommendations with regard to the corporate governance
framework in India by reviewing the international best practices 88, while none of these
committees deal with the aspect of corporate governance for unlisted companies. Even Clause 49
of the Listing Agreement, which is the bedrock of corporate governance in India, regulates only
the Listed Company. SFIO is a body that deals with corporate frauds in cases where complex
investigation is involved, or when the case at hand may have international ramifications or
involves public interest. However, it was felt that the SFIO does not have the necessary teeth to
deal with the matters and lacks statutory recognition. With the enactment of the Companies Act,
2013 the SFIO has been embodied with the statutory recognition and the necessary powers. 89

84 Reebok India case: Corporate mismanagement led to Scam, September 23, 2012, The Economic Times,
http://articles.economictimes.indiatimes.com/2012-09-23/news/34040662_1_conspiracy-and-fraudulent-practisesreebok-india-gurgaon-police

85 SFIO report finds Reebok guilty of fudging A/Cs: Sources, June 10, 2013
http://www.moneycontrol.com/news/cnbc-tv18-comments/sfio-report-finds-reebok-guiltyfudging-acssources_895198.html?utm_source=ref_article
86 Sahil Arora and Utkarsh Soni Investor Protection In The Aftermath of The Reebok Fraud Case: An Appraisal
of the need for corporate governance in Non-Listed Companies, XI Capital Markets Conference (December 21 22, 2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263081

87 Shleifer, Andrei; Vishny, Robert W, A survey on Corporate Governance, 52 JOURNAL OF


FINANCE 737-783 (1997) available at http://onlinelibrary.wiley.com/doi/10.1111/j.15406261.1997.tb04820.x/full
88 India: An Overview of Corporate Governance of Non-Listed Companies, Corporate Governance of
Non Listed Companies (OECD 2005), available at
http://www.oecd.org/corporate/corporateaffairs/corporategovernanceprinciples/37190767.pdf
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Corporate governance is based on the corporate ownership structure. 90 Hence, the principles of
best practices that are followed in the case of listed companies may not be applicable for unlisted
companies. Also, the unlisted companies generally are sole proprietorships or private companies
and may not have shareholders.
However, corporate governance is not restricted to the aspect of protection of investors.
Accountability and monitoring functions of the company is the essential tenet of corporate
governance.91 The Reebok India fraud has reflected that the management of the company and the
auditors may be involved in corporate scams. In light of such a revelation, it is extremely
important to protect the stake holders of the unlisted company. And in cases such as the Reebok
India Fraud case, the shareholders of the parent company may be affected. Hence, the legal and
regulatory framework for listed companies in terms of corporate governance shall focus on the
aspect of accountability and monitoring function of the Company so that corporate scams could
be avoided in unlisted companies.
THE SATYAM FIASCO AND STATE OF CORPORATE GOVERNANCE IN INDIA
Satyam Computer Services Limited is a global information technology service provider. The
Satyam scandal can be traced back to the announcement of the World Bank that a few employees
of the Satyam has hacked the system and retrieved price sensitive information. Hence, World
Bank did not renew its 5 year contract with Satyam and severed all the ties with the Company.
Later, Ramalinga Raju announced that the the Company would acquire Maytas Infrastructure and
Maytas Properties and an influx of $ 1.6 billion. However, on account of pressure from the
shareholders, the Company had to withdraw the proposal of acquisition. The value of ADR of
Satyam fell by 50% overnight. There was a pending complaint against Satyam by Upaid Sytems.
The case was decided and Satyam was held responsible for an intellectual fraud and forgery and
a claim $1 Billion was made against the Satyam. Ramalinga Raju then wrote a letter to the Board

89 India Seeks to Overhaul a Corporate World Rife With Fraud,


http://dealbook.nytimes.com/2013/08/15/india-seeks-to-overhaul-a-corporate-world-rife-with-fraud/?_r=0
90Sahil Arora and Utkarsh Soni Investor Protection In The Aftermath of The Reebok Fraud Case: An Appraisal of
the need for corporate governance in Non-Listed Companies, XI Capital Markets Conference (December 21 - 22,
2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263081

91 CADBURY, A., REPORT ON THE COMMITTEE OF THE FINANCIAL ASPECTS OF


CORPORATE GOVERNANCE (Gee Publishing, London 1992) referred in
www.cbr.cam.ac.uk/pdf/wp277.pdf
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of Satyam and forwarded the same to the SEBI regarding the accounting fraud that was
committed.
he outlined that the companys balance sheet for the quarter ending on 30 September 2007 had
inflated cash and bank balances of upto 50.4 billion rupees (AU $ 1.44 billion). With a quoted
cash reserve of 53,610, the actual cash reserves stood at 3,210 million which is just about 5% of
the declared value. The letter also stated that the financial statements consist of understated
liabilities worth 12,300 million rupees and non-existent accrued income of 3,760 million
rupees92. Pricewaterhouse Coopers acted as the external auditor of the Company and they
approved the balance sheets of the Company year after year. Ramalinga Raju was willing to
cover up the gap between the actual accounts and the reported accounts by showcasing that an
investment would be made in Maytas Infrastructure and Properties. However, the shareholders
did not approve of the investment and raised a concern.
The failures on the front of corporate governance that paved the way for the corporate fraud of
Satyam would be analyzed. The Decision regarding Acquisition of Maytas Infrastructure and
Properties was not approved by the shareholders, while Ramalinga Raju held a meager 8.5% of
shareholdings in the company. Maytas Infrastructure was a company in the name of the sons of
Ramalinga Raju, acquisition of such a Company may be termed as a related party transaction in
which the Chairman of the Company has a vested interest. However, the Board approved the
decision and the Independent directors also did not raise objections to the decision. Item 16A of
Form 20F which was submitted to the Securities Exchange Commission, Satyam Company
admitted that noone in the Audit Committee had the qualifications of an Audit Committee
Financial Expert as required by the Securities Exchange Commission. The Satyam did not
compose of independent directors in the real sense. The shareholders have a right to know the
credibility of the directors.93
The independent directors of Satyam were serving as directors in the Board of Directors of eight
other companies. The Board did not comprise of any person who was financially literate, that is
one who could read and interpret the Financial statements of the Company. The Board of Satyam
was not a well rounded Board. The Board of Directors did not have any independent Board
leadership. Satyam did not have a Corporate Governance Committee, which is a deviance from
international best practices of corporate governance. Ironically enough, Satyam was endowed
with the with the Golden Peacock Award by the WCFG, which is the highest honor in Corporate
92 Shivanna, Manoj, The Satyam Fiasco - A Corporate Governance Disaster! (May 2010). Available at SSRN:
http://ssrn.com/abstract=1616097 or http://dx.doi.org/10.2139/ssrn.1616097

93 Lessons from Satyam fiasco that can help improve corporate governance in India, Jan 02 2009,
http://www.livemint.com/Companies/OqLofvAsyiwHkEBlLJaoOL/Lessons-from-Satyam-fiasco-thatcan-help-improve-corporate-g.html
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Governance and Satyam was recognized as a Global Leader in the arena of Corporate
Governance.94
First Global, a Mumbai Based brokerage house has estimated that the Indian shareholders have
lost close to $2 billion since 2003 prior to the Satyam Scandal due to issues stemming out of
Corporate Governance failures.95
INSIDER TRADING AS AN UNFAIR TRADE PRACTICE: AN EXAMINATION OF
THE LEGAL AND REGULATORY FRAMEWORK AND SIGNIFICANT INSTANCES
Section 12A of the Securities and Exchange Board of India, 1992 prohibits manipulative and
deceptive devices, insider trading and substantial acquisition of shares. SEBI (Prohibition of
Insider Trading) Regulations, 2002 and SEBI (Prohibition of Fraudulent and Unfair Trade
Practices) Regulations, 2003 also form a part of the legislative framework relating to Insider
Trading in India.
Insider trading in securities refers to dealing in securities by an insider who has the knowledge of
material inside information which is not known to the general public.
It may be pertinent to trace out the history and evolution of regulations relating to insider trading
in India. In the year 1979, the Sachar Committee recommended that amendments shall be made
to the Companies Act, 1956 in order to restrict the dealings in shares by the employees of the
respective company so as to prevent insider trading.
In 1986 the Patel Committee made a recommendation that the Securities Contract Act, 1956
should be amended so as to prevent unfair stock deals and prohibit insider trading 96. Abid
Hussain Committee recommended that the SEBI shall formulate regulations and governing codes
to prohibit insider trading. It also recommended that insider trading activities shall attract civil
and criminal proceedings and penalties shall be imposed for insider trading. SEBI regulations on
insider trading were introduced in 1992. These regulations were amended in 2002 and Chapter
VA was inserted in the SEBI Act for stipulating the provisions regarding insider trading.97
94 id
95 Shivanna, Manoj, The Satyam Fiasco - A Corporate Governance Disaster! (May 2010). Available at SSRN:
http://ssrn.com/abstract=1616097 or http://dx.doi.org/10.2139/ssrn.1616097

96 Deemed to be Insiders: Major players of Insider Trading, available at http://nmims.edu/wpcontent/uploads/2012/p3/MPSTME/Insider%20%20Trading-Abhay%20Kumar.pdf


97 ibid
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Regulation 2(e) of the SEBI (Prohibition of Insider Trading) Regulations, 2002 98 defines an
insider as a person who is connected with the company and may have access to unpublished
price sensitive information or could receive the information from any person in the company.
Regulation 2(h)(a) of The Regulations define price sensitive information as any information that
is directly or indirectly connected with the company and has the potential of materially affecting
the prices of the securities of the company in case such information is published. Regulation 3 of
SEBI (Prohibition of Insider Trading) Regulations, 2002 prohibits an insider from dealing in the
securities of a company when he is in possession of price sensitive information and he shall also
not communicate such information to anyone either directly or indirectly. Regulation 4 of SEBI
(Prohibition of Insider Trading) Regulations, 2002 stipulates that any person who deals in
securities while in possession of unpublished price sensitive information shall be held guilty of
insider trading. Regulation 4A of the aforesaid Regulations provides that the Board can make
inquiries and conduct inspection in case it has formed a prima facie opinion that the regulations
have been violated. Regulation 5 of SEBI (Prohibition of Insider Trading) Regulations, 2002 99
provides for the power of SEBI to conduct an investigation with regard to breach of the insider
trading regulations. The model code of conduct for prohibition of insider trading purports that a
compliance officer shall be appointed by the company. Also, there shall be a pre-clearance of
trade by the officer of designated employees. SEBI (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Market) Regulations, 2003100 is another set of regulations which
prohibit unfair and fraudulent trade practices in the capital markets. According to Regulation 3 of
the a prohibition of dealing directly or indirectly in dealing with securities in a fraudulent
manner, no manipulative or deceptive devices shall be employed to contravene the SEBI Act or
rules and regulations or employ any device to defraud the investors. Regulation 4 provides for
prohibition of manipulative, fraudulent and unfair trade practices. The regulations also define
fraud as any act, expression, omission or concealment committed whether in a deceitful manner
or not by a person or by any other person with his connivance or by his agent while dealing in
securities in order to induce another person or his agent to deal in securities, whether or not there
is any wrongful gain or avoidance of any loss.
A few decided cases of the SEBI may be analyzed so as to scrutinize the aspect of insider trading
as an unfair trade practice. The Hindustan Lever Limited Brooke Bond Lipton India Ltd.
(BBLIL)

98 www.sebi.gov.in/acts/insideregu.pdf
99 ibid
100 http://www.sebi.gov.in/acts/futpfinal.html
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SEBI had suspected that Hindustan Lever Limited was indulged in insider trading. In August
1997, SEBI charged Hindustan Lever Limited for having indulged in insider trading by making
use of unpublished price sensitive information. HLL purchased shares of Brooke Bond Lipton
India Ltd (BBLIL) worth Rs 8 lakhs from UTI at Rs 350.35 per share two weeks prior to the
prior to the formal announcement of the merger between BBIL and HLL. SEBI ruled that HLL
made use of unpublished price sensitive information and is thereby guilty of insider trading. In
March, 1998 SEBI passed an executive order holding HLL guilty of insider trading whereby it
directed HLL to pay compensation to UTI to the tune of Rs 3.4 crores and also initiated criminal
proceedings against the directors of HLL and BBIL.101
HLL filed an appeal against the executive order of the SEBI. The contention of HLL was that the
merger between HLL and BBIL was speculated by the market and media and henceforth cannot
be termed as unpublished price sensitive information. Also, after the merger of BBIL and HLL
was formally announced, the press articles specified that said merger was expected. HLL also
argued that it was a transferee company and hence cannot be treated as an insider. Also, the rise
of share price of BBIL from Rs. 242 to Rs 320 between January and March before the proposed
transaction was an information which was generally known to the public. 102 HLL also argued that
it did not have any price sensitive information about BBIL and the shares were purchased in
order to facilitate Uniliver to acquire 51% shares of BBIL. The Appellate Authority of the
Finance Ministry dismissed the SEBI order.
In the case of Rakesh Aggarwal verus SEBI103, Rakesh Agarwal, the Managing Director of ABS
Industries Limited was involved in negotiations with the Bayer AG with respect to their intention
takeover ABS Industries. SEBI alleged that Rakesh Agarwal made use of this unpublished price
sensitive information had purchased shares of ABS through his brother in law and tendered the
said shares in the open offer made by Bayer. Rakesh Agarwal contended that such purchase of
shares was done in the interest of the company. However, the SEBI directed Rakesh Agarwal to
make a deposit of Rs. 3400000 in the Investor and Education Fund of Stock Exchange Mumbai
and National Stock Exchange. SAT held that SEBIs order was not sustainable in the eyes of law
since the same was done in the interest of the company.
In the case of Samir Arora versus SEBI104, April 2003, there were stipulations that there would be
consolidation of Digital Global Soft Limited and Hewlett Packard Indian Software Operations.
101 Executive order passed by SEBI available at
http://www.watchoutinvestors.in/Press_Release/sebi/1998050.asp
102 http://corporateinsiderstrading.wordpress.com/2012/02/02/case-of-insider-trading-hindustan-leverlimited-hll-brooke-bond-lipton-india-limitedbblil/
103 (2004) 1 CompLJ 193 SAT, 2004 49 SCL 351 SAT
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In August 2003, SEBI charged Samir Arora of insider trading under Section 11B and Section
11(4)(b) of the SEBI Act. SEBI initiated action against Samir Arora on the grounds that he traded
the shares of Digital Global Soft Limited on the basis of unpublished price sensitive information.
He also did not make disclosures about crossing the 5% limit of acquisition of shares in various
companies. He also caused panic in the market by announcing his decision to quit Alliance
Capital. SEBI also debarred Samir Arora from dealing in the securities market for a period of 5
years. SEBI imposed a penalty of Rs 15 crores on Alliance capital. In October 2004, the
Securities Appellate Tribunal set aside the order of SEBI on the ground on insufficient evidence
on place to prove that Samir Arora indulged in insider trading. After this case, it was observed
that overturning of the order of the SEBI by the Securities Appellate Tribunal almost became a
norm.105
The aspect of unfair trade practices followed by the unlisted companies shall also be examined.
In the case of Sahara India Real Estate Corporation Limited & Ors Versus Securities and
Exchange Board of India & Anr106, Sahara Real Estate Corporation Limited had violated the
SEBI (Issue of Capital and Disclosure Requirements) Guidelines, 2009 and the SEBI (Disclosure
for Investor Protection) Guidelines, 2000. The Supreme Court held that the SEBI can intervene
with the issuance of shares through private placement when the interest of the investors is
concerned. Hence, the SEBI was held to have wide powers for the protection of investors even in
unlisted companies in case the issue is pertaining to the protection of the investors.

PREVENTION OF CORPORATE FRAUDS: THROUGH THE LENS OF COMPANIES


ACT, 2013
The Companies Bill, 2012 was passed by the upper house of the Parliament 107 and received
Presidential assent. In the wake of the Satyam scam wherein shareholders were defrauded by the
104 2005 60 SCL 377
105 S. Vaidya Nathan, The Samir Arora case: A setback for SEBI, Business Line,
http://www.thehindubusinessline.in/bline/iw/2004/10/17/stories/2004101700530600.htm

106 http://www.sebi.gov.in/cms/sebi_data/attachdocs/1351500106870.pdf
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Chairman of the Company, inspite regular audits, the need for a stringent oversight corporate
legislation was felt.
Although no major developments took place since the Satyam scam, the adoption of the
Companies Bill, 2012 can be seen as a major step in the Indian Corporate sector. The Companies
Act, 2013 is believed to be a legislation that would impose checks and balances and lead to
prevention of corporate frauds in India.
The most significant characteristic feature of the Companies Act, 2013 in this regard is that the
Act has laid down stringent punishment for the act of committing a fraud as defined in the
Companies Act. The punishment may be to the tune of huge penalty and imprisonment. The Act
provides for the establishment of the National Financial Reporting Authority in order to lay down
and monitor the accounting standards.108
The Serious Fraud Investigation Office has now been given statutory recognition and have been
given various powers including the power to start investigation and frame charges. 109 Earlier, the
SFIO was considered as a toothless tiger since it did not have the requisite statutory recognition
and powers. However, the Companies Act, 2013 has overcome this problem and such a step
would go a long way in prevention of corporate frauds and enabling smooth investigation of the
corporate frauds. The Companies Act, 2013 has also introduced the aspect of introduction of
class action suits110 and provisions for prevention of insider trading111. The Act also provides for
class action suits through which the minority shareholders can get empowered and take action
against the companies that are indulging in frauds112.

107 India Seeks to Overhaul a Corporate World Rife With Fraud, AUGUST 15,
2013http://dealbook.nytimes.com/2013/08/15/india-seeks-to-overhaul-a-corporate-world-rife-withfraud/?_r=0
108 Section 132 of the Companies Act, 2013
109 Section 211 and 212 of the Companies Act, 2013
110 Section 245 of Companies Act, 2013
111 Section 195 of Companies Act, 2013
112 Section 245 of the Companies Act, 2013
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CHAPTER V:
SHAREHOLDER ACTIVISM AND CORPORATE GOVERNANCE
THE CONCEPT OF SHAREHOLDER ACTIVISM
Shareholder Activism can be traced back to eighty years when Henry Ford chose to cancel a
special dividend and instead spend the money on advancing social objectives. The court
ultimately sided with the dissented shareholders, reinstated the dividend, sparking a new
paradigm in shareholder activism. In 1990s shareholder activism found mainstream pension
fund managers like CalPERS pushing for the repeal of staggered boards and the poison pills.
These players used a form of quiet activism favoring abstentions and withholding votes for
important proxy issues as a way to influence Board and Management decisions. The purpose of
shareholder activism is to provide the company with an insight into the manner in which the
shareholders may influence the companys behavior. Shareholder activism is also basis for the
shareholders to stipulate the options that are available with the shareholders wishing to pursue an
activist agenda. In UK, Shareholder activism was exercised through proxy battles, publicity
campaigns, shareholder resolutions, litigation and negotiations with management. Shareholder
activism may be defined as a mode of establishing a dialogue with the management on issues
that concern the shareholders. It aims at improving the corporate culture. Shareholder activism
aims at utilizing the corporate democracy provided by law. The effectiveness of large
shareholders in corporate governance is reflected generally is a few countries such as UK, US,
Germany and Japan.113 The role of large shareholdings in influencing the corporate governance
of enterprises is a significant issue. 114
The emergence of shareholder activism is a new facet of corporate governance in India. The key
drivers which facilitate shareholder activism are the regulatory reforms which give scope for
shareholder participation and market forces which create an activist stance in the investors.
113 Jayati Sarkar and Subrata Sarkar, Large Shareholder Activism in Corporate Governance in Developing
Countries: Evidence from India, available at http://www1.fee.uva.nl/fm/Conference/cifra2000/Sarkar.pdf

114 Rafael La Porta, Florencio Lopez-de Silanes, Andrei Shleifer and Robert Vishny Investor protection and
corporate

governance,

Journal

of

Financial

Economics

http://leedsfaculty.colorado.edu/bhagat/InvestorProtectionCorporateGovernance.pdf

Corporate Governance DissertationPage 38

58

(2000)

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Shareholder activism in India is consistent with the international trend. Although the impact of
shareholder activism on corporate governance may not be unambiguous in companies which
have large shareholding pattern, the influence that shareholder activism has on corporate
governance cannot be disregarded.115
In the wake of corporate frauds in India, the corporate governance reforms reflect empowerment
the investors. In India, the corporate sector is dominated b y the promoters and controlling
shareholders, in such a scenario, the need for empowerment of the investors through shareholder
activism becomes more significant. The recent regulatory reforms in India empower the
shareholders and facilitate their participation through various mechanisms such as e-voting,
voting through postal ballots, etc. However, inspite of furtherance of shareholder activism by the
regulatory regime in India, the impact of shareholder activism may get dampened on account of
the fact that many companies in India are widely controlled by majority shareholders. Also, the
mechanism available with remedies available to the shareholders to counter the management is
not efficient.
In the past two decades, the corporate governance mechanisms have developed in the line of
global standards and hence various reforms have taken place in the regulatory framework. These
reforms include appointment of the Board of Directors, independence in the audit process,
certification of financial statements etc. The Stock Markets have also advocated the role of good
governance practices116. However, the efficacy of the set standards remains an unanswered
question, more so in the light of the Satyam scandal.117
The influence of controlling shareholders in India is very magnificent and the current scenario is
characterized by the lack of shareholder activism in the institutional and retail investors 118. The
perceived absence of shareholder activism in India has triggered reforms which are directed
towards providing a framework wherein the investors are empowered and have a significant
role119.
115 Varottil Umakant, EMERGENCE OF SHAREHOLDER ACTIVISM IN INDIA, NSE Quarterly
Briefing, April 2013, available at http://www.nse-india.com/research/content/res_QB1.pdf
116 Bernard S. Black & Vikramaditya S. Khanna, Can Corporate Governance Reforms Increase Firms Market
Values? Evidence from India, JOURNAL OF EMPIRICAL STUDIES, Vol. 4 (2007), available at http://ssrn.com
/abstract=914440

117 Umakanth Varottil, A Cautionary Tale of the Transplant Effect on Indian Corporate Governance, 21(1) NAT.
L. SCH. IND. REV.1 (2009).

118 id
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In India, the controlled companies are predominant and even in these companies, the minority
shareholders are deterred from participating in the corporate decision making, this further works
in favor of the large shareholders, who emerge as the sole decision makers in the Company. 120
Also, the cost of availing of the remedies against the management acts as a deterrent in
enforcement of the rights of the minority shareholders; further leading to the absence of
shareholder activism in India.121 Hence on account of the collective action problems, retail and
institutional investors were viewed as passive investors. The evolution of shareholder activism in
a developed country such as the USA can also be traced back only to the 1990s.122
Shareholder activism may be defined as series of proactive efforts on the part of the shareholders
to influence the behavioral patterns of the firm and the governance rules. Hence, it is a
mechanism to change the manner of the company's management without an actual change in the
control of the company.123
The most important shares of shareholder activism are participative shareholder activism,
interactive shareholder activism and shareholder activism whereby a combative strategy is used.
In the participative shareholder activism, the shareholders actively participate in corporate
franchise by exercising their votes in the meetings. Although, they are be the minority
shareholders, on account of the overwhelming participation of the minority shareholders; the
course of management undergoes a change124. In the interactive shareholder activism, the
shareholders communicate with the management and derive information and also make attempts
119 Varottil, Umakanth, The Advent of Shareholder Activism in India (October 22, 2012). Journal on
Governance, Vol. 1 No. 6, 2012 Available at SSRN: http://ssrn.com/abstract=2165162 or
http://dx.doi.org/10.2139/ssrn.2165162
120 Mathew, Hostile Takeovers in India: New Prospects, Challenges, and Regulatory Opportunities, 2007(3)
COLUM. BUS. L. REV. 800 available in cblr.columbia.edu/archives/10900

121 Lee Harris, Missing in Activism: Retail Investor Abstinence in Corporate Elections, 2010 COLUM. BUS. L.
REV. 104, 166, available in www.memphis.edu/law/facultystaff/bio/harriscv3142012.pdf

122 Stuart Gillan & Laura T. Starks, The Evolution of Shareholder Activism in the United States (2007), available
at http://ssrn.com/abstract=959670

123 Bernard Black, Shareholder Activism and Corporate Governance in the United States, in PETER NEWMAN
(ED.), available at http://ssrn.com/abstract=45100

124 Financial Reporting Council, The UK Stewardship Code (September 2012), available at
http://www.frc.org.uk/Our-Work/Codes-Standards/Corporate -governance/UK-Stewardship-Code.aspx.
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to convince them about the direction in which the company should proceed. 125 In shareholder
activism wherein a combative strategy is used, the shareholders make attempts to overthrow the
management through mechanisms such as the hostile takeovers.126

REGULATORY REFORMS STRENGTHENING THE SHAREHOLDER ACTIVISM IN


INDIA
The regulatory reforms in India have focused on furthering greater shareholder participation. The
approach in terms of the regulatory reforms depicts various facets of shareholder activism. The
various angles of shareholder activism may be reflected in terms of manner of participation of
shareholders in meetings and the role of shareholders in corporate decision making.
Manner of casting votes
In 2001, the Companies Act was amended and the facility of voting by postal ballot was
introduced in 2001.127 The aim of this amendment was to address the issues faced by the retail
investors who could not be physically present for casting the votes at the company meetings. The
system of postal ballot provides the shareholder the facility of casting their votes through post
instead of being physically present in the meeting. The Central Government laid down rules and
laid down a list of the resolutions wherein the Companies were required to compulsorily provide
125 Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control,
155 U. PA. L. REV. 1021 (2007).
126 Brian R. Cheffins & John Armour, The Past, Present and Future of Shareholder Activism by Hedge
Funds, 37 J. CORP. L. 51 (2011) available at blogs.law.uiowa.edu/jcl/wpcontent/uploads/2012/01/Cheffins-web.pdf
127 Section 192A of the Companies Act, 1956
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a facility of voting by postal ballot.128 In those resolutions which did not feature in the list, the
Companies had the discretion of not providing the facility of postal ballot.
Although the mechanism of voting through postal ballot provided the retail shareholders an
avenue to participate in the corporate franchise, the efficacy of this mechanism remained an
issue. The shareholders could participate in the corporate decision making through postal ballot,
but they could not be a part of the deliberations that take place in course of the decision being
taken by the management. In a recent report, it was observed that the shareholder participation
through postal ballot remained as low as 3% on an average.129
Hence, introduction of voting by postal ballot failed to have an impact. After the system of
voting by postal ballot failed to have a positive impact, technological advancements were utilized
in the regulatory reforms for enhancing shareholder participation. Companies (Passing of the
Resolution by Postal Ballot) Rules, 2011 were passed which specifically recognized voting
through the electronic means. SEBI amended the Listing agreement in 2012 for providing a
mechanism whereby the companies were required to provide e-voting facilities 130. Also, the top
500 listed companies on the Bombay Stock Exchange were required to provide an e-voting
facility. It may be expected that the introduction of the evoting facility would enable greater
participation by the shareholders because the penetration of technology had increased. Also, the
e-voting facility is a much cheaper mode and made encourage the shareholders to participate in
decision making.131
Participation of Shareholders in Meetings
It is important that the shareholder shall exercise their voting rights in an informed manner and
the same is possible only when the shareholders are present in the meetings and get an
opportunity to engage in deliberations for exercise of corporate franchise. The government of
India recognized that the shareholders may have some limitations in being physically present in
the meetings. Hence, the Government of India introduced the concept of e-participation. The
128 Companies (Passing of the Resolution by Postal Ballot) Rules, 2001
129 Welcome to the World of E-Voting, THE FIRM: CORPORATE LAW IN INDIA, July 2, 2012, referred in
Varottil, Umakanth, The Advent of Shareholder Activism in India (October 22, 2012). Journal on Governance, Vol. 1
No. 6, 2012 Available at SSRN: http://ssrn.com/abstract=2165162 or http://dx.doi.org/10.2139/ssrn.2165162

130 Securities and Exchange Board of India, Amendment to the Equity Listing Agreement Platform for
E-Voting by Shareholders of Listed Companies, Circular CIR/CFD/DIL/6/2012 (Jul. 13, 2012).
131 Tania Kishore, E-voting will make life easier for investors, BUSINESS STANDARD, July 4, 2012,
available at www.business-standard.com/search?type=news&q=E-voting
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companies were required to provide the shareholders an option to attend the meeting through
audio visual means in such a manner that all the participants can communicate and participate
effectively132.
The Chairman of the Company has the responsibility to ensure that the integrity of such meeting
is maintained. The Government had the intention to provide that such a facility shall be
mandatorily provided. However, on account of the fact that an issue raised that the meetings held
through audio-visual means may not have legal validity under the Companies Act, 1956;
provision of such facilities was optional even by the Listed Companies.133 Since the holding of
meetings through audio-visual means is not compulsory, the efficacy of the rules becomes an
issue.
Voting in the Meetings as a Responsibility
Shareholding in a Company can be considered as a bundle of rights.134 The right to cast vote and
participate in the corporate franchise is the most significant right of a shareholder. Shareholders
however, have the discretion to vote or refrain from voting. The regulatory authorities had
recognized the passivity among the retail and institutional investors in terms of exercising their
voting as a responsibility. Mutual Funds are one category of institutional investor. SEBI specified
that the mutual funds were required to exercise their voting rights in the investee company in a
responsible manner.135
A circular was issued by the SEBI in 2010 whereby the Institutional Investors were required
play an active role in ensuring better corporate governance of listed companies. The SEBI
adopted a comply or explain approach.136 As per this approach the institutional investor was
required to participate in the meetings of the company and was answerable for not attending the
meeting.
132 Ministry of Corporate Affairs, Government of India, Green initiative in the Corporate Governance
Participation by shareholders in general meetings under the Companies Act, 1956 through electronic mode, General
Circular No. 27/2011 (May 20, 2011)
133 Ministry of Corporate Affairs, Governance of India, Green Initiatives in Corporate Governance Further
Clarification regarding participation by Shareholders or Directors in meetings under the Companies Act, 1956
through electronic mode authorization regarding e-voting, General Circular No. 72/2011 (Dec. 27, 2011).

134 Cambridge Gas Transportation Corporation v. Official Committee of Unsecured Creditors of Navigator
Holdings [2006] UKPC 26, [2007]

135 Circular for Mutual Funds, SEBI/IMD/CIR No 18 / 198647/2010 (Mar. 15, 2010)
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The Asset Management companies were also required to disclose the participation in the
meetings in the annual report of the company and the firm's website. Disclosure also needs to be
made with regard to the area in respect of which the voting rights were exercised such as
corporate governance, merger and takeovers etc. This regulatory reform of the SEBI facilitates
participation of the mutual funds being institutional investors in the process of exercising their
voting rights.
The Companies Act, 2013 as a Furtherance of Shareholder Activism
The Companies Act, 2013 can be considered as a furtherance of the protection of investors and
facilitation of greater participation by the shareholders. Section 110 of the Companies Act, 2013
provides for voting by postal ballot. This provision was contained even in the Companies Act,
1956. Voting by postal ballot can be regarded as a mechanism to facilitate greater participation of
the shareholders. The SEBI has also taken steps in the direction of propagation of class action
suits. The SEBI (Investor Protection and Education Fund) Guidelines, 2009, provide that the
SEBI can aid investors in undertaking legal proceedings that are in the interest of investors at
large in the company that is listed or proposed to be listed137. Section 245 of the Companies Act,
2013 provides for class action suit. This can also be regarded as a facet of shareholder activism
because shareholder activism includes proceedings against the management of the Company for
alleged mismanagement. The provision for a class action suit would enable the aggrieved
shareholders to proceed against the management and enforce their rights. The aspect of class
action suits has been very successful in the US to promote shareholder activism. The provision of
class action suit may be observed as a basis of which the minority shareholders can become
active watchdogs of the Company instead of helpless spectators. 138 Thus, a mechanism whereby
the shareholders have an avenue to enforce their rights can also be regarded as a furtherance of
shareholder activism.
The Companies Bill, 2012 provided for the rights of the shareholders to approve certain related
party transactions139, the Companies Act, 2013 provides for a similar provision that the Boards
Report shall disclose the related party transactions and the reasons for entering into the related
136 Anita Indira Anand, An Analysis of Enabling vs. Mandatory Corporate Governance: Structures Post-Sarbanes
Oxley, 31 DEL. J. CORP. L. 229, 229-30 (2006).

137 http://indiacorplaw.blogspot.in/2009/06/shareholder-activism-and-class-action.html Section 245


138 http://www.openthemagazine.com/article/business/thumbs-up-for-shareholder-activism
139 Umakanth Varottil, EMERGENCE OF SHAREHOLDER ACTIVISM IN INDIA, NSE Quarterly
Briefing, April 2013, available at http://www.nse-india.com/research/content/res_QB1.pdf
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party transactions. As per the provision, in case a Board of Director enters into a related party
transaction and does not take the approval of the Board or the shareholders within three months
from the date of entering into such transaction, the same may be held as avoidable at the option
of the Board. Hence, although the aspect of disclosure of the related party transactions to the
shareholder would not have a direct relation to shareholder activism, it would nevertheless
facilitate transparency and promote informedness of the shareholders and the fact that the
shareholders approval may be required for the ratification of a related party transaction may be
treated as a provision in furtherance of Shareholder Activism. Another important provision in the
Companies Act, 2013 is that the minority shareholders shall be permitted to select an
independent director. This, in effect would empower the minority shareholders. 140 Thus, the
Companies Act, 2013 also furthers the aspect of shareholder activism.
Significant changes were made to the Listing agreement in 2013 by the SEBI whereby the aim
was to protect the minority shareholders interests in mergers and other forms of corporate
restructuring involving listed companies.141
Assessment of the Reforms
An assessment of the regulatory reforms undertaken in India reflects that the shareholder
participation is sought to be increased, it cannot be denied that shareholder activism shall be self
generated. Another issue that demands scrutiny is that of lack of information available with the
shareholders with regard to the meetings and the Companies Act, 1956 also does not provide an
elaborative framework of dissemination of information regarding the meetings.
SHAREHOLDER ACTIVISM: A RECENT EXAMPLE IN INDIA
Although the Companies Act, 2013 facilitated a few reforms in furtherance of shareholder
activism142, there was a recent instance which reflects shareholder activism in action.
The Children's Investment Fund is a hedge fund in the United Kingdom. TCI holds 1% shares in
Coal India which is a government company wherein the government holds 90% stake. TCI raised
the concern that Coal India has huge government influence and thus was refusing to sell its
products at market prices. TCI also raised issues about the governance of Coal India as a public
140 Section 150 of the Companies Act, 2013
141 ibid
142 Jayanta Mallick, Shareholder Activism gains foothold in 2012, Business Line,
http://www.thehindubusinessline.com/markets/shareholders-activism-gains-foothold-in2012/article4210248.ece
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listed company. According to the Articles of Association 0f Coal India, the President of India has
the power to direct the affairs of the company and the same was received as a satisfactory answer
by TCI. TCI went on to initiate a legal action against Coal India before the Kolkata court. It has
also proceeded to initiate arbitration with Coal India as the opposite party under certain bilateral
investment treaties143. TCI is a hedge fund that has a track record of being successful in terms of
shareholder activism in many other countries.
The main allegations of the TCI in the law suit were that the Ministry of Coal did not permit
Coal Indi as an independent company. Also, the international market pricing norms are not
followed by Coal India. Also, TCI pointed out that the Directors of Coal India were not
performing their duties in a reasonably efficient manner and fail to exercise care and skill; which
is the main reason for the Company running into losses 144. The Government denies to be bound
to follow the international pricing norms and did not accept the allegations of TCI 145. While the
suit remains to be decided, regardless of whether or not TCI succeeds in the case; what needs to
be observed is that shareholder activism can be utilized as a weapon in the hands of the minority
shareholders to enforce their rights.
It can thus be inferred that shareholder activism is a proactive action of the shareholders and
many not require complex reforms for initiation. For instance, class action suit as a provision in
the Companies Act, 2013 did not exist when TCI initiated the suit and set an example of
shareholder activism in India. Thus, it may be further be purported that on account of the recent
regulatory reforms in India, shareholder activism may be seen as a manner of enforcement of
rights of the shareholders against their companies.
CORPORATE GOVERNANCE INTERMEDIARIES
Corporate Governance intermediaries play a significant role in influencing the function of
corporate decision making. Proxy Advisory firms advise the institutional investors regarding the
manner of exercising their votes.146

143 Coal India faces a surprising case of shareholder activism in India, available at
http://www.policymic.com/articles/6356/coal-india-faces-a-surprising-case-of-shareholder-activism-inindia
144 Umakanth Varottil, EMERGENCE OF SHAREHOLDER ACTIVISM IN INDIA, NSE Quarterly
Briefing, April 2013, available at http://www.nse-india.com/research/content/res_QB1.pdf
145 TCI plea to raise prices has no legal basis: Coal India, The Economic Times
http://articles.economictimes.indiatimes.com/2013-01-28/news/36596302_1_cil-directors-coal-pricescoal-india
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It may not be economical for the retail investors to consult the proxy advisors; hence the proxy
investors also make public recommendations regarding exercise of voting rights by shareholders.
The proxy advisors are well established in the international arena in the form of corporate
governance intermediaries and their recommendations have the potential to influence corporate
decision making. In India, the industry of proxy advisors came up in 2010. The major proxy
advisors in India include InGovern, Institutional Investor Advisory Services and Stakeholders
Empowerment Services. These proxy advisors have published various recommendations
pertaining to the corporate proposals in listed Companies in India. The proxy advisors give
recommendations with regard to major corporate decisions such as appointment of auditors,
independent directors and transactions such as mergers and takeovers.147
In cases where the proposals of the managements are against the corporate governance norms,
the proxy advisors recommend the shareholders to vote against the proposal of the management.
The proxy advisors have also recommended against the proposal of the management with regard
to corporate restructuring where the value of the public shareholders may deteriorate after the
corporate restructuring decision is taken. The proxy advisors have also recommended against the
appointment of independent directors and auditors wherein the corporate governance norms are
not followed and the same is not in the interest of the shareholders.148
Hence, on account of proxy advisors in India, the Companies in India cannot disregard the
impact of the minority shareholders and institutional investors. The objective of the proxy
advisors is to act as corporate governance intermediaries and to ensure that the decisions of the
management of the company are not against the corporate governance norms established in
India, by keeping the investors aware of the proposal of the management of companies with
respect to the aspect of corporate governance. Also, the fact that the proxy advisors make their
recommendations public, can be viewed as a mechanism of imposing checks and balances on the
functioning of the proxy advisors. The listed companies in India are under a mandatory legal
obligation to follow the corporate governance standards. However, the close monitoring of the
companies by the proxy advisors would trigger the listed companies to follow higher corporate
146 Paul Rose, On the Role and Regulation of Proxy Advisors, MICHIGAN LAW REVIEW: FIRST
IMPRESSIONS, available at http://www.michiganlawreview.org/articles/on-the-role-and-regulation-of-proxyadvisors

147 Bhuma Srivastava, Proxy advisory firms give a boost to shareholder activism, THE MINT, June 29,
2012, available at http://www.livemint.com/Companies/HeuG8SPSw3zXE4sUYhecqN/Proxy-advisoryfirms-give-a-boost-to-shareholder-activism.html
148 Sucheta Dalal, Proxy advice: Check on Misgovernance, MONEYLIFE, August 11, 2011 available at
http://suchetadalal.com/?id=22ef29a5-277b-916c-4e548f747d82&base=sections&f
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governance norms and may also act as a basis for the companies to follow international best
practices in terms of corporate governance.149
Another benefit of the institutional investors is that the cost of carrying out research and
analyzing the corporate governance norms in terms of the proposals of the management can be
outsourced to the proxy advisors. The advent of the proxy advisors in India can be termed as a
new facet of emergence of corporate governance in India, the efficacy of the mechanism cannot
be determined owing to the fact that the proxy advisors industry has boomed in India in the
recent past.150
Although the mechanism of proxy advisors in India has many advantages, the concerns raised
with regard to the proxy advisors in other jurisdictions needs to be scrutinized. One of the
drawbacks of the system could be that in case a proxy advisor runs for profit and provides
consultancy service to the company with regard to corporate governance and also gives
recommendations to the shareholders, a situation of conflict of interest may arise and the same
needs to be addressed. Also, the policies followed in evaluating the corporate governance norms
in the companies are standardized; they are not evaluated in terms of the nature of the company.
Also, the aspect of responsibility and legal liability of the proxy advisor is not dealt with under
any legislation; hence close monitoring of the mechanism may be required. Also, the proxy
advisors are not amenable to any government intervention; thus the issue of accountability and
transparency in functioning of the proxy advisors may arise. The SEBI could play an important
role in monitoring the proxy advisors and ensuring their liability.151
INTERNATIONAL TRENDS OF SHAREHOLDER ACTIVISM
After the global financial crisis, the phenomenon of shareholder activism has been gradually
increasing. The institutional investors are making an attempt to engage with the management of
the portfolio companies and hedge fund activism also has a chilling effect on the board rooms in
Indian Companies. Retail Investors participation in critical corporate decision has been
recognized by the regulatory reforms world over. In US, the concept of say-on-pay reforms was
introduced whereby the shareholders could participate in decision making with regard to the
compensation payable to executive directors. Access to decision making is another crucial
149Varottil, Umakanth, The Advent of Shareholder Activism in India (October 22, 2012). Journal on
Governance, Vol. 1 No. 6, 2012 Available at SSRN: http://ssrn.com/abstract=2165162 or
http://dx.doi.org/10.2139/ssrn.2165162
150 ibid
151 Sucheta Dalal, Proxy advice: Check on misgovernance, MONEYLIFE, August 11, 2011.
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reform that has taken place. In India and Turkey, the system of e-voting in listed companies was
introduced.152
Efforts are also being taken in the direction of promoting participation of the institutional
investors. The UK Stewardship Code provides for participation of the investors in order to
enhance the overall governance standards.
The role of proxy advisors in shareholder activism has not been denied by the countries.
However, the Countries estimate a possibility of conflict of interest of the proxy advisors with
the firm on one hand and the investor on another hand. Hence, in Europe 153 and United States,
attempts are being made to define the role of proxy advisors without ambiguity.
AN OVERALL PERSPECTIVE OF SHAREHOLDER ACTIVISM: EVALUATING THE
NEED OF SHAREHOLDER ACTIVISM
In the United States of America, the aspect of shareholder activism is exercised through filing of
class action suit. The shareholders in us exert pressure on the management of the company to
follow the good corporate governance practices. The shareholders also closely monitor the
corporate affairs and effectively participate in the meetings to exercise their voting power. The
aspect of shareholder activism in India may be termed as almost non-existent. In order to
promote shareholder activism, the ministry of corporate affairs and Securities and Exchange
Board of India in order to promote protection of investors and raise awareness amongst the
shareholders. Clause 49 of the listing agreement provides for various disclosures and
maintenance of transparency154.
In the Satyam scam, the when the management of Satyam Computers Limited decided to
takeover the Maytas Infrastructure Limited, the Institutional Investors pressurized the
management to withdraw its decision henceforth, the decision was withdrawn only in account of
the pressure faced from the shareholders. After this, the value of the American Depository
Receipts, which were listed in the New York Stock Exchange, fell down. Consequent to this, the
152 Melsa Ararat & Muzaffer Eroglu, Istanbul Stock Exchange Moves First on Mandatory Electronic
Voting, The Harvard Law School Forum on Corporate Governance and Financial Regulation (Nov. 6,
2012) available at blogs.law.harvard.edu/corpgov/tag/muzaffer-eroglu
153 European Commission, Green Paper: The EU corporate governance framework (2011), available at
http://ec.europa.eu/internal_market/ company/docs/modern/com2011-164_en.pdf

154 Shareholder Activism-Healthy trend for Corporate Governance


http://www.lawyersclubindia.com/articles/print_this_page.asp?article_id=1517
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shareholders in the US filed various class action suits against director of Satyam Computers
Limited alleging its directors have committed violations of the US Securities Exchange Act,
1934, by issuing materially false and misleading statements. Hence, in terms of occurrence of
corporate frauds such as the Satyam Fiasco, it becomes exceedingly necessary for the
shareholders to exercise diligence and ensure that their rights are protected. In case of lack of
shareholder activism, major corporate frauds would become rampant. Thus, the Satyam scam can
be viewed as a result of failure of corporate governance on the part of the Company and lack of
shareholder activism.
Shareholder activism in India is at a nascent stage and comes to the fore only in instances where
institutional investors holding a significant stake are in a position to question the quality of
corporate governance.155 The minority shareholders are generally not aware of the means through
which they can exercise their rights and in order to enhance good corporate governance
practices, increased activism on the part of the shareholders is extremely critical. 156 The exercise
of rights by the minority shareholders in terms of shareholder activism can be regarded as a step
to ensure furtherance of promotion of corporate governance.
The landmark Companies Act, 2013 has put in an impressive framework for making firms more
accountable to shareholders, but the provisions on corporate governance will have teeth only if
shareholders start exerting their rights157.
The TCI case was the first instance in India wherein a listed company was threatened by an
institutional investor with regard to corporate governance practices. The role of institutional
investors in furtherance of corporate governance is extremely significant. Also, recently, the
Vedanta Restructuring instance, Vedanta announced the merger of Sesa Goa and Sterlite
Industries. The institutional investors had protested against the merger.158
The need for shareholder activism can be brought out by analyzing the issues that are a setback
in enforcement of the rights by the shareholders. For instance, the shareholders do not exercise
155 Enhancing Transparency and Accountability in Indian Corporates, available at
http://www.kpmg.de/docs/Enhancing_Transparency.pdf
156 ibid
157 Indias missing shareholder activists,
http://www.livemint.com/Opinion/NvhadreiRdsM4bJbMSTAxK/The-lack-of-shareholder-activism-inIndia.html
158 INSTITUTIONAL SHAREHOLDER ACTIVISM IN INDIA, http://www.ingovern.com/wpcontent/uploads/2012/03/Institutional-Shareholder-Activism-in-India.pdf
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their rights and abstain from voting; this is the most crucial reason for the lack of shareholder
activism in India, The regulatory system in India is not considered effective enough and the
extent of time taken in resolving a grievance of a shareholder act as a major drawback159

CHAPTER IV:
CONCLUSIONS AND SUGGESTIONS
In light of the discussion on Investor Protection and Corporate Governance, it may be reflected
that the Indian legal and regulatory framework of corporate governance is elaborative enough to
encompass the aspect of investor protection in listed companies. The Listing Agreement provides
an extensive set of disclosures that shall be mandatorily be made to the shareholders of the
Company. The Companies Act, 1956, Securities and Exchange Board of India (Issue of Capital
and Disclosure Requirements) Regulations, 2009; SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 and SEBI (Prohibition of Insider Trading Regulations) 1992 which
was amended in 2002 also provide for various aspects that shall be disclosed to the shareholders
by the companies. The mandatory requirement of the Shareholders Grievance Committee has an
extremely significant role in safeguarding the shareholders and redressing their grievances on a
timely basis. Although the efficacy of the Shareholders Grievance Committee depends on the
members of the Committee and the perspective of the company with regard to corporate
governance, the mandatory provision of setting up of a Shareholder Grievance Committee has far
reaching implications in terms of safeguarding the interests of the investors.
The corporate governance framework in India is very extensive and makes every attempt to
protect the investors interests. In fact investor protection can be termed as a manifestation of
good corporate governance practices in India. Tracing out the history and evolution of corporate
159 Shareholder Activism: Greenmail to Governance , http://www.advantageindia.in/GreenmailtoGovernance.pdf
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governance in India reflects that the role of maintenance of transparency in the Company shall be
considered as extremely significant in ensuring that good corporate governance practices are
followed. Thus, the amendment to the Listing Agreement requires an elaborative set of disclosure
norms that shall be followed by the Company. The reason for the amendment to the Listing
Agreement was that maintenance of transparency in the company shall be extremely significant
to ensure the protection of investors in India.
An analysis of the Satyam Fiasco and the Reebok Fraud Case reflects that good corporate
governance practices are the bedrock of investor protection. Such corporate frauds and unfair
trade practices occur owing to the lack of good corporate governance in India. Hence, the need of
corporate governance arises in order to facilitate protection of the investors. These corporate
frauds occurred on account of loopholes in the corporate governance of the companies. Hence,
the role of corporate governance in furtherance of investor protections shall be recognized.
It can also be inferred that the institutional shareholders have an important role to play
influencing the corporate to follow good corporate governance practices. The institutional
investors can establish a dialogue with the management of the company and ensure that they
review the strategies, disclosure norms and many other aspects. This would create accountability
on the management to follow good corporate governance practices as this would create a level of
answerability.
The aspect of shareholder activism has also been discussed in light of the corporate governance
framework in India. It can be concluded that the regulatory reforms in India provide a much
larger scope of enhancement of shareholder activism. However, it cannot be denied that the
reforms would be meaningless if the shareholders do not be aware of their rights and make an
attempt to enforce these rights. Thus, in effect, shareholder activism bottles down to proactive
action on the part of the shareholders. In case the shareholders make an attempt to participate in
the management of the company, the corporate governance practices of the company would be
enhanced to a great extent. Also, the shareholder activism can be used as a tool in the hands of
the shareholders to enforce their rights and influence decisions of the management. The
corporate governance mechanism in the company may be enhanced on account of the
shareholder activism. However, it cannot be denied that the shareholder activism is in the nascent
stage in the current Indian scenario. The need of shareholder activism arises because the
companies indulge in unfair trade practices and corporate fraud and evade the corporate
governance norms. Hence, the shareholders shall act proactively and ensure that the company
maintains transparency and does not take any decision that goes against the interest of the
investors. The Companies Act, 2013 has provided for the aspect of class action suits. This can be
viewed as a step toward promotion of shareholder activism in India because in case a class of
investors is dissatisfied with the management, they can proceed against the company and enforce
their rights. Thus, the Companies Act, 2013 can be termed as a furtherance of investor protection
India.
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The aspect of Corporate Governance in unlisted Companies also requires a scrutiny. The
corporate governance framework in India does not mandate corporate governance practices in
Unlisted Companies. The Corporate Governance Voluntary Guidelines, 2009 provide for various
disclosures that shall be made by the companies. It can be inferred that the Guidelines encompass
the aspect of investor protection in terms of corporate governance. However, these guidelines are
not mandatory in nature although they provide for a comply-or-explain basis of enforcement.
These guidelines do address the need of investor protection impliedly by laying down a series of
disclosures that shall be made to the shareholders by the company. However, these guidelines are
not adequate enough because it is easy to evade the guidelines and the enforcement of these
guidelines poses another issue. A perusal of the Companies Act, 1956 provides that the
shareholders have various rights in terms of proceeding against the company for winding up,
oppression or mismanagement and the Act as such does not provide for the rights of the
shareholders in terms of enforcing disclosures in terms of corporate governance which are
necessary for the protection of the investors. The protection of the minority shareholders in the
company is also another issue that needs to be addressed since the framework of the Companies
Act, 1956 and the Corporate Governance Voluntary Guidelines, 2009 are not adequate enough to
protect the rights of the minority shareholder.
It is thus suggested that legal and regulatory framework shall be developed in India in terms of
Corporate Governance encompassing the need for investor protection. In effect the hypothesis
stands proved. The reason is that the disclosure norms required by the Listed Companies is
adequate enough to address the issue of protection of investors. Various clauses of the Listing
agreement provide for a series of disclosures that need to be made by the company to the
shareholders. These disclosures entail maintenance of transparency in the Company and the same
shall be construed as the basis of the protection of investors. However, one aspect that cannot be
disregarded is that regardless of the efficacy of the company in terms of corporate governance,
the need of shareholder activism cannot be ruled out because shareholder activism has an
extremely important role in ensuring that the company continues to follow good corporate
governance practices and does not indulge in such activities that would defy the interest of the
investors.
Hence, inspite of the adequacy of the legal and regulatory framework of Corporate Governance
in India in listed companies, the adequacy would hold no meaning if the shareholders do not act
proactively, ensure that their rights are protected and that the concerned organization does not
indulge in any practices that would defy the interests of the investors. Finally, owing to the fact
that in unlisted companies, there is no such mandatory requirement to follow corporate
governance practices; legal and regulatory framework shall be developed in India with regard to
the protection of the investors since the protection of the investors in unlisted companies is an
equally critical issue.

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Section 245
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