Minority Shareholder Protection: A Study

on The Oppression reference to Majority

Rule

ABSTRACT:

The debate on the Majority rule and Minority rights has been the pivotal point of
discussion since a long time. The legal positioning that existed was that the rule of majority will
prevail if it is in accordance with the provisions of the company law1

Therefore, it is only majority of members who can control the board of directors. The
majority in most cases maintained their rights without considering the interests of minority
which results in the violation of the rights of minority. But the recent amendments to the
Company laws have restricted this rule of majority supremacy to some extent. In this paper, we
will attempt to study the recent amendments to the majority rule and understand the rights of the
minority shareholders given in Companies Act of 1956 vis-à-vis the Companies Act of 2013.
The judicial pronouncements on this subject has also been considered.

INTRODUCTION:

The members holding the maximum shares are considered to be the majority shareholders
in a company. The Company Law does not define the term “minority shareholder”. But
generally, it is understood that those holding the minor shares are known as Minority
shareholders. It can also be understood by saying that minority shareholders are those who hold
such amount of shares which does not give them the control over the company.

This principle is that the will of the majority should prevail and bind the minority is
known as the principle of majority rule. The management of a company is usually based on the
majority rule. The general rule in any company is that the directors are the elected
representatives of the company and hence, they have the right to manage the affairs of the
company. Those rights that are not given to the directors are exercised by the members in their
general meeting. This decision is usually decided on the basis of majority. Thus, the majority
rule means the right of the majority shareholders to run the company and manage its affairs. This
in turn means that the majority has its way in the general meeting. The rights of the minority
shareholders are hence, limited in any company and their rights have been violated many a times.

1
Foss v. Harbottle (1843) 67 ER 189
STATEMENT OF PROBLEM:

Why there are still oppression of minority shareholder in India despite the protection
given under Company law?

HYPOTHESIS:

Low enforcement of laws is the reason for oppression of minority shareholders in India.

OBJECTIVES:

1. To study about the minority protection offered in India.

2. To understand the existing rights of the minority shareholders and to analyse the current
situation of the rights of the minority shareholders in the India.
3. To understand how far the majority rule and minority rights has evolved in India.
4. To study the recent trends in minority shareholder activism.

COMPARATIVE STUDY ON MINORITY RIGHT UNDER COMPANIES ACT, 1956

AND COMPANIES ACT, 2013 :

Despite the fact provisions have been in place under the CA 1956 to protect the interest
of the minority shareholders, the minority has been incapable or unwilling due to lack of time,
recourse or capability- financial or otherwise. This has resulted in the minority to either let the
majority dominate and suppress them or squeeze them out of the decision making process of the
company and eventually the company. CA 2013 has sought to invariably provide for protection
of minority shareholders rights and can be regarded as a game changer in the tussle between the
majority and minority shareholders. Various provisions have been introduced in CA 2013 to
essentially bridge the gap towards protection and welfare of the minority shareholders under CA
1956.

Presently, 'minority shareholders' are not defined under any law, however, by virtue of
Section 395 and Section 399 of CA 1956, minority shareholders have been set out as ten percent
(10%) of shares or minimum hundred (100) shareholders, whichever is less, in companies with
share capital; and one-fifth (1/5) of the total number of its members, in case of companies
without share capital. In general terms, minority shareholding can be understood to mean holding
such amount of shares which does not confer control over the company or render the shareholder
with having a non-controlling interest in a company. CA 1956 provides for various provisions
dealing with situations wherein rights of minority shareholders are affected and the same can be
divided into two major heads, i.e., (a) oppression and mismanagement of the company; and (b)
reconstruction and amalgamation of companies.

OPPRESSION AND MISMANAGEMENT:

CA 1956 provides for protection of the minority shareholders from oppression and
mismanagement by the majority under Section 397 and 398 Oppression as per Section 397(1) of
CA 1956 has been defined as 'when affairs of the company are being conducted in a manner
prejudicial to public interest or in a manner oppressive to any member or members' while the
term mismanagement has been defined under Section 398 (1) as 'conducting the affairs of the
company in a manner prejudicial to public interest or in a manner prejudicial to the interests of
the company or there has been a material change in the management and control of the company,
and by reason of such change it is likely that affairs of the company will be conducted in a
manner prejudicial to public interest or interest of the company'. Right to apply to the Company
Law Board in case of oppression and/or mismanagement is provided under Section 399 to the
minority shareholders meeting the ten percent shareholding or hundred members or one-fifth
members limit, as the case may be. However, the Central Government is also provided with the
discretionary power to allow any number of shareholders and/or members to apply for relief
under Section 397 and 398 in case the limit provided under Section 399 is not met.

On the other hand, CA 2013 provides for provisions relating to oppression and
mismanagement under Sections 241-246. Section 241 Section 244(1) provides for the right to
apply to Tribunal under Section 241, wherein the minority limit is same as that mentioned in CA
1956. Under CA 2013, the Tribunal may also waive any or all of the requirements of Section
244(1) and allow any number of shareholders and/or members to apply for relief. This is a huge
departure from the provisions of CA 1956 as the discretion which was provided to the Central
Government to allow any number of shareholders to be considered as minority is, under the new
CA 2013 been given to the tribunal and therefore likely to be exercised by the tribunal

TO FURTHER BRIEFLY EXAMINE A FEW PROVISIONS OF CA 1956 VIS-A-VIS THE PROVISIONS OF CA

2013:

Provision of Section 397 and 398 of CA 1956 are combined in Section 241 of CA 2013 and accordingly
applications for relief in cases of oppression, mismanagement etc. will have to be directed to the
tribunal.

While the powers of the Tribunal under CA 1956 on application under Section 397 or 398 and Section
404 were limited, CA 2013 granted additional powers to the Tribunal including to:

(a) restrictions on the transfer or allotment of the shares of the company;

(b) removal of the managing director, manager or any of the directors of the company;

(c) recovery of undue gains made by any managing director, manager or director during the period of his
appointment as such and the manner of utilisation of the recovery including transfer to Investor
Education and Protection Fund or repayment to identifiable victims;

(d) the manner in which the managing director or manager of the company may be appointed
subsequent to an order removing the existing managing director or manager of the company;

(e) appointment of such number of persons as directors, who may be required by the Tribunal to report
to the Tribunal on such matters as the Tribunal may direct; and

(f) imposition of costs as may be deemed fit by the Tribunal.

he requirement of establishing existence of 'just and equitable' circumstances to waive any and
all requirements of the section pertaining to the meeting the minimum minority limits and
providing 'security' while allowing such an application are excluded from the Companies Act,
2013.

Further, by way of Section 245, CA 2013 has introduced the concept of class action which was
non-existent in CA 1956.

Minority Shareholders Protection: Assessment and Challenges This section appraises issues
related to minority shareholders’ rights and their protection. Before proceeding further, it is
important to establish, the identity of minority shareholders. They are shareholders (or investors),
who are not in a controlling position of the company and dependent upon the wishes/actions of
dominant majority shareholders. One of the important objectives of corporate governance is that
all the shareholders should be treated equally, also taking into consideration minority
shareholders2 Majority shareholders are well positioned, as either being in the management or
control of the management, to protect their rights. Minority shareholders are not in the same
position as that of dominant shareholders. Therefore, minority shareholders require protection of
law and that decrees effective basis of corporate governance in India. Corporate governance
should give sufficient opportunity to minority shareholders for protection of their rights and
redressal in case of violation of rights. This section assesses current Indian practices and
benchmarks it on the OECD Principles of Corporate Governance that postulates that all the
shareholders should be treated equally including all the minority and foreign shareholders. The
World Bank Report on the Observance of Standards and Codes3 , which yardsticks India’s status
on with OECD principles has not rated India very well in the treatment of minority shareholder
and the protection of their rights.

EQUITABLE TREATMENT OF SHAREHOLDERS PARTICULARLY IN REFERENCE

TO MINORITY SHAREHOLDERS AND OPPORTUNITY TO GET EFFECTIVE
REDRESSAL FOR VIOLATION OF THEIR RIGHTS:

Minority shareholders have been given protection under the Companies Act, 1956. Under
Section 397 and 398 of the Act, minority shareholders in case of oppression or mismanagement
by controlling shareholder/ management may seek relief by approaching the Company Law
Board (CLB). However, minority shareholders may seek redressal from CLB only under
condition of at least 100 shareholders or hold at least 10% of shares under section 399 of the Act.
Minority shareholders if not satisfied may file a petition in the High Court or Supreme Court of
2
OECD. Principles of Corporate Governance, 2004
3
World Bank, Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country
Assessment: India, World Bank-IMF, Washington, DC, USA, 2004.
India. Varottil, however, points these provisions for minority shareholder’s protection are
inadequate and inefficacious “Minority shareholders are required to satisfy certain prerequisites
from substantive point of view before can espouse their cause”. 4

Further, irregularities exist in share registration and transfer, hindering minority shareholder to
get their proper redressal of grievance. Varma also suggest that the provisions of the Companies
Act, 1956 for safeguarding minority shareholder are effective only under extreme cases of mis-
governance and winding5 World Bank report points that shareholders may file derivative and
class actions suits to dominant shareholder/ management only under certain cases. Moreover, the
delay in court proceedings and judgment hinders safeguarding shareholder rights. Courts in India
have a massive number of pending cases, with case adjudication extending from 5 to 20 years
and even beyond 20 years in some stances ([4, 13, 27]). Clause 49 of the Listing Agreement
(Section VI (C)), mandates listed companies to have a “Shareholder Grievance Committee”.
Non-executive director should be the Chairman of this committee to redress the grievance of
shareholders and investors. However, the efficacy of such committees is still questionable due to
possible allegiance of non-executive director with management. Such committee has not proven
very successful. SEBI has also been very to slow take actions on companies for shareholder
grievance redressal.

INSIDER TRADING AND SELF-ABUSIVE DEALING SHOULD BE PROHIBITED :

In India, insider trading is prohibited and regulated by SEBI’s Prohibition of Insider Trading
Regulations, 1992. Further, from 1995 onwards stock exchanges have to establish a surveillance
unit to keep check on insider trading as directed by SEBI. Under Clause 49of the Listing
Agreement, senior management has to make disclosures to the board relating to all material
financial and commercial transactions, where they have a personal interest that may be
potentially conflicting with the interest of the company at large. Directors have also to disclose
their shareholding if it exceeds beyond a given threshold limit. World Bank Report suggests
promulgated law prohibits insider trading, but still it is not uncommon in India. Though, insider
trading in India is limited mostly to junior employees, but in certain cases of mergers, dominant
shareholders have often been involved in insider trading through friends or relatives Recent
Satyam fraud further gives some evidence that dominant shareholders and some employees were
involved in insider trading.6

DIRECTORS AND MANAGERS OF THE COMPANY SHOULD DISCLOSE ANY

MATERIAL INTEREST IN TRANSACTIONS OR MATTERS AFFECTING THE
CORPORATION:
4
Varottil, U.,“A Cautionary Tale of the Transplant Effect on Indian Corporate Governance”, National Law School of
India Review, Vol. 21, No. 1, 2010, pp. 1–49.
5
Varma, J.R.,“Corporate Governance in India: Disciplining the Dominant Shareholder”, IIMB Management Review,
Vol. 9, No. 4, 1997, pp. 5–18.
6
Singh J.P.; Kumar, N.; Uzma, S.,“Satyam Fiasco: Corporate Governance Failure and Lessons Therefrom”, IUP
Journal of Corporate Governance, Vol. 9, No. 4, 2010, pp. 30-39.
In India, related party is defined as senior management directors, and their close family
members. There exist a number of provisions to deal with the issue of related party transactions
in India. Sections 297, 299 and 300 of the Companies Act, 1956 have provisions on related party
transactions, but without teeth and come with regulatory hurdles. However, Accounting Standard
(AS18), which requires companies to disclose all the related party transactions, has somewhat
improved the situation. Under Clause 49 of the Listing Agreement , audit committee should
review and approve all the related party transactions. Further¸ Auditing and Assurance Standard
23 makes it necessary on the part of auditor to identify and disclose the related party transaction
in the financial statements. In India, therefore, plethora of laws exists for related party
transactions. However, World Bank report and OECD7 regard abusive related party (where
dominant shareholders/ promoter are involved) as one of the major corporate governance issues
in India. Promoters through related party transactions use firm’s assets for private benefits. In
family managed firms, many of the transactions occur between controlling shareholder and firm
that result in expropriation of shareholder wealth. Expropriation may come in several forms
involving a series of self-dealing transactions through the sale of goods and assets and services,
loan from the company on preferential basis, or through the transfer of assets from one company
to another.8 Indian companies majority of which are family controlled, strive only to comply
with inescapable stipulations of law and always endeavor to get better of existing ambiguities.9
Failed Satyam- Maytas deal resulting in exposure of Satyam scandal is a typical example ([21],
[22]). Purohit, enlist many cases where promoters were involved in abusive related party
transactions [17].

7
OECD (2009),“ Guide on Fighting Abusive Related Party Transactions in Asia”, Corporate Governance Series,
September 2009.
8
Johnson, S.; La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A., “Tunneling”, American Economic Review, Vol. 90, 2000,
pp. 22-27.
9
Kumar, N. (2011),“Curbing and Monitoring Related Party Transactions: A Way Forward to Enhancing Corporate
Governance Standard in India”, November 29, [Online] Available: