Shareholders' Rights & Shareholder Activism 2024 Comparisons

The Companies Act, 2013 ( “Act”) is the primary legislation in India relating to companies. The Act provides for two main types of companies that can be formed in India:

• a private company whose articles of association ("articles") restrict the right to transfer its shares, limit the number of its members and prohibit invitation to the public to subscribe to its securities; and
• a public company.

The Act also allows a one-person company, which is a private company with only one person as its member.

These companies can be limited by shares, by guarantee, or be an unlimited company.

Additionally, a subsidiary of a company that is not a private company is deemed a public company, even if its articles classify it as a private company.

Foreign investors typically prefer to establish a private company limited by shares for their investments and ventures in India. This is because the Companies Act exempts private companies from several regulations, giving them a more advantageous position compared to public companies. The compliance requirements for private companies are less stringent than those for public companies, allowing for greater flexibility in management and operations.

Foreign investors are not permitted to set up a one-person company as only a natural person who is an Indian citizen – regardless of whether they reside in India or not – is eligible to be a member of such company.

A company limited by shares can issue two kinds of shares: equity shares and preference shares. Equity share capital can be issued either with voting rights or with differential rights with respect to dividends, voting or otherwise. Preference share capital refers to the share capital of the company and carries or would carry preferential rights or accords priority with regards to the payment of dividends and repayment in case of a winding-up or repayment of capital.

A private company may issue (on terms it deems appropriate) any type of share capital. However, private companies typically restrict their share capital to the two types mentioned above.

An equity shareholder has the basic rights to:

• attend and vote on resolutions at a general meeting;
• receive copies of the annual report, notice of a general meeting and declared dividends; and
• inspect documents such as the members’ register and the minutes of general meetings.

The basic rights attached to shares are set out in the Act and/or the terms of the issue. A company’s articles may provide for additional rights for a specific shareholder/shareholders’ group, provided such additional rights do not conflict with the provisions of the Act.

Where the share capital of a company is divided into different classes of shares, the rights attached to the shares of any class may be varied through the following measures, provided that the provision with respect to such variation is contained in the company’s memorandum of association (“memorandum”) or articles:

• with the consent in writing of the holders of not less than 75% of the issued shares of that class; or
• by passing a special resolution at a separate meeting of the holders of the issued shares of that class.

In the absence of such a provision in the memorandum or articles, such variations can still take place if the terms of the issue of shares of that class do not prohibit them.

Furthermore, if variation by one class of shares affects the rights of another class of shareholders, the consent of 75% of that other class of shareholders shall also be obtained.

There is currently no minimum paid-up share capital requirement under the Act for the types of companies mentioned in 1.1 Types of Company, regardless of whether the company is incorporated by persons resident in India or outside India.

The minimum number of shareholders for the types of companies mentioned in 1.1 Types of Company are as follows:

• for a private company – two; and
• for a public company – seven.

Under the Act, there is no requirement for any such shareholder to be residing in India. However, foreign direct investment (FDI) in India is limited/restricted in certain sectors/business activities; where 100% FDI is not permitted in a sector, the balance of the shareholding is to be held by a shareholder(s) who is a person resident in India. Further, as per the current regulatory regime, FDI from shareholders based in countries that share a land border with India requires the prior approval of the Government of India.

Where there are two or more sets/groups of shareholders in a company, it is common to have a shareholders’ agreement (SHA) or joint venture agreement (JVA), the relevant provisions of which are also reflected in the charter documents of the company (memorandum and articles).

The typical provisions included in a SHA/JVA pertain or relate to:

• the ownership percentage;
• management of the company, the constitution and composition of the board and the representation rights of each party;
• the conduct and proceedings of the board and shareholders’ meetings (including quorum, reserved matters, etc);
• future funding, provisions on the transfer of shares, exit options, assignment, non-compete and non-solicitation; and
• other usual provisions (such as arbitration, governing law, information rights, confidentiality, termination, etc).

The enforceability of SHAs/JVAs has been a subject matter of extensive litigation, with conflicting judgments of the High Courts of different states on the matter. Pursuant to the court judgments and certain changes in the law, it can be deduced that SHAs/JVAs are enforceable as contracts between the contracting shareholders/parties. However, for the contracting shareholders to enforce the relevant provisions of the SHA/JVA against the joint venture company or other shareholders, the provisions of the agreement shall be incorporated in the articles. Articles constitute a contract between each member and the company, and between the members inter se. Furthermore, the provisions of the Act have effect notwithstanding anything to the contrary contained in any such agreement, and any provision contained in such an agreement shall, to the extent to which it is repugnant to the provisions of the Act, become or be void, as the case may be.

In respect of public companies (whose shares are freely transferrable), even the Act now recognises that any contract or arrangement between two or more persons in respect of the transfer of securities shall be enforceable as a contract.

A number of matters prescribed under the Act are required to be transacted only at a general meeting of the shareholders. All general meetings except the annual general meeting (AGM) are referred to as extraordinary general meetings (EGM).

AGM

Every company is required to hold an AGM each year. An AGM is called by giving not less than 21 clear days’ notice, either in writing or through electronic means. An AGM may also be convened at shorter notice with the consent (in writing or electronically) of not less than 95% of the members entitled to vote thereat.

In addition to other matters that are reserved for the Annual General Meeting (AGM) under the law or the company’s articles (known as special business), the AGM must handle ordinary business matters. These include reviewing the financial statements and reports from the directors and auditors, declaring any dividends, appointing directors to replace those who are retiring, and deciding on the appointment and remuneration of the auditors.

EGM

All matters other than the ordinary business matters to be transacted at an AGM can be transacted at an EGM. Please see 2.3 Procedure and Criteria for Calling a General Meeting.

An EGM can be called by providing at least 21 clear days’ notice, which can be given either in writing or electronically.

Additionally, an EGM can be convened on shorter notice if the majority of members representing at least 95% of the paid-up share capital eligible to vote at the meeting consent.

Shareholders cannot independently call and hold an Annual General Meeting (AGM); it is the responsibility of the board to convene the AGM each year within a specified timeframe.

An EGM can be called by the board whenever deemed necessary or upon the written request of shareholders who collectively hold at least 10% of the paid-up share capital with voting rights. This request must be submitted at least 21 days before the proposed date of the EGM. The notice shall state the matters to be discussed at the meeting and should be signed by those making the request. The board is required to convene the EGM within the specified time frame. If the board fails to do so, the shareholders who made the request have the right to call and hold the EGM themselves within the same period. Additionally, under certain circumstances, the Tribunal may also convene an EGM or AGM.

All shareholders of a company are entitled to receive notice of general meetings and have the following basic information and inspection rights:

• to receive the audited annual financial statements along with the auditor’s report and the directors’ report thereon;
• to receive the notice of the general meeting along with an explanatory statement setting out the material facts concerning each item of special business to be transacted at the general meeting;
• to inspect the minutes book of the general meetings;
• to inspect the statutory registers maintained by the company under the Act, such as the register of members, the register of contracts or arrangements in which directors are interested; and
• to inspect the annual returns submitted by the company.

The shareholders’ meetings are held physically. However, COVID-19-related restrictions on the movement of persons in 2020 led to the government permitting companies to hold such meetings through videoconferencing or other audio-visual means for a prescribed period, which has been repeatedly extended by the government and is currently valid until 30 September 2025. Certain classes of companies are also required to provide e-voting and postal ballot facilities to shareholders.

The quorum requirements for the general meetings are as follows.

• For a public company, if on the date of the meeting, the total members of the company are:
1. not more than 1,000 – five members personally present;
2. between 1,000 and 5,000 – 15 members personally present; and
3. more than 5,000 – 30 members personally present.
• For a private company – two members personally present.

However, the articles can provide for a higher quorum.

There are two primary types of resolutions, which the shareholders pass by casting their votes either on a show of hands, electronically or in a poll: an “ordinary resolution” and a “special resolution”.

An ordinary resolution is a resolution for which a notice has been duly given and must be passed by a simple majority (votes cast in favour exceed the votes against the resolution).

A resolution is classified as a special resolution when the notice for the general meeting clearly indicates the intention to propose it as such. Additionally, if any other form of communication has been provided to the members, this also qualifies as notifying them. For a special resolution to be approved, the votes in favour must be at least three times the number of votes cast against it. In practical terms, this means that at least 75% of the votes must be in favour of the resolution for it to be adopted.

Only the votes of members who are “entitled and voting” are counted.

The Act also prescribes a special majority for very few matters – eg, a compromise or arrangement with creditors and members requires the approval of the majority of members representing 75% in value of the share capital voting in person or by proxy or by postal ballot.

Certain matters are reserved under the Act for shareholders’ approval by way of ordinary resolution or special resolution.

Matters requiring ordinary resolution include:

• appointing a director in place of those retiring;
• considering the audited financial statements and the reports of the directors and auditors;
• declaring a dividend;
• appointing auditors and fixing their remuneration;
• removing a director;
• entering into certain related party transactions; and
• altering the memorandum to increase, consolidate, sub-divide, convert or cancel share capital.

Matters requiring special resolution include:

• altering the objects clause in the memorandum of a company or changing the place of its registered office from one state to another;
• changing the name of a company;
• altering the articles;
• varying the rights of special classes of shares;
• reducing the share capital;
• making loans and investments or providing guarantee or security in excess of the prescribed limits (not applicable to a private company);
• removing the auditors; and
• winding up the company voluntarily.

Voting Rights

Every member of a company limited by shares who holds equity share capital therein shall have a right to vote on every resolution placed before the company, and their voting right on a poll shall be in proportion to their share in the paid-up equity share capital of the company. If a company has issued equity shares with differential rights as to voting and dividends, voting rights would then be computed accordingly. In the case of voting by a show of hands, each shareholder is entitled to one vote.

Preference shareholders can vote only on resolutions affecting their share rights. However, if their dividends are unpaid for two or more years, they gain the right to vote on all matters at general meetings, like equity shareholders.

Voting by Proxy/Authorised Representative

Proxy: a member of a company is entitled to appoint another person (who need not be a member of the company) as a proxy, who shall attend and vote at general meetings on behalf of such member. Proxy is not permitted to speak during the meeting and can only vote on a poll.

Authorised representative: a corporate member of a company may, by a resolution of its board or other governing body, authorise any person it deems fit to act as its representative at any general meeting of the company. Such an authorised representative is treated as a member personally present.

Manner of Voting

The Act provides for the following manner of voting by shareholders.

• Show of hands: the voting in any general meeting on a resolution is conducted through a show of hands unless a poll is demanded or the voting is carried out electronically. A proxy cannot vote by show of hands.
• Poll: before or on the declaration of the voting result on any resolution on a show of hands, the chair of the general meeting may (on its own motion) order a poll to be taken. The chair shall order a poll to be conducted if a request is made by members present in person or by proxy (when permitted) who collectively represent at least 10% of the voting power or hold shares with a total paid-up amount of at least INR500,000.
• Electronic means: every company that has listed its shares on a recognised stock exchange, as well as any company with at least 1,000 members, is required to provide its members with the ability to vote on resolutions proposed for consideration at a general meeting through electronic means.
• Postal ballot: Any item of business that is not considered an ordinary business, as well as any matters for which directors or auditors have the right to be heard at a general meeting, may also be conducted through a postal ballot (ie, the casting of a vote by a shareholder via postal or electronic means). For companies with more than 200 members, certain prescribed matters must be specifically transacted through postal ballot.

For voting by poll, electronic means, or postal ballot, a scrutiniser is appointed to oversee the voting process and ensure that it is carried out fairly and transparently.

A shareholder cannot bring up a specific issue to be considered or resolved and put it to vote at the general meeting if the said issue was not included in the agenda/notice convening the general meeting. However, shareholders holding the prescribed number/percentage of shares can requisition the company to:

• give notice to members of any resolution which may properly be moved and is intended to be moved at a meeting, and the company shall be bound to give notice of such resolution if the same was deposited not less than six weeks before the meeting; and
• call an EGM and set out the matters for consideration at the EGM so requested (see 2.3 Procedure and Criteria for Calling a General Meeting).

When special notice of a resolution is required by the Act (for example, for the removal of a director) or by the articles, it must be provided by members who hold at least 1% of the total voting power or shares with a paid-up amount of up to INR500,000. Subsequently, the company must notify its members of the proposed resolution in the prescribed manner.

Oppression and Mismanagement

As a general rule, a shareholder cannot challenge a resolution that has been validly passed at a general meeting. However, shareholders do have the option to approach the National Company Law Tribunal (“Tribunal”) to contest a resolution under certain circumstances. Over time, through various decisions, the courts and the Tribunal have outlined the specific situations in which shareholders can seek the Tribunal’s intervention. It is important to note that not every non-compliance with company law, failure to follow required procedures, or a one-time illegality will be sufficient to warrant such intervention by the Tribunal.

The Tribunal may intervene where the complainant shareholder(s) can demonstrate the following:

• Oppression: the affairs of the company have been or are being conducted in a manner prejudicial to public interest or the interest of the company, or in a way that is oppressive to said shareholder or any other member(s) of the company; or
• Mismanagement: a material change has been brought about in the management or control of the company, and the affairs of the company will likely be conducted in a manner prejudicial to its interests, that of its members, or any class of members.

At least 100 shareholders are needed to file a complaint with the Tribunal, or if that number is less than 10% of the total membership, then that smaller percentage can proceed. Additionally, any single member or group of members holding at least 10% of the company’s issued share capital can also bring a complaint. However, the Tribunal has the discretion to waive this requirement so that members can file their complaint. It is important to note that there is no threshold for a shareholder who chooses to approach a civil court, though such courts typically do not handle these matters.

Class Action Suit

Under the Act, a specified number of members can approach the Tribunal if they believe that the management and conduct of the company’s affairs are harmful to the company’s or its members’ interests. They may seek an appropriate order from the Tribunal to declare a resolution that alters the company’s memorandum or articles void, especially if that resolution was passed by suppressing important facts or providing misleading information to the members. Additionally, the Tribunal can restrain the company and its directors from acting on such a resolution.

As a flourishing economy, India has attracted large investments from international investors and financial institutions. Institutional investors and large shareholder groups keep a close watch on their portfolio companies, including their progress, performance and public disclosures made from time to time.

Institutional investors and other shareholder groups actively use the rights attached to their shareholdings, such as voting during general meetings. The involvement of investors and shareholder groups in discussing matters to be transacted by the company in a meeting also influences the public shareholders. Institutional investors engage in dialogue with company management and boards of directors with inputs on strengthening the corporate governance practices and protection of investor rights and interests. By leveraging their shareholding and influence, they also advocate for transparency, accountability, and sustainable practices to be adopted by the company. They also help in ensuring that company aligns its operations with long-term shareholder value, ethical conduct, and regulatory requirements.

A registered holder of shares, also known as the ostensible owner, is required to make a declaration to the company if they do not hold a beneficial interest in those shares. This declaration must include the name and details of the beneficial owner. In turn, the beneficial owner must also submit a similar declaration regarding the registered member. The company will record and report these declarations to the Registrar of Companies.

The Act recognises only the registered owner of the shares as the individual legally entitled to enjoy the rights associated with those shares.

Rights shares, bonus shares and dividends are offered to the registered member. However, the registered member may direct the company to pay the dividend on their shares in favour of the beneficial owner and may renounce the rights shares offered to them in favour of the beneficial owner.

Typically, the beneficial owner enters into a contract with the registered owner, or another instrument is executed for the creation of a beneficial interest, which records the arrangement between the parties with respect to the shares held by the nominee/registered member and, inter alia, provides that the registered member shall hand over the notice of the general meetings received by the registered member to the beneficial owner and that the registered member shall vote on such issues as per the directions and instructions of the beneficial owner. The Act or the company is not concerned with such arrangements between the parties.

As a general principle, all resolutions requiring shareholders’ approval are passed only at a general meeting. However, certain matters are reserved under the Act to be passed (as ordinary or special resolution) only by postal ballot if a company has more than 200 shareholders. Very few matters expressly provided under the Act can also be passed with the written consent of the members, such as variations of the rights of any class of shares (see 4. Cancellation and Buyback of Shares).

The Act provides for pre-emptive rights with regard to fresh issues of shares to a company’s shareholders. In cases where the company intends to raise monies by way of issuing further shares, such shares are first offered to the existing shareholders of the company in proportion to their paid-up share capital (referred to as a “rights issue”), unless the shareholders have decided by way of a special resolution to issue shares to any persons, regardless of whether or not they include any existing shareholders.

In the case of a rights issue, a shareholder may accept or decline an offer for subscribing to the shares on a rights basis, may subscribe for a lower number of shares than offered, or may renounce the shares offered to them in favour of another person, unless the Articles state otherwise.

A private company must limit the transfer of its shares in its articles.

The shares of a public company are freely transferable. However, the Act recognises that any contract or arrangement between two or more persons in respect of the transfer of securities shall be enforceable as a contract.

A company shall not register a transfer of shares (where such shares are held in physical form) unless a proper instrument of transfer in the prescribed format, duly stamped and executed by or on behalf of the transferor and the transferee, is delivered to the company within 60 days from the date of execution (along with a certificate of the securities or a letter of allotment of the securities). That said, the Government of India has recently mandated that every private company (previously, this was mandatory for public companies only), other than a small company, shall issue securities in dematerialised form and shall facilitate the dematerialisation of all its existing securities by 30 September 2024. Further, a company (except those which are exempted) can now transfer the shares only in the dematerialised form. The transfer of shares is now facilitated through the Depositories by the Depository Participants with whom the said companies are registered.

Any transfer of shares (which shall also be in dematerialised form) from a person resident in India to a resident outside India (or vice versa) is also subject to Indian foreign exchange laws – including the sectoral caps on foreign investment, adherence to pricing guidelines and reporting requirements. Furthermore, a transfer of shares from a person resident in India to a resident outside India is also subject to sectoral caps on foreign investment (if applicable) and adherence to prescribed pricing guidelines.

Shareholders have the right to create security interests over their shares through methods such as pledges, charges, or hypothecations unless the company’s articles specifically prohibit this. Private companies are typically required to restrict the transfer of shares in their articles, but they often allow shareholders to establish security interests imposed on their shares for the specific purpose of securing loans for the company.

Unlisted Companies

As stated in section 2.13 Holding Through a Nominee, both the registered owner and the beneficial owner of shares are required to make specific declarations to the company. Additionally, every individual identified as a “significant beneficial owner” of a company must file a declaration with the company. Upon receiving this declaration, the company is obligated to submit a necessary return to the Registrar of Companies.

If a company has knowledge or reason to suspect that an individual (who is not a member of the company) is a “significant beneficial owner,” or that this individual is aware of the identity of a significant beneficial owner, the company must provide notice to that individual in the prescribed manner.

Listed Companies

As per the Securities and Exchange Board of India (SEBI) takeover regulations, the following applies in the case of a listed public company:

• any acquirer, together with persons acting in concert with him, acquiring shares or voting rights in a target company, which taken together aggregates to 5% or more of the shares of such target company, shall disclose their aggregate shareholding and voting rights in such target company to the concerned Stock Exchange(s) and the target company in the prescribed manner; and
• any person, together with persons acting in concert with him, who holds shares or voting rights entitling them to 5% or more of the shares or voting rights in a target company, shall disclose the number of shares or voting rights held and any change in shareholding or voting rights (even if such change results in their shareholding falling below 5%, should there be a change in such holdings from the last disclosure made and if such change exceeds 2% of the total shareholding or voting rights in the target company), to the concerned Stock Exchange(s) and the target company in the prescribed manner.

Furthermore, per the SEBI insider trading regulations, disclosures must be made to the company by every promoter, member of the promoter group and director of the company regarding the shares held, acquired or disposed of by them.

A company may cancel its shares after issue by way of a reduction of share capital by passing a special resolution and through confirmation by the Tribunal, either with or without extinguishing the liability on any of its shares, in any manner. In particular, it may:

• cancel paid-up share capital lost or unrepresented by available assets; or
• pay off any paid-up share that exceeds the company’s wants.

A company may buy back its shares, provided that its articles authorise the same and a special resolution has been passed at a general meeting for the buyback. The board can authorise a buyback of 10% or less of the total paid-up equity share capital and free reserves of the company by passing a resolution at its meeting. A company cannot buy back if it has defaulted in the repayment of deposits, interest payment, redemption of debentures, preference shares, payment of dividend or repayment of any loan.

Key conditions for buyback include the following:

• the buyback should be 25% or less of the aggregate paid-up capital and free reserves of the company, and the buyback of equity shares cannot exceed 25% of the total equity paid-up share capital of the company in any financial year;
• the ratio of aggregate secured and unsecured debt after the buyback to the paid-up capital and its free reserves should not be more than 2:1;
• a declaration of solvency is to be made by the directors and filed with the relevant Registrar of Companies in the prescribed manner before making the buyback; and
• a company may purchase its own shares out of its free reserves, the securities premium account or the proceeds of the issue of any shares or other specified securities, but the buyback shall not be made out of the proceeds of an earlier issue of the same kind of shares or the same kind of other securities.

Buybacks by a company whose shares are listed on a recognised stock exchange are also governed by the provisions of the relevant SEBI regulations.

A company may pay dividends to its shareholders. The board of a company may declare interim dividends, whereas final dividends can be recommended by the board but declared by the shareholders at the AGM. Interim dividends for a financial year can be declared during that financial year or at any time between the closure of the financial year and the holding of the AGM.

A company can only declare or pay dividends for any financial year out of its profits for that year, arrived at after providing for depreciation as per the Act, or out of the profits of any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of the Act and remaining undistributed, or out of both. Where a company proposes to declare dividends out of the accumulated profits earned by it in previous years and transferred by the company to the free reserves, owing to inadequacy or absence of profits in any financial year, such declaration of dividends shall not be made, except in accordance with the prescribed rules.

A company cannot declare or pay dividends from its reserves other than free reserves. Furthermore, no company can declare dividends unless carried over previous losses and depreciation not provided in the previous year or years are set off against the company’s profit for the current year.

Appointment of Directors

Except as otherwise provided in the Act, the company shall appoint every director in a general meeting. The board can appoint additional directors or alternate directors (if the articles permit) or fill a casual vacancy.

In the case of a public company, unless the articles provide for the retirement of all the directors, not less than two-thirds of the total number of directors shall be persons whose period of office is liable to determination by retirement by rotation and eligible to be reappointed at the AGM. Independent directors are not included in the computation of the total number of directors. At the AGM, one-third of such directors, for the time being, are liable to retire by rotation and shall retire from office. At the AGM at which a director so retires, the company may fill the vacancy by appointing the retiring director or some other person.

A person who is not a retiring director can be appointed as a director at any general meeting if he or some member intending to propose him as a director has provided to the company a written notice signifying their candidature as a director or, as the case may be, the intention of such member to propose them as a candidate for that office, along with the deposit of the prescribed amount, which is refundable in prescribed situations.

Removal of Directors

Shareholders have inherent powers under the Act to remove a director by passing an ordinary resolution at the general meeting, pursuant to receiving a “special notice” from shareholders of a resolution to remove a director. The Act provides for an elaborate process to be complied with in relation to the removal of a director.

A notice of intention to propose a resolution must be provided to the company by a group of members holding at least 1% of the total voting power or by members who own shares on which the required aggregate amount has been paid up. Upon receiving this notice, the company is obligated to inform its members about the resolution at least seven days before the meeting, or, if that is not feasible, to publish the notice in newspapers.

The director affected by the resolution has the right to make a written representation and can request the company to distribute that representation to all members. The company is required to do so if there is sufficient time available.

Additionally, an independent director who has been reappointed for a second term can only be removed by a special resolution passed after allowing the director a reasonable opportunity to be heard.

The board is vested with management powers over the company, while shareholders can only exercise power over matters reserved under the Act or the company’s articles for approval. Therefore, shareholders generally cannot interfere with the board’s decision-making process, usurp any authority available to them or challenge a board decision that has been passed in compliance with the Act and is not ultra vires of the memorandum and articles.

The courts/Tribunal in India are usually reluctant to interfere with the management decisions taken in the best judgement of the directors unless it can be proved that the directors acted mala fide in a manner that is prejudicial to the interest of the company, in which case they may approach the Tribunal alleging mismanagement. See 2.11 Challenging a Resolution, which, to a greater extent, applies here as well.

Appointment of Auditors

The first auditor of a company is appointed by the board within 30 days from the date of incorporation. If the board fails to appoint an auditor within this timeframe, the company must appoint one at a general meeting within 90 days. This auditor will hold office until the conclusion of the first Annual General Meeting (AGM).

At the first AGM, the shareholders will appoint an auditor who will hold office until the conclusion of the sixth AGM.

If a casual vacancy occurs in the position of an auditor, the board must fill it within 30 days. However, if a casual vacancy arises due to the resignation of an auditor, the appointment must also be approved by the company at a general meeting. The newly appointed auditor will hold office until the conclusion of the next AGM.

Removal of Auditors

A company may remove an auditor from office before the expiry of its term through the shareholders passing a special resolution at a general meeting only after obtaining the prior approval of the Central Government. The auditor concerned shall be given a reasonable opportunity to be heard.

The company board is required to formulate a Directors’ report, which is attached to the audited annual financial statements for the shareholders’ consideration. Various matters pertaining to the company’s affairs are required to be included in said report, including various aspects of corporate governance such as the number of board meetings held, and related party transactions.

A listed company is also required to provide a corporate governance report to be attached to the Directors’ Report, containing a brief statement on the:

• company’s philosophy on the code of governance;
• composition and category of directors;
• attendance of each director;
• number of shares held by non-executive directors;
• chart or a matrix setting out the skills, expertise and competence of each director;
• various committees of the board, including their terms of reference, meetings held and the attendance of each committee member; and
• remuneration of directors.

A listed company is also required to submit a quarterly compliance report on corporate governance in the prescribed format to the recognised stock exchange(s) within 21 days from the end of each quarter.

The Act does not contain an explicit provision on the duties of a controlling (holding) company towards the other shareholders of the company it controls. The general rule is that the controlling shareholder should not cause the conduct of the company’s business and affairs to be undertaken in a manner that is prejudicial to the interests of the controlled company or any of its other shareholders. A shareholder may approach the Tribunal if the controlling company (majority shareholder(s)) acts in a manner that is oppressive to the minority shareholders (see 2.11 Challenging a Resolution).

Under the Insolvency and Bankruptcy Code, 2016, the corporate debtor by itself (by passing a special resolution of its members) may initiate its corporate insolvency resolution process if it has committed a default in paying a debt that has become due and payable but not paid, by making an application to the adjudicating authority providing the name of the person proposed to be appointed as interim resolution professional. If the resolution process fails, the adjudicating authority may pass a winding-up order.

Under the Act, shareholders of a company may also approach the Tribunal for the company’s winding-up by passing a special resolution. Upon liquidation (by whatever mode, whether by creditors, corporate debtor or the company itself under the supervision of the Tribunal), the liquidator realises and distributes the assets in the order of priority, resulting in a waterfall method as provided under the law. The claims of the equity shareholders over the proceeds from the sale of assets rank last after the insolvency resolution process costs, workers’ dues, debts owed to secured creditors, the wages of other employees, government taxes and dues, amounts payable to preference shareholders, etc.

Shareholders may approach the Tribunal if they believe that the company’s affairs are being conducted in a manner that is prejudicial to the public interest or the interest of the company, or that is oppressive to the shareholder concerned or any other shareholder(s), provided the complaining shareholders meet the criteria for making such an application (as mentioned in 2.11 Challenging a Resolution). They may also bring a class action suit against the company.

Shareholders can bring legal action against a director(s) for:

• any act done in a manner that is prejudicial to the interest of the company;
• fraud on the company;
• any act that goes against the law or the charter documents;
• negligence or breach of their duties as directors;
• any act done in a mala fide manner; or
• the diversion of company funds.

Shareholders can also bring an action against any officer or employee of the company for wrongfully obtaining the possession of any property or wrongly withholding or applying such property for purposes other than those expressed or directed in the articles and authorised by the Act. Shareholders can also remove a director by passing an ordinary resolution and following the process as provided under the Act (see 6.1 Rights to Appoint and Remove Directors).

The Act does not provide an explicit provision regarding a derivative action. However, courts have paved the way for bringing such an action, and some courts have allowed such suits on the grounds of oppression and mismanagement. Such a suit is only maintainable if the shareholders have come with “clean hands”.

Certain elements of a derivative action can be found in “class action” suits, which are alternate remedies available to minority shareholders (see 2.11 Challenging a Resolution). The major difference is that a class action is to sue on behalf of the entire class, whereas, in a derivative action, the directors and officers are sued on behalf of the corporate entity.

Shareholder activism has arrived in India and is growing. Various legal and regulatory provisions or tools are available to activist shareholders under the Act and SEBI regulations to encourage/promote their activism, such as:

• information and inspection rights available to the shareholders;
• the ability of shareholders to appoint and remove directors;
• the facility of e-voting to vote from remote places without physically attending the meeting;
• the right to approve the remuneration of directors in public companies;
• shareholder approval required for the appointment and removal of the director, the payment of dividends, etc;
• shareholders have a right to request a shareholders’ meeting by requiring the board to call an EGM on the agenda of their choice and concern;
• shareholders’ approval required in the case of a listed company for material related-party transactions and in an unlisted company where the transactions are above the prescribed threshold; and
• shareholders have several legal remedies against the prejudicial and oppressive conduct of the company or its directors/officers.

Activist shareholders have become more involved and vocal. They undertake a pivotal and proactive role and leverage their rights to influence the company’s internal and external matters. Activist shareholders usually focus on:

• opposing excessive promoter influence and ensuring good corporate governance, creating transparency with regards to the management of the company or changes in the internal structure of the company due to poor management by the board;
• promoting change in policies governing environment and social governance;
• ensuring the protection of shareholders’ interests and rights;
• financial issues, such as cost cutting, increasing shareholder value, capital inefficiency and under-performance; and
• addressing the problem where the management does not adequately respond to shareholders’ concerns.

Activist shareholders commonly employ various strategies to protect their interests, influence or strengthen corporate governance policies, and bring transparency to the company’s affairs. To pursue such an agenda, activist shareholders employ the following strategies:

• consistent interaction with the board to ensure transparency, giving strategic advice, and actively participating through a stakeholders’ relationship committee;
• requesting the board to convene a general meeting to discuss a particular agenda;
• organising campaigns or making public announcements of their opinion on a particular matter proposed to be transacted at a meeting or after such matter has been passed;
• using legal remedies such as approaching the Tribunal on the grounds of company affairs being conducted in a manner that is prejudicial to the company and its shareholders or initiating a class action suit; and
• filing a complaint with SEBI on the grounds of a breach of governance norms as prescribed for listed companies.

Activist shareholders do not need to acquire a large shareholding in the target company; even with a small stake, they may pursue their agenda by seeking other shareholders’ support.

In India, shareholder activism is a recent phenomenon that is not specific to any industry or sector. Of late, institutional investors have targeted or taken an interest in promoter-driven companies and recently listed companies, addressing issues such as succession, governance issues, enhanced remuneration proposals for promoter directors, related party transactions, the induction of independent directors and the alteration of articles proposing to give more management control and powers to the promoters. Some examples of companies targeted by such activists in the recent past include Zee TV, Dish TV, FSN E-Commerce Ventures Ltd. (Nykaa), Sun TV, Zomato, Eicher and Burger King. Recently, a class action suit was filed against Jindal Poly Films, accusing the company of selling preference shares to promoter entity at depressed valuations, causing a loss to minority shareholders. Investors of an EdTech company Byju’s filed a case of oppression and mismanagement before the Tribunal and sought its founding director’s removal. Certain shareholders of ICICI securities attempted a class action lawsuit against the company’s delisting and merger plan with ICICI Bank. Trends suggest that there has been a gradual rise in the litigations being initiated by aggrieved shareholders.

In India, institutional investors (including mutual funds, insurance companies and foreign portfolio investors) are more active than individual shareholders.

Activist shareholders have been seen to play a vital role in achieving decent success. Pursuant to such activism, resolutions for certain matters involving promoters have been rejected, such as enhanced remuneration proposals for promoter directors, altering articles proposing to give more management control and powers to the promoters, and related party transactions. In a few cases, institutional investors/large shareholders did not hesitate to initiate legal proceedings against the company/promoter directors when their demands/proposals were not accepted or the existing board did not resolve their issues. There have also been instances where the promoters have passed the resolutions despite the activist shareholders and opposition because of their large shareholding in the company concerned.

Strategies Employed to Respond to Activist Shareholders

A company may consider following a three-fold strategy in responding to activist shareholders – before, at and after the general meeting. Before any general meeting, the company may proactively approach such shareholders to understand their concerns and demonstrate a willingness to consider their views. A company may also consider and analyse the solution proposed by the activist shareholder and formulate a suitable strategy for resolving the issue.

At the general meeting, the company may elaborate and explain the adoption of such a strategy to the activist shareholders, convincing them why it is mutually beneficial for the company and its members. After the conclusion of the meeting, companies ensure the implementation of the strategy and undertake a timely review of its impact, which is relayed to the shareholders.

Minimising the Risk of Shareholder Activism

Shareholder activism arises in companies with weak governance and the treatment of the rights of its shareholders. To minimise the risk of shareholder activism, a company or its board may take the following steps:

• ensure that the company complies with the legal and regulatory requirements;
• formulate a corporate strategy and policies that are beneficial to the growth of the company and its members;
• create transparency by having periodic conversations and dialogues with the institutional and other major public shareholders regarding the matters of concern to them;
• ensure timely and sufficient disclosure of those matters requiring disclosure under the applicable listing and disclosure laws; and
• evaluate the company’s performance, its strategies and policies, and the conduct of its management.