Indian company law permits the formation of companies with limited liability, which are the preferred form of companies for commercial undertakings. Typically, these are incorporated as private companies (which can restrict the transfer of their shares and cannot have more than 200 shareholders) or public companies (whose shares are freely transferable and do not restrict the number of their shareholders).

Subsidiaries of public companies are also considered public companies, and all companies with listed equity instruments (“listed companies) are also public companies.

Foreign investors generally prefer private companies. Shares of private companies can be made subject to transfer restrictions in their charter documents, and are also subject to fewer compliances and restrictions (for instance, no requirement to appoint independent directors or whole time key managerial personnel or to constitute certain committees), which provides greater flexibility.

Public companies, including listed companies, are also subject to certain securities laws, which place restrictions on options and forward contracts and do not apply to private companies.

The two main classes of shares issued by Indian companies are equity shares and preference shares. Preference shares may also be convertible into equity shares depending on their terms. However, foreign investors are permitted to invest in equity shares and instruments compulsorily convertible into equity shares only.

Preference shareholders have a preferential right (over equity shareholders) with respect to any dividend payments and repayment of the paid-up share capital in case of winding up. Preference shareholders have voting rights only over matters that impact their rights but can vote on all matters if dividend has not been paid on such shares for over two years.

Equity shareholders have the right to participate in and vote on all matters tabled at a general meeting, as well as the right to receive dividend and repayment of share capital in case of winding-up after distribution to preference shareholders and other relevant parties, such as workmen and creditors.

Private companies may have other classes of shares (with different voting and dividend rights) and public companies meeting certain criteria are permitted to issue equity shares with differential rights (with different voting and dividend rights) subject to certain conditions/restrictions.

In addition to the rights set out in law, shareholders’ rights are usually set out in the charter documents of companies and in shareholders’ agreements. However, such rights under charter documents and shareholders’ agreements cannot be in derogation of statutory rights.

Shareholders’ rights may be varied only if the company’s charter documents permit such variation or if permitted by the terms of issuance of such shares. Shareholders’ rights may be varied with the written consent of 75% of holders or with a special resolution (at least a 75% majority, present and voting) being passed at a separate meeting of shareholders of that class. Further, if such variation affects the rights of any other class of shareholders, then the consent of shareholders of that other class will also be required in the same manner.

There is no minimum authorised or paid-up capital required for a company in India. However, minimum capital requirements may apply in case of certain businesses (for instance, financial services businesses) if prescribed by the relevant regulators.

A private company must have at least two members and a public company is required to have at least seven members. One person companies (OPCs) (with a natural person as the shareholder) are also permitted but not common.

Indian companies law does not prescribe a requirement to have Indian resident shareholders. However, Indian foreign exchange control laws may prohibit or limit foreign investors in an Indian company operating in specified sectors.

Shareholders’ agreements (SHAs) and joint venture agreements (JVAs) are commonly used to set out the rights and obligations of various shareholder groups in a company (private or public). The terms of SHAs and JVAs are also included in a company’s charter documents to serve as public notice (to the world at large) and ensure that they are binding on the company itself.

(SHAs/JVAs typically include provisions in relation to the following:

• Governance and management – these typically include rights in relation to board and committee-level representation, nomination of key managerial personnel, formulation of business plans and budgets and future fund raising.
• Protective matters – these generally include affirmative voting rights, anti-dilution rights, non-compete and non-solicit or anti-diversion of opportunities provisions, information and inspection rights, rights in case of a deadlock and rights in case of events of default.
• Transfer related matters – depending on the objectives of the investment, these may be in the nature of lock-in, pre-emptive rights in case of transfers, tag along rights and drag along rights.
• Exit matters – depending on the stage of growth of the company and the long-term objectives of the investment, the provisions generally included may be in relation to undertaking an initial public offer of the company, strategic sale of its shares and buyback.

SHAs/JVAs are binding and enforceable on shareholders inter-se, but not if they are in derogation of law or the charter documents. Therefore, it is common (and recommended) that the key provisions of SHAs/JVAs are included in the charter documents (which can be accessed publicly subject to payment of a nominal fee), which also ensures that they bind the company and all its shareholders.

Companies are required to conduct an annual general meeting (AGM) for each financial year. Advance notice of at least 21 days must be given for an AGM to the shareholders, directors and auditor(s) of the company. An AGM may be convened at shorter notice with the consent of at least 95% of the shareholders entitled to vote.

Matters such as approval of financial statements, directors’ and auditor’s reports, appointment of directors in place of retiring directors (if any), appointment and fixing of remuneration of auditors, and declaration of dividend (if any) (known as ordinary business items) are to be considered at an AGM.

A company may also conduct a general meeting other than the AGM, ie, an extraordinary general meeting (EGM) to transact any items of business which require shareholder approval. An EGM also requires 21 days’ notice, but may be convened at shorter notice with the consent of the majority of shareholders in numbers entitled to vote, and who represent at least 95% of the capital of the company entitled to vote.

The board of directors of a company may convene a general meeting whenever it deems fit. Separately, shareholders holding at least 1/10th of the total paid-up capital may requisition a general meeting by sending a list of matters for consideration to the registered office of the company.

The board of directors of a company is then required to call for a general meeting within 21 days, and the general meeting must be conducted within 45 days of receiving such requisition from the members. Failure on the board’s part to conduct a general meeting despite a valid requisition entitles such shareholders to conduct and hold the general meeting within three months of making the requisition.

All shareholders have the right to receive notice of a general meeting accompanied by supporting documents.

Shareholders are entitled to receive the board’s report, the auditor’s report and the financial statements of the company. Shareholders are also permitted to inspect all documents referred to in the notice of the shareholders’ meeting. Shareholders may also inspect the company’s registers, constitutional documents, annual returns and minutes book of general meetings.

Shareholders of a Listed Company also have access to periodic and event-based corporate disclosures made by the listed company to stock exchanges. Listed companies are also mandatorily required to make certain information (such as employee benefit scheme documents, policy on dealing with related party transactions and criteria of making payments to non-executive directors, and details of board and committee composition) available on the company’s website.

Companies may conduct general meetings (ie, AGM and EGMs, if any) through video-conferencing or other audio-visual means subject to compliance with certain conditions (such as maintenance of a recorded transcript of the meeting and the facilitation of shareholder participation).

At least two shareholders are required for conducting a general meeting of a private company.

In the case of a public company, at least five shareholders (in case it has up to 1000 shareholders); 15 shareholders (in case it has more than 1000 but up to 5000 shareholders); or 30 shareholders (in case it has more than 5000 shareholders), must be present for a general meeting to be quorate.

A company’s charter documents may specify a higher quorum for general meetings.

There are primarily two types of resolutions that may be passed at general meetings:

• Special resolutions – matters requiring a special resolution are required to be assented to by at least a 75% majority of shareholders (by value) present and voting.
• Ordinary resolutions – matters requiring an ordinary resolution are required to be assented to by at least a simple majority of shareholders (by value) present and voting on the matter.

Whether a matter requires a special or ordinary resolution is prescribed by applicable law or the charter documents. In some cases, a special majority is required (for instance, majority in number and 75% by value are required to approve a merger/de-merger scheme) or certain interested shareholders may not be permitted to vote (for instance, in case of approval of related party transactions).

Matters requiring ordinary resolution typically include matters such as, alteration of the company’s share capital, declaration of dividend, and re-appointment of directors retiring by rotation; and matters requiring special resolution include matters such as, making material investments in securities, issuance of shares on a preferential basis, and sale or disposal of whole or substantially the whole of the company’s undertaking. Please see 2.6 Types of Resolutions and Thresholds for the percentage requirements of shareholder approval.

Shareholders may either exercise their voting rights themselves or through a proxy (in case of non-individual shareholders, through an authorised representative). One individual cannot act as proxy for more than 50 shareholders or shareholders holding more than 10% of the voting rights.

Voting may be by show of hands or a poll (subject to the charter documents). Prior to the declaration of results by show of hands, a poll may be ordered to be taken by the chairperson or demanded by certain shareholders (ie, shareholders holding at least 1/10th of shares on which at least INR5,00,000 has been paid-up).

Listed companies and public companies with a thousand or more members are required to provide e-voting facility to shareholders. Further, companies with 200 or more members are mandatorily required to have certain items (such as alteration of objects, articles, issue of shares with differential voting rights, buyback and sale of undertaking by company) approved by shareholders through post or any other electronic mode.

A company may opt to pass resolutions other than ordinary business items or items on which the company’s directors or auditors have a right to be heard through voting by electronic means without convening a general meeting, on which shareholders must express their assent or dissent within a period of 30 days from the date of dispatch of notice.

Matters which will be taken up at a general meeting are usually decided by the board of directors (as required under applicable law or the charter documents). Shareholders may, through their board nominees, require certain matters to be taken up at shareholder meetings but there is no general right of shareholders to require a matter to be taken up at a meeting that has been convened by the board.

However, if there is a particular matter that the shareholders want to discuss at a general meeting, shareholders holding at least 1/10th of the total paid-up capital may requisition a general meeting of the company to discuss the matters sent by such shareholders to the company (as mentioned in 2.2 Procedure and Criteria for Calling a General Meeting).

Shareholders do not have a right to challenge a resolution validly passed at a duly convened general meeting. However, decisions of the company (including at a meeting) may be challenged through an action for oppression and mismanagement (O&M).

An O&M claim may be made by 100 shareholders or 1/10th of the total shareholders, whichever is lower, by making an application to the jurisdictional National Company Law Tribunal (NCLT).

A class action may also be initiated by 100 shareholders or 5% of the total shareholders, whichever is lower, to challenge a decision of the company, through filing of a complaint with the jurisdictional NCLT.

NCLT may waive the prescribed thresholds for filing an O&M claim or a class action basis the facts and circumstances of the case before it.

An O&M challenge may be on the grounds that the decision is prejudicial to public interest or oppressive to any members or prejudicial to the company’s interests, and a class action may be on grounds that the management of the company’s affairs is prejudicial to the company, its shareholders or depositors. However, practically, there is a high bar for the NCLT to intervene.

Institutional shareholders or shareholder groups usually seek special rights (such as board nomination rights, information rights, consultation rights or affirmative voting rights) in unlisted companies, which allow them to influence or monitor company actions.

In case of listed companies, institutional shareholders may influence decisions through special rights (to the extent specifically agreed with the company or the controlling shareholders at the time of investment) or in other cases, by exercising their voting rights at a shareholders’ meeting.

Further, in case of listed companies, institutional investors may also rely on voting guidance actively published by proxy advisory firms on resolutions as and when they come up.

Institutional investors may also exercise influence on voting by retail/public investors by publicly announcing their decision in advance.

In case shares are legally held by a nominee of the beneficial owner, all rights related to such shares vest in the nominee (i.e., the registered owner). The registered owner and the beneficial owner typically execute agreements regarding the exercise of rights by the registered owner in relation to shares held on behalf of the beneficial owner. While beneficial interest held in shares outside of the registered owner is required to be declared to the company, agreements between the registered owner and beneficial owner, if any, are not required to be disclosed to the company.

As mentioned in 2.8 Voting Requirements, any item other than ‘ordinary business’ items, or items on which the company’s directors or auditors have a right to be heard, can be passed without holding a general meeting. However, Indian company law does not otherwise provide for passing of written resolutions (without a vote/meeting).

There is no absolute pre-emption right available to shareholders in case of an issue of new shares (unless specifically provided in the charter documents) as a company may opt to issue shares to third parties without first offering them to shareholders, if shareholders agree to such issue (known as a preferential issue) by way of a special resolution.

Transfer of a private company's shares is subject to restrictions in its charter documents (including typically the approval of the company’s board of directors). Shares of public companies are freely transferable.

Statutory lock-in requirements may apply to shares issued by listed companies and in case of investments in specific sectors (such as insurance). Further, share transfers may be subject to restrictions under SHAs and JVAs.

Share transfers may also be subject to statutory or regulatory approvals. For instance, approval may be required for a person to acquire prescribed shareholding in entities such as banks and insurance companies, acquisition of control or substantial shareholding in listed companies is subject to an open offer, acquisition of shares above certain limits by persons from land bordering countries requires prior government approval, and certain acquisitions may need approval of the Competition Commission of India under Indian competition law.

Shareholders have the ability to create security interest over their shares, subject to restrictions under the company’s charter documents or under SHAs/JVAs. There may also be regulatory approval requirements or restrictions in certain sectors, such as insurance, for such pledges.

In case of foreign investors, share pledges are only permitted to:

• Indian banks or financial institutions for bona fide purposes; and
• overseas banks for securing the credit facilities extended to:
1. the non-resident;
2. a non-resident who is the promoter of the company; or
3. the overseas group company of such company.

Creation, invocation or release of pledges over shares held by promoters of a listed company are required to be publicly disclosed.

A list of all shareholders of unlisted companies is submitted by companies to the Ministry of Corporate Affairs with an annual report, and this is accessible publicly upon payment of a nominal fee. The company obtains these details from its own records (if shares are in physical form – as such shares may only be transferred by submitting a form to the company itself) and from depositories (in case shares are held in dematerialised form). In the case of creation of beneficial ownership in shares, a filing is required to be made to the relevant company. Please see 2.12 Holding Through a Nominee.

In the case of listed companies, names of all shareholders with more than 1% shareholding are made publicly available as of the end of every calendar quarter. Further, there is automatic disclosure of any person acquiring 5% or more shares in a listed company (and any subsequent increases or decreases of 2% or more). Such acquisition is also required to be reported by the shareholder, if the shareholder breaches the 5% or 2% limit along with persons acting in concert.

Shares may be cancelled by reduction of capital or buyback (see 4.2 Buybacks). Capital may be reduced by a company pursuant to a NCLT-sanctioned scheme with shareholders’ approval by special resolution (75% shareholders, present and voting). Capital reduction does not need to be proportionate, and selective capital reduction (ie, reduction of share capital held by certain shareholders) is permissible subject to the protection of interests of minority shareholders (such as fair valuation), which is reviewed by the NCLT.

A company may buy-back its shares (once a year) subject to the following key restrictions:

• the buy-back must be approved by a special resolution of shareholders, unless the buyback is less than 10% of the paid-up capital and free reserves, in which case a board approval is sufficient;
• a company may only buyback fully paid-up shares and the buyback may only be up to 25% of the aggregate of paid-up capital and free reserves; 
• buyback may be out of the company’s free reserves, securities premium account or proceeds of issue of any shares or other specified securities, and the proceeds of an issue cannot be used for buyback if the same type of shares or other specified securities issued are being bought back;
• buyback may be from existing shareholders on a proportionate basis or from employees for shares issued pursuant to employee benefit schemes, and a listed company may also buy back shares from the open market;
• buyback must not result in the aggregate of secured and unsecured debt of the company exceeding the twice of company’s paid-up capital and free reserves;
• the company cannot make a further issue of the same type of shares or specified securities as those bought back for six months, other than a bonus issue or for discharge of subsisting obligations (such as conversion of preference shares into equity shares); and
• the shares bought back by the company must be extinguished within prescribed timelines.

Buyback by listed company is subject to additional requirements, such as prohibition on buyback through negotiated deals, no buyback with an intention to delist and no buyback from promoters or persons in control of the company (in case of buyback through a stock exchange).

Dividends are required to be proposed by the board of a company and may be declared only with shareholders’ approval by ordinary resolution.

Dividend is payable out of the company’s profits for a financial year (after accounting for depreciation) or the company’s profits for previous financial years (after providing for depreciation) or a combination of both.

In case of inadequate profits or absence of profits during a financial year, dividend may be declared out of the company’s free reserves subject to meeting certain conditions.

The board may also declare interim dividend during the financial year or until the AGM for the financial year is conducted out of the surplus in the profit and loss account or out of profits for that financial year or from profits generated until the preceding quarter.

Further, a company which has invited, accepted or renewed deposits from the public, or accepted deposits from its members, or defaulted in repayment of deposits is prohibited from declaring dividend till the default is rectified.

Subject to any other conditions prescribed in charter documents, shareholders have the right to appoint directors by way of ordinary resolution. Special resolution is required for:

• reappointment of an independent director;
• appointment of a person who has attained 70 years of age as a managing or whole-time director; and
• appointment or continuation of a person who has attained 75 years of age as a non-executive director of a listed company.

The board may appoint a person as an additional director to fill a casual vacancy, whose appointment must be confirmed by shareholders at the next general meeting. In case of a listed company, such director appointment by the board must be approved by the shareholders within three months. Additionally, shareholders of a listed entity have the right to approve/reject the continuation of a director on the board of a listed company every five years.

Removal of a director also generally requires an ordinary resolution, but may only be undertaken after providing the director a right to be heard at the meeting for his/her removal.

Company law demarcates the powers of the board and the shareholders in relation to the company, wherein the board is responsible for the management of the day-to-day affairs of the company and there are certain powers that are reserved for the shareholders such as material investments in securities, director and auditor appointments and material related party transactions. The latter category of matters cannot be decided by the board and require shareholders’ approval. 

Regarding challenges before the courts, courts in India do not typically interfere with the decisions of the board and uphold the board’s commercial wisdom on management-related decisions, unless shareholders can show that the decisions of the board constitute O&M or give rise to a class action. Please see 2.10 Challenging a Resolution for the factors that may lead to such action and the thresholds to be met by shareholders to file a class action and an O&M claim.

Another alternative for shareholders is to initiate action to remove the directors whose actions they are not satisfied with in accordance with the procedure set out in 6.1 Rights to Appoint and Remove Directors. These options may be more feasible in privately held companies, and are more difficult to implement in public unlisted and listed companies with diversified shareholding. 

Shareholders approve the appointment of auditors based on the recommendation of the audit committee and the board (in case the company is required to constitute an audit committee).

While the board may fill a casual vacancy arising from an auditor’s resignation within 30 days, the auditor appointed will be subject to shareholders’ approval within three months of appointment by board.

Auditors may be removed by a company prior to expiry of their term only with the permission of the central government and the approval of shareholders by special resolution, after giving the auditor a reasonable opportunity of being heard.

Directors do not have a duty to report to shareholders on governance matters. However, the board of directors of all companies are required to furnish a report to the shareholders annually alongside the company’s financial statements at its general meeting.

Such a report covers the board’s comments on qualifications and remarks in the auditors’ reports, details of related party transactions and loans, guarantees or investments. The board’s report also includes a directors’ responsibility statement covering compliance with accounting standards, maintenance of adequate accounting records and adequacy of internal financial controls (only applicable for listed companies).

The controlling shareholder does not owe any duties to the shareholders of the company it controls. However, such controlling shareholders (known as promoters) may have disclosure obligations and liabilities under law for certain actions.

If a company is insolvent, it may initiate a corporate insolvency resolution process (CIRP) with the approval of its shareholders through special resolution. Further to this resolution, the company will have to file an application for initiating CIRP with NCLT.

Post initiation of CIRP, shareholders have no say in the CIRP as shareholders are not members of the committee of creditors (CoC), the decision-making body in relation to the resolution process (unless they are financial creditors), and shareholders do not have the ability to block the decisions taken by the CoC.

Shareholders may only challenge the NCLT order in relation to the insolvency process on limited grounds (the approved resolution plan being in contravention of the provisions of law, material irregularity in exercise of powers by the resolution professional and non-compliance of the resolution plan with prescribed criteria).

Preference and equity shareholders (in that order) are the last beneficiaries of the distribution of proceeds from sale of the liquidation assets in case the company goes into liquidation, and may not receive any amounts depending on the level of debts of the company that need to be settled.

Shareholders may initiate an O&M claim or a class action in the jurisdictional NCLT against the decisions of the board and the management. Please refer to 2.10 Challenging a Resolution above for details.

At least 100 shareholders, or shareholders holding 10% of the company’s paid-up capital, may also apply to the jurisdictional NCLT to seek an investigation into the company’s affairs.

Further, shareholders may, by special resolution, request the central government to investigate the affairs of a company. Practically, this threshold is difficult to meet by minority shareholders or shareholders who are not in control of the company’s management.

Shareholders of a listed company and/or a company undertaking a regulated business (such as financial services) may also file a complaint with the Securities and Exchange Board of India (“SEBI”, the securities markets regulator) and/or with the respective sectoral regulator, for instance, in violations of law or actions taken against the interests of minority shareholders or the company.

Directors of Indian companies have statutorily prescribed fiduciary duties, such as acting in good faith, exercising duties with reasonable care, diligence and independent judgment, avoiding conflict of interest and not obtaining an undue gain or advantage.

Further, in the case of listed companies, SEBI has also prescribed certain duties for directors, such as reviewing compliance reports pertaining to all applicable laws in relation to the listed company, ensuring that plans are in place for orderly succession for appointment of directors and senior management, and recommending fee/compensation payable to non-executive directors.

A breach of fiduciary duties by a director makes the director liable to penalties. Such breach may also form the basis of an O&M claim, pursuant to which the NCLT may order removal of a director or officer, termination or modification of any arrangement executed between the company and its director or officer, and the recovery of any undue gains made by the director or officer during the period of his/her appointment.

In case of a class action suit by shareholders, NCLT has the power to restrain the company and directors from acting on a resolution passed by suppressing material facts or misstatement to shareholders or depositors or claim damages/compensation or other suitable action against the directors for any wrongful conduct, act or omission on their part.

Directors and officers of the company engaged in fraudulent acts or omissions with an intent to deceive, to gain undue advantage or to injure the interests of the company, its shareholders or creditors may be punishable with imprisonment, penalty and fine.

Shareholders may file a complaint with the jurisdictional Registrar of Companies, SEBI (in case of listed companies) or the concerned sectoral regulator (in case of regulated entities) to report instances of fraud and demand an investigation.

Shareholders may also seek the removal of a director in accordance with the process set out in 6.1 Rights to Appoint and Remove Directors.

While Indian law does not have any specific provisions for derivative action, NCLT has broad powers to remedy wrongs against the company while deciding upon an O&M claim.

For instance, the NCLT’s order in an O&M claim may provide for the removal of any of the directors of the company, recovery of undue gains made by the managing director, manager or director, the purchase of shares or interests of any members of the company by other members or by the company, or the regulation of conduct of affairs of the company in future.

Further, shareholders may also file complaints with SEBI or sectoral regulators, requesting action on behalf of the company in case of any breaches of law by the directors/management against the company’s interests.

Shareholder activism in India is usually prevalent in the case of listed companies. While unlisted public companies and private companies may also have activist shareholders, they have limited avenues to take action on account of thresholds for actions such as O&M claims and class actions.

There are no specific legislative provisions governing or regulating shareholder activism, and these shareholders typically operate within the rights available to shareholders under Indian company law and shareholders’ protection regulations made by SEBI, to challenge and/or block decisions or proposals by listed companies.

Shareholder activism has increased following larger participation by foreign and domestic institutions in the Indian securities market. Typically, foreign funds and domestic funds, as well as certain public-spirited individual shareholders, have engaged in shareholder activism.

Certain changes in law have helped further shareholder participation and activism in case of listed companies. For instance:

• the provision of e-voting facility has been made mandatory for all listed companies since April 2014, which has helped improve retail investor participation in shareholder decisions;
• SEBI has increasingly prescribed measures to require approval of non-controlling shareholders for certain actions including related party transactions (on which no related party can vote to approve), divestment of large undertakings and certain types of mergers, affording activist shareholders the opportunity to weigh in and influence outcomes;
• similarly, SEBI has prescribed measures such as shareholders’ approval being required for special rights being granted to any shareholder (including limiting such rights to five years before requiring approval again), continuation of directors beyond a term of five years and payments pursuant to upside sharing arrangements with executives/management by a particular shareholder;
• institutional shareholders such as mutual funds, alternative investment funds, insurance companies and pension funds have been mandated to exercise their independent judgment and cast votes on all shareholder matters, and publicly disclose their voting policies and the manner in which they have exercised their voting rights on certain prescribed matters, leading to an increase in voting participation by such institutional investors with greater accountability.

The introduction of the above measures, especially by SEBI, has helped improve corporate governance and transparency in listed companies. This has resulted in institutional and public shareholders taking conscious decisions on resolutions which they believe are prejudicial to the interests of the company or resolutions which are not backed by commercial rationale. Therefore, exercise of voting rights to defeat resolutions has been a major tool available to public/activist shareholders.

Specifically, in relation to M&A transactions by listed companies, shareholders could file a complaint with SEBI and/or the relevant sectoral regulator (if they believe that such transaction is not in the interests of the company, its minority shareholders or unduly favours the company’s promoters). This would lead to regulatory intervention and a closer scrutiny of the conduct of the parties during the course of the transaction by the regulator.

Additionally, the advent of proxy advisory firms, which track listed companies and release detailed voting advice on resolutions, has helped increase investor awareness of corporate governance issues and management/controlling shareholder accountability.

In addition to O&M and class action (covered in 2.10 Challenging a Resolution), application to NCLT or the Central Government for an investigation in the company’s affairs (covered in 10.1 Remedies Against the Company) and the ability to requisition a general meeting (covered in 2.2 Procedure and Criteria for Calling a General Meeting), shareholders may file complaint against listed companies through the SEBI Complaint Redressal (SCORES) platform, an online grievance redressal facilitation platform provided by SEBI, or by writing to SEBI or the concerned sectoral regulator.

Activist shareholders typically aim to ensure better corporate governance and transparency in management decisions to enhance shareholder value, and highlight and oppose proposals that may not be in the interest of the company.

Such proposals may include transactions that benefit members of the promoter group over other shareholders (such as related party transactions or special rights for a group of shareholders) or actions that may not have sound commercial basis (such as mergers or acquisitions) or appointment of directors or executives that may not serve the interest of the shareholder body at large or lead to conflicts.

Activist shareholders also aim to obtain relief in case of wrongdoing by promoters, exposure of frauds or wrongdoing and make management accountable for decisions that may affect the interests of shareholders.

There have been relatively few attempts by activist shareholders to acquire significant stakes in listed companies in India due to various reasons, such as:

• concentrated promoter shareholding in large number of listed companies;
• high costs of an open offer (which may be triggered upon acquisition of more than 25% shares or voting rights or acquisition of control); and
• foreign portfolio investors along with their affiliates not being permitted to hold 10% or more of a listed company, which limits their ability to acquire substantial stakes in listed companies.

The agenda of activist shareholders is usually to challenge proposals that may not be in the interest of shareholders at large or to cause changes to help improve shareholder value. For instance, activist shareholders may:

• Seek to prevent value erosion by seeking investigation into the affairs of a company basis accounting irregularities or fund diversion by promoters. For instance, a shareholder complaint to SEBI against Rajesh Exports Limited, a listed company (in relation to large trade receivables that had been outstanding for several years) led to an investigation by SEBI, which resulted in findings on siphoning of funds, misrepresentation of revenue and obstruction of attempts to verify overseas operations.
• Express dissatisfaction with the functioning of the company by rejecting the director and auditor appointments (please refer to 11.4 Recent Trends).
• Prevent value extraction by promoters/related parties. For instance, the domestic institutional investors and minority shareholders holding approx. 9% stake in Ambuja Cements Limited (“ACL”) voted against a proposal for ACL to acquire a 24% stake in a Holcim India entity from Holderind Investments Ltd. (Mauritius) followed by a merger.
• Seek a better offer price in an open offer which would benefit all public shareholders who tender their shares in the offer. For example, during Daiichi Sanyko’s proposed acquisition of Zenotech Laboratories Limited (“Zenotech”), the promoter of Zenotech and other shareholders challenged the open offer price for the acquisition, on the grounds that the open offer price should have been the same higher price at which a recent acquisition of the shares in Zenotech had been made.
• Seek a better share swap ratio or seek to defeat a delisting proposal by tendering shares at a significantly higher price if the scrip is undervalued. For instance:
1. in relation to the proposed delisting of ICICI Securities and merger with ICICI Bank pursuant to a scheme, Quantum Mutual Fund issued a public statement that it will not be voting in favour of the scheme as the swap ratio was detrimental to the interests of the minority shareholders, and an investor, Manu Rishi Gupta, challenged the fairness of the share valuation process before the NCLT; and
2. during the reverse book building process undertaken for the proposed delisting of Vedanta Limited, Life Insurance Corporation of India, that held approx. 6% stake in the company, tendered its shares at a premium of 267% to the floor price, which became the discovered price in the process and ultimately led to the delisting not going through as the required number of shares were not tendered in the delisting.

Activist shareholders may also seek to influence voting by institutional and retail investors through social media campaigns or press releases (in tandem with proxy advisory firms or otherwise), highlighting concerns regarding the transactions proposed to be approved by shareholders of a listed company, and the safeguards required to make the transaction acceptable for public shareholders. In some cases, this has led to listed companies withdrawing/modifying the agenda items fearing investor backlash/lack of investor support.

Large cap companies tend to invite greater shareholder scrutiny than other listed companies. There has also been a trend for such investors to focus on companies that have widely dispersed and limited non-promoter shareholding, especially if they anticipate actions such as mergers or delisting.

Further, family-controlled companies and conglomerates, particularly in relation to resolutions involving promoter successor-related appointments and compensation and related party transactions, are closely watched by activist shareholders.

Shareholder approvals for director appointments and remuneration in listed companies have been facing increased scrutiny, with proxy advisory firms closely observing and commenting on multi-boarding beyond certain thresholds, meeting attendance, quantum of variable pay, limited experience, poor company performance and lack of independence (in case of independent directors). This has led to the voting down of such resolutions by public shareholders, directors resigning prior to consideration of the resolutions for their re-appointment, companies withdrawing the resolution in question and subsequently proposing the appointment/re-appointment with revised remuneration parameters and/or detailed justification/ rationale.

For instance:

• the re-appointment of Mr Bimal Jalan, former governor of the Reserve Bank of India (India’s banking regulator), to the board of directors of HDFC Bank as an independent director was opposed by proxy advisory firms on grounds of less than 75% attendance at board meetings and his membership of the boards of more than six companies;
• the re-appointment of Mr Om Prakash Bhatt as an independent director of Tata Motors was opposed by proxy advisory firms as he had been a director on the board previously and had a long-standing association with other companies of the Tata Group;
• proxy advisory firms opposed the appointment of Ms Rama Kirloskar as the joint managing director of Kirloskar Brothers Limited on account of her age (31 years) and experience;
• the proposal for payment of higher salaries to Mr Karl Slym, the late managing director, and two executive directors of Tata Motors, Mr Ravindra Pishrody and Mr Satish Borwankar, was opposed by proxy advisory firms on the grounds of heavy losses and poor performance of the company in the previous financial year; and
• the re-appointment of Mr Ashok Kurien as a director of Zee Entertainment was opposed by proxy advisory firms as Mr Kurien (as a member of the audit committee and the nomination and remuneration committee) was considered accountable for the way in which remuneration was handled in FY 20-21, the losses on account of RPTs, and other governance concerns.

Privately pooled funds, which usually seek to maximise value for their constituents, and in some cases, individuals who are former employees or have a public-spirited approach or particular motivations against a company, tend to play an activist role.

Institutional investors such as mutual funds and insurance companies prefer acting through exercise of their voting rights, and their actions are driven by proxy advisory reports. Therefore, while not investors themselves, such proxy advisory firms have become increasingly active in facilitating shareholder activism.

Due to the concentrated promoter holding in many listed companies, activist shareholders are not always successful in having their demands met. There have been instances where activist shareholder demands have been met. For instance:

• shareholders of Nestle India rejected an increase in royalty payments to a promoter of the company;
• more than 95% shareholders of Raymond Limited rejected a sale of company property to promoters and other family members;
• shareholders of Lakshmi Vilas Bank rejected re-appointment of the company’s managing director and CEO, some other directors and statutory auditors; and
• shareholders of Eicher Motors rejected the proposal for re-appointment of and payment of increased remuneration to the company’s managing director.

Please also refer to 11.3 Shareholder Activist Strategies above.

Listed companies must, on an ongoing basis, engage pro-actively with proxy advisory firms and activist shareholders to understand their concerns, and keep these in mind while developing commercial proposals or deciding terms of major transactions. This also helps companies position shareholders proposals appropriately, highlighting steps taken to benefit the company and its shareholders.

Once announced, and before such proposals are put to vote, companies may reach out to proxy advisory firms and activist shareholders to understand their concerns, if any, and share the rationale for the proposed actions and how they benefit the company and its shareholders.

Before responding to proxy advisory firms or activist shareholders, companies must consider undertaking a priority analysis from a business continuity perspective, assess the allegations made through internal teams and external counsel and consider litigation preparedness.

To minimise the risk of proposed company actions not meeting shareholder scrutiny, listed companies must consider implementing the following measures:

• ongoing and periodic communication with shareholders on company strategy;
• meaningful engagement with proxy advisors and institutional investors, and periodic analysis of analyst reports and proxy advisor recommendations;
• undertaking periodic review and analysis of shareholder and whistleblower complaints as well as information requests from shareholders;
• monitoring of media reports and coverage to track activist investors and understand any trends in challenges from such investors; and
• seeking feedback and assessment from external counsel and advisors who are familiar with activist shareholder action in advance of major proposals, to pre-empt possible challenges and make modifications to the proposals or communication strategy, if required.