The last two decades have seen a major move towards enhanced standards of corporate governance in India. While some of this may be due to the globalisation of governance practises that affected Indian firms, regulatory reforms led by India's Securities and Exchange Board (SEBI) also played a role. Since 2000 SEBI has needed well-recognized governance frameworks and processes to be implemented by publicly listed companies.

These include an independent board of directors, an independent auditing process, Chief Executive and Chief Financial Officer Certification of the financial statements, and the like. The financial markets that have put a premium on good governance practices have welcomed those initiatives. At the same time, the current norms are said to be far from acceptable and this line of critique has been underlined by governance crises such as the one experienced in the Satyam accounting scandal.

Given the dominance of controlling shareholders in most Indian companies, one of the major shortcomings in the current waiver is the lack of shareholder activism, in particular amongst Indian companies. This perceived deficiency in Indian corporate governance seems to be resolving itself through the advent of activist shareholders in the Indian corporate sphere, whose efforts have been further bolstered by regulatory reform. [1]

The phenomenon of shareholder activism, which has hitherto been absent in India, has quickly made its mark, and has become a force for Indian listed companies to reckon with. In line with reforms in many countries that aim to give shareholders greater control, recent regulatory changes in India reflect a greater opportunity for shareholder participation in the form of postal ballot, e-voting and the like.

The rapid proliferation of proxy advisory firms, a phenomenon hitherto inexistent in India, offers shareholders the advice they need to exercise their corporate franchise in an informed way. The presence of radical institutional shareholders in some corporate boardrooms in India, such as private equity funds and hedge funds, has already triggered disruption.

While these developments pave the way for a change in the tenor of the governance debate, shareholder activism is facing some systemic and institutional vulnerabilities within Indian markets. In most Indian companies the power of controlling shareholders works to dampen the effects of shareholder activism. In India, the legal system and institutions are not conducive to making timely and cost-effective remedies to shareholders who pursue a litigation strategy to fight managements considered to be harmful to shareholder interests.[2]

In 2009, SEBI had barred listed entities from issuing shares with superior rights on the apprehension of possible misuse of superior voting rights and the detrimental impact on other shareholders. By a press release dated June 27, 2019, followed by amendments to the SEBI Listing Regulations and ICDR Regulations on July 29, 2019, SEBI decided to permit tech companies (intending to be listed) to have shares with superior voting rights (SR Shares), and set forth the framework to govern such SR Shares (the DVR Framework).

According to the DVR System, companies to be listed in the 'tech sector' are allowed to offer SR shares to promoters who hold executive positions with the issuer.[3] The understandable purpose seems to provide impetus to the promotion of dependent companies, in order to be able to scale and go public.

This versatility aims to assist promoters in maintaining control while enabling shareholding dilution to collect capital. The very principle of superior rights, notwithstanding the well-meaning purpose, inevitably generates the presence of a deprived class, in this case the other shareholders. This principle itself, exacerbated by the dominated Indian corporate culture of the dominant promoter, could potentially:

1. discourage and dissuade other shareholders who have until recently, and even largely today, been passive shareholders from participating in the affairs of SR Shares companies; and
2. counteract the thrust towards a more active investment environment guided by stronger corporate interests.

The regulators seem to have understood this and have incorporated some protections in the DVR System in the form of, among others, sunset provisions for the expiration of certain superior rights, in order to resolve certain concerns. However, due to lack of clarification two prongs under the event-based sunset clauses are likely to further complicate matters for the other shareholders in their current form.[4]

The second update regarding shareholder activism is the report dated May 2019 (the Report) by the SEBI working group on issues related to proxy advisers. Proxy advisory firms play a very important role in the involvement of shareholders in management by bridging the gap between management proposals and strategies, which are very often embedded in accounting and financial jargons, and the shareholders of the company.

Within the Indian context these firms are relatively new. Given the drive toward a broad-based diversified corporate culture, proxy consulting firms will increasingly play the required role of facilitating meaningful interaction between shareholders and management, and play a key role in forward-looking shareholder activism.

In this spirit, the SEBI working group has rightly taken the position that over-regulation, especially in the form of any restriction of the scope of advice or the role of proxy advisors, would thwart their positive impact on corporate governance. In this regard, conflict of interest is the one concept that is worth emphasising, and takes centre stage in any form of governance discussions. Furthermore, given the limited number of institutions in the field and their dual role in capacity – one as a shareholder advisor and the other as a corporate consultant – conflicts are bound to arise.

While such a dual role is recognised as having the positive effect of a holistic redress of issues, the recommendations of the working group on enhanced procedures for managing conflict of interest (to ensure objectivity and independence) and how they are to be disclosed by proxy advisory firms should be in the bucket of mandatory compliance rather than in the general 'compliance'.[5]
 
Conclusion
Future efforts can be undertaken on two fronts in building upon the present study. First, greater empirical research is needed on the impact of Indian shareholder activism, which would help better understand its desirability and effect in the Indian context. Secondly, more efforts need to be made to enhance the power of minority shareholders who are compelled to act in the shadow of shareholder control.

These include measures such as cumulative voting for the appointment of independent directors, prohibition of controller shareholder voting in the case of interest-party transactions, and the like. If such an enabling regime were created, activist shareholders would be provided with the necessary incentives to bring about a general improvement of corporate governance standards in the listed companies.

End-Notes:

1. Shareholder activism in India available at:  https://uk.practicallaw.thomsonreuters.com/w-013-9526?transitionType=Default&contextData=(sc.Default)&firstPage=true
2. Corporate governance and Shareholder activism available at: https://blog.ipleaders.in/shareholder-activism-corporate-governance/
3. Boosting Shareholder activism in Corporate India available at: https://www.livemint.com/Opinion/pmfj3Ug7d0BYVd6YW4QXgP/Boosting-shareholder-activism-in-India.html
4. The legal and regulatory framework surrounding shareholder activism in India available at: https://www.lexology.com/library/detail.aspx?g=f3ff1c1c-d0b8-4d94-9370-771f0c2590a3
5. Shareholder activism: Will the Indian landscape change? Available at: https://www.deccanherald.com/opinion/panorama/shareholder-activism-will-the-indian-landscape-change-850413.html