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Certified that the project entitled SHAREHOLDER ACTIVISM IN INDIA: A CRITICAL

STUDY is a piece of original bona fide research undertaken by me. It is further certified that
no part of this project has been submitted by me for any else purpose.

PLACE- Guwahati
DATE- 31st October, 2015

Tushar Solanki


1. Introduction
1.1. Literature Review
1.2. Scope and Objective
1.3. Research Problem
1.4. Research Methodology
2. Shareholder Activism: The Concept
2.1. Who is Shareholder?
2.2. Collective Action Problems; Shareholder Apathy
2.3. Shareholder Passivity as the Starting Point
3. Regulatory Reforms Towards Greater Shareholder Participation
4. Corporate Governance Intermediaries
4.1. Proxy Advisor in India: Their Influence
5. Evaluating the Impact of Shareholder Activism
5.1. Distilling the Evidence
5.2. Effect on Controlled Companies
6. Conclusion

Chapter 1

The last two decades have seen a significant thrust towards enriched corporate governance
standards in India. While some of this may be attributable to the globalization of governance

practices that have had their impact on Indian companies, regulatory reforms directed by the
Securities and Exchange Board of India (SEBI) have also had a part to play. Since 2000,
SEBI has required public enlisted companies to install well-recognized governance structures
and mechanisms. These include an autonomous board of directors, a self-governing audit
process, and authorization of financial statements by the chief executive officer and chief
financial officer, and the like.1 These efforts have been involved by the stock markets that
have reflected a premium towards good governance practices.2
At the same time, the existing principles are said to be far from the desired, and governance
crises such as that observed in the Satyam accounting scandal have highlighted this line of
criticism.3 Given the encouragement of controlling shareholders in most Indian companies,
one of the noteworthy shortcomings in the current dispensation is the absence of shareholder
activism, particularly amongst institutional and marketing investors that hold minority
stakes.4 This perceived weakness in Indian corporate governance appears to be addressing
itself through the onset of activist shareholders in the Indian corporate sphere, whose efforts
have been further buoyed by regulatory reforms. The phenomenon of shareholder activism,
hitherto absent in India, has made its mark rapidly, and has become a force to reckon with for
Indian listed companies.
Consistent with modifications in several countries that seek to confer greater power in the
hands of shareholders, the recent governing developments in India indicate a greater
opportunity for shareholder participation in the form of postal ballot, e-voting and the like.
1 Corporate governance measures are administered through clause 49 of the
listing agreement entered into between listed companies and the stock
exchanges. Although the listing agreement is essentially a contractual
arrangement, it has statutory support as violations of the listing agreement could
result in penal consequences. 23E, Securities Contracts (Regulation) Act, 1956.
2 Bernard S. Black & Vikramaditya S. Khanna, Can Corporate Governance
Reforms Increase Firms Market Values? Evidence from India, JOURNAL OF
EMPIRICAL STUDIES, Vol. 4 (2007), available at
/abstract=914440; Dhammika Dharmapala & Vikramaditya Khanna, Corporate
Governance, Enforcement, and Firm Value: Evidence from India, (2008) available
3 Umakanth Varottil, A Cautionary Tale of the Transplant Effect on Indian
Corporate Governance, 21(1) NAT. L. SCH. IND. REV.1 (2009).
4 Ibid., at 49.

The speedy explosion of proxy advisory firms, a hitherto non-existent phenomenon in India,
bestows shareholders with the guidance necessary to exercise their corporate franchise in a
well-versed manner. The existence of activist institutional shareholders such as private equity
funds and hedge funds has already initiated an upheaval in some corporate boardrooms in
While these developments pave the way for a transformation in the intention of the
governance debate, shareholder activism encounters certain operational and formal
weaknesses within the Indian markets. The domination of controlling shareholders in most
Indian companies operates to diminish the effects of shareholder activism. The legal system
and institutions in India are not encouraging to rendering timely and cost-effective remedies
to shareholders who accept a litigation approach to counter managements that are alleged to
act contrary to shareholder interests. This paper finds that although shareholder activism is
becoming substantial in the Indian markets, its impact as a degree of corporate governance
enhancement is far from clear.
The paper deals with the theoretical framework of shareholder participation in corporate
democracy, and comments on the inefficiencies of the present structure, before going on to
define the concept of shareholder activism and to describe its various types. Part III looks at
the historical position in India where shareholder passivity was the norm. Part IV examines
various regulatory reforms undertaken in India that enable shareholders to be more
participative in corporate decision-making. These include measures such as e-voting, virtual
shareholders meetings, and voting policies for mutual funds. Part IV explores the roles of
corporate governance intermediaries such as proxy advisory firms and governance analysts
and their impact on shareholder activism. Part V evaluates the likely impact of shareholder
activism in India after considering the empirical evidence from other countries, and Part VI


Literature Review

Singh Avtar, Company Law, Eastern Book Company, Lucknow, 2013.

This book gives the basic idea about the shareholder and their role in the business formation
and how they can form business enterprise for their own interest. It also provide the other
aspects for forming any business enterprises and conditions regarding the same.

Dr. Saharay, H.K., Company Law, Universal Law Publishing Co., New Delhi,

This book gives the fundamental principles regarding the formation of the company and
different kinds of parts related to it. It defines the shareholders role in a separate chapter and
gives the vast knowledge regarding their roles in the company and managing the
administration of the company with other officials of the company.

Dr. Tripathi, S.C., Modern Company Law, Central Law Publications,

Allahabad, 2012.

This book gives the basic idea about the shareholder and their role in the business formation
and how they can form business enterprise for their own interest. It also provide the other
aspects for forming any business enterprises and conditions regarding the same.

Jain, N.K., Company Law: Law and Practice, Deep & Deep Publications Pvt.
Ltd., New Delhi, 2011

This book gives the fundamental principles regarding the formation of the company and
different kinds of parts related to it. It defines the shareholders role in a separate chapter and
gives the vast knowledge regarding their roles in the company and managing the
administration of the company with other officials of the company.

Varottil Umakanth, The Advent of Shareholder Activism in India, Journal on

Governance, Vol. 1 No. 6, 2012.

The article gives the proper understanding of the topic shareholder activism in India and
provided the various issues related to it. It explains all the aspects regarding the shareholder
activism and also analysis the current scenario related to the activism under Indian laws with
regards to business and its structure.


Scope and Objective

Though the statement mentions Shareholders Activism in India: A Critical Study, the
researcher specifies the subject area to understand the shareholders activism in India and also
tries to critically analysis the importance and its impact on Indian companies.


Research Problem

Whether the trend of shareholders activism in India provide the large and small companies,
firms, etc., any new framework and how the shareholders taking the initiatives to provide
their hand to build Indian market at large?


Research Methodology

Research Design
To conduct my research project we will use these two types of research design: Exploratory
and Descriptive.
Doctrinal Method: The methodology that we used in this project is doctrinal. I went through
different books and articles in the library and tried to gather information regarding the topic
and will try to incorporate those materials in our project.
Sources of Data
I have used secondary sources of data for the purpose of my Research work which includes
books and several articles. I cannot definitely forget to acknowledge the various internet sites
which have been of immense use in conducting my study.
The project is not without its own set of limitations however a care has been taken to reduce
them to a minimal level. As the topic demands so the researcher limits its scope to
shareholders activism to India and I encountered two basic limitations during the compilation
of this project that is lack of time and resources to perform the extensive study.

Chapter 2
Shareholder Activism: The Concept

2.1. Who is shareholders?

Any person, company or other institution that owns at least one share of a companys stock.
Shareholders are a company's owners. They have the potential to profit if the company does
well, but that comes with the potential to lose if the company does poorly. A shareholder may
also be referred to as a "stockholder".5
Unlike the owners of sole proprietorships or partnerships, corporate shareholders are not
personally liable for the companys debts and other obligations. Also, corporate shareholders
do not play a major role in running the company. The board of directors and executive
management perform that function. Common stockholders are, however, able to vote on
corporate matters, such as who sits on the board of directors and whether a proposed merger
should go through (preferred stockholders usually do not have voting rights). They also
benefit when the company performs well and its share price increases, and they have the right
to trade their shares on a stock exchange, which makes stock a highly liquid investment.

2.2. Collective Action Problems; Shareholder Apathy

In large public listed companies, the public (or non-promoter) shareholders have relatively
modest stakes and these do not provide sufficient incentives for them to work together and
organize coalitions to meaningfully participate in decision-making of companies. In the
classic Berle & Means Corporation where shareholding is diffused, 6 while the shareholders
are owners of the company, the managers controlling the company as shareholders are unable
to participate in decision-making due to collective action problems. 7 Even in controlled
6 Adolf A. Berle & Gardiner C. Means, The Modern Corporation and Private Property 47 (1932).
7 Collective action problems are the difficulties that arise in achieving consensus among a diffused
set of shareholders who do not play an active role in the company. The heterogeneity of interests and
differing levels of information available with these shareholders exacerbate the problems. See,
Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 NW.
U.L. REV. 547, 557 (2003).

companies, which are predominant in India, 8 collective action problems prevent minority
shareholders from coalescing, which reduces their effective participation through the exercise
of corporate franchise. In such a case, the lack of minority shareholder participation augurs to
the benefit of the controlling shareholders, and managers appointed with their concurrence.
Related to the collective action problem is shareholder apathy. 9 Since the costs of
coordination among minority shareholders are high, these shareholders either abstain from
voting or merely vote in favour of management (or the controlling shareholders, as the case
may be).10
With this background, it would be useful to examine how shareholder activism may be
defined, and also to consider various types of activism.

Defining the Concept

Shareholder activism is considered to be a set of proactive efforts [on the part of
shareholders] to change firm behaviour or governance rules.11 It signifies the efforts on the
part of investors to influence the behaviour of management in governing the company.
Activist investors are often viewed as investors who, dissatisfied with some aspect of a
8 Shaun J. Mathew, Hostile Takeovers in India: New Prospects, Challenges, and Regulatory
Opportunities, 2007(3) COLUM. BUS. L. REV. 800; George S. Geis, Can Independent Blockholding
Play Much of a Role in Indian Corporate Governance?, 3 CORP. GOVERNANCE L. REV. 283
9 Kahan & Rock, supra note 15, at 1038-39; See also, Randall S. Thomas, The Evolving Role of
Institutional Investors in Corporate Governance and Corporate Litigation, 61 VAND. L. REV. 299
(2008); Stephen J. Choi & Jill E. Fisch, On Beyond CalPERS: Survey Evidence on the Developing
Role of Public Pension Funds in Corporate Governance, 61 VAND. L. REV. 315 (2008).
10 See, Lee Harris, Missing in Activism: Retail Investor Abstinence in Corporate Elections, 2010
COLUM. BUS. L. REV. 104, 166; Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate
Law, 26 J.L. & ECON. 395 (1983). See also, Lucian Bebchuk, The Case for Increasing Shareholder
Power, 118 HARV. L. REV. 833, 877 (2005) (Noting some of the reasons why shareholders may have
a tendency to vote in favor of management proposals).
11 Bernard Black, Shareholder Activism and Corporate Governance in the United States, in PETER
(1998), available at; Stephen M. Bainbridge, Shareholder Activism
SERIES, available at; Roberta Romano, Less is More: Making
Institutional Investor Activism a Valuable Mechanism of Corporate Governance, 18 YALE J. ON
REG. 174 (2001).

companys management or operations, try to bring about change within the company without
a change in control.12 Activist investors can be contrasted from passive investors, who rarely
participate in corporate decision-making. Passive investors usually vote with their feet. If
they are not satisfied with decisions taken by the management or controlling shareholders,
they simply exit the company by selling their shares, a practice fancifully referred to as the
Wall Street walk.13
There are various shades of shareholder activism, although this paper primarily deals with
three, referring first type as participative shareholder activism. In this type, shareholders
assume greater responsibility for participating in shareholder meetings and exercising their
corporate franchise. This way, greater participation by minority shareholders could have an
impact on the outcome of corporate decisions. Even if the decisions themselves may not be
different because minority shareholders may only have infinitesimal shareholding in the
company, their overwhelming response cannot be ignored altogether by managements and
controlling shareholders. While shareholders, particularly of the institutional variety, are
demonstrating greater interest in participative activism, legal reforms in various jurisdictions
are utilizing soft law and self-regulatory mechanisms to encourage greater participation by
shareholders in corporate decision-making.14
The second type of activism is more upfront. Interactive shareholder activism involves the
direct engagement by the shareholders with the management. Large institutional shareholders
seek to interact with the management and obtain an assessment of the affairs of the company.
Such interaction usually takes place when either the shareholders are unconvinced of the
direction adopted by the management on certain matters, or when the company undertakes a
major transaction (such as a merger) or suffers a material adverse effect (such as a significant
loss, or other extraordinary event such as a corporate fraud). Shareholders not only interact to
obtain more information from the management, but also to convince the management of the
12 Gillan & Starks, supra note 9, at 5.
13 Jayne Elizabeth Zanglein, From Wall Street Walk to Wall Street Talk: The Changing Face of
Corporate Governance, 11 DEPAUL BUS. L.J. 43 (1998).
14 Financial Reporting Council, The UK Stewardship Code (September 2012), available at governance/UK-Stewardship-Code.aspx.
For a survey of trends regarding activism in various leading jurisdictions around the world, see, Lisa
M. Fairfax, Shareholder Democracy on Trial: International Perspective on the Effectiveness of
Increased Shareholder Power, 3 VA. L. & BUS. REV. 1 (2008).

strategy to be followed and changes to be effected to enhance value to shareholders. 15 The

disadvantage of the interactive type of activism is that management and controlling
shareholders are under no legal obligation to involve with shareholders, and can merely
choose to ignore them. In such a case, the interactive efforts may not be productive.
An extended version of such interactive type brings us to the third category where
shareholders adopt a combative strategy. This involves efforts to overthrow incumbent
management through processes such as proxy fights or hostile takeovers that result in a
change in control of the company.16 A more aggressive form involves the initiation of
litigation against the company, its board and management. Certain types of investors, such as
pension funds and hedge funds, have utilized this strategy more recently in certain
jurisdictions like the US to achieve their goals.17
With this background regarding the basis for, and types of, shareholder activism, the paper
now turns to the development of the phenomenon in India.

15 This type of activism is becoming prominent with certain types of institutional investors such as
hedge funds. Thomas W. Briggs, Corporate Governance and the New Hedge Fund Activism: An
Empirical Analysis, 32 J. CORP. L. 681 (2007); Marcel Kahan & Edward B. Rock, Hedge Funds in
Corporate Governance and Corporate Control, 155 U. PA. L. REV. 1021 (2007).
16 Briggs, supra note 15 at 681; Brian R. Cheffins & John Armour, The Past, Present and Future of
Shareholder Activism by Hedge Funds, 37 J. CORP. L. 51 (2011).
17 Kahan & Rock, supra note 15, at 1038-39; See also, Randall S. Thomas, The Evolving Role of
Institutional Investors in Corporate Governance and Corporate Litigation, 61 VAND. L. REV. 299
(2008); Stephen J. Choi & Jill E. Fisch, On Beyond CalPERS: Survey Evidence on the Developing
Role of Public Pension Funds in Corporate Governance, 61 VAND. L. REV. 315 (2008).

Chapter 3
Regulatory Reforms towards Greater Shareholder Participation

Over the last decade, regulatory efforts in India have focused on inducing greater
participation in shareholder decision-making.18 This has been implemented through a step-bystep approach that addresses different facets of shareholder participation. These include the
manner of voting, the manner of participating in shareholders meetings, and whether
shareholders might be compelled to cast their votes. Each of these is addressed in a proper

A. Voting Methods
In 2001, the facility of voting by postal ballot was introduced. 20 This was intended to address
the problems faced primarily by retail shareholders who had to attend and physically
participate in shareholder meetings, often in remote locations of the country. The system of
postal ballot permits shareholders to send in their votes by post instead of personally
attending and voting at a meeting. A set of rules promulgated by the Central Government
18 Sec 166(2), Companies Act, 1956, wherein annual general meetings can be held only at the
registered office of the company or at some other place within the same city, town or village as the
registered office, although there are no geographical restrictions as far as other shareholders meetings
are concerned.
19 John Armour & Priya Lele, Law, Finance, and Politics: The Case of India, 43 LAW & SOCY
REV. 491, 496.
20 192A, the Companies Act, 1956.

listed certain resolutions that are to be mandatorily put to vote by postal ballot. 21 In other
cases, the company has the option to offer the postal ballot facility.22
While the postal ballot facility represented a sea change in terms of providing a better option
for retail shareholders to cast their corporate franchise, it failed to make a serious impact. The
postal ballot facility may have removed some of the procedural obstacles to shareholder
voting, but it was not intended to address the broader issues of collective action problems and
shareholder apathy. Moreover, since shareholders are unable to participate in the discussions,
and to obtain the benefit of the deliberations in the meeting before they cast their votes,
participation levels have been found to be extremely low. One report states that the response
of shareholders through postal ballot has been abysmally low at only about 3% on average.23
Given the inadequate functioning of the postal ballot system, more recent regulatory
developments have sought to utilize technological advancements to enhance shareholder
participation and voting.24 On this occasion, the initiative emanated from SEBI. In July 2012,
SEBI amended the listing agreement requiring large companies to provide electronic voting
(e-voting) facilities in respect of matters requiring postal ballot. 25 According to this new
dispensation, the top 500 listed companies on the Bombay Stock Exchange and the National
Stock Exchange are required to provide e-voting facility with effect from October 1, 2012.
Two agencies have already been certified to provide e-voting platforms. 26 Although it is too
21 These are matters that materially affect shareholder interest, such as alteration of the constitutional
documents, sale of substantial undertaking of the company, buyback of shares, issue of shares with
differential voting rights, and the like. 4, Companies (Passing of the Resolution by Postal Ballot)
Rules, 2001.
22 Although not mandated by legislation, SEBI exhorted companies to undertake shareholder voting
through postal ballot even in other cases by imposing this as a condition while granting specific
dispensations to companies, such as in exemptions from making an offer under SEBIs takeover
23 Welcome to the World of E-Voting, THE FIRM: CORPORATE LAW IN INDIA, July 2, 2012.
24 Welcome to the World of E-Voting, THE FIRM: CORPORATE LAW IN INDIA, July 2, 2012.
25 Securities and Exchange Board of India, Amendment to the Equity Listing Agreement Platform
for E-Voting by Shareholders of Listed Companies, Circular CIR/CFD/DIL/6/2012 (Jul. 13, 2012)
26 Id. These agencies are the Central Depository Services (India) Limited (CDSL) and the National
Securities Depository Limited (NSDL). Both these agencies have established e-voting systems,
available at and

early to gauge the effectiveness of e-voting, it is expected to generate greater participation by

shareholders. For example, the e-voting process is less costly compared to the postal ballot,
and involves less time and effort on the part of the shareholders as well as the company.27
However, due to its reliance on technology, the success of e-voting would depend on the
extent of penetration of computers and the Internet across the country.28

B. Shareholder Meetings
In order to enable the shareholders to exercise their corporate franchise in an informed
manner, it is important that they are able to participate in meetings, both to make an
assessment as to the manner in which they should exercise their votes, also to speak at the
meetings and convey their views to enable the other shareholders to exercise their votes in an
informed manner as well. Recognizing the limitations of physical shareholders meetings, the
Government of India has introduced the concept of electronic participation. Companies may
now provide the option to shareholders to attend meetings electronically, through audiovisual means, such that all persons participating in that meeting communicate
concurrently with each other without an intermediary, and participate effectively in the
meeting.29 Moreover, companies may provide video conferencing connectivity during such
meetings in at least five locations within India. 30 At the same time, responsibility is placed on
the company and the chairman of the meeting to put in adequate safeguards to ensure the
integrity of the meeting. Although these measures were initially intended to be mandatory for
listed companies in the period subsequent to the financial year 2011-12, concerns were raised

27 Vinod Kothari, E-voting becomes mandatory for all listed companies, MONEYLIFE, July 16,
2012; Tania Kishore, E-voting will make life easier for investors, BUSINESS STANDARD, July 4,
28 It would not be far-fetched to expect persons holding shares in companies to have access to
computers and the Internet.
29 Ministry of Corporate Affairs, Government of India, Green initiative in the Corporate Governance
Participation by shareholders in general meetings under the Companies Act, 1956 through electronic
mode, General Circular No. 27/2011 (May 20, 2011), 4(a).
30 Id., at 6.

regarding the legal validity of electronic meetings in the context of the Companies Act, due to
which such electronic meetings are intended to be optional for listed companies too.31
Since these measures are only discretionary, and are yet to be fully operative, they are
unlikely to be widely followed. While it is certainly probable that some of the blue-chip
companies will adopt these voluntary measures, widespread compliance across corporate
India may have to wait.

C. Voting as Responsibility
Shareholding in a company is considered to be a bundle of rights. 32 One such right conferred
is to participate in corporate decision-making through the exercise of voting power. In this
jurisprudential framework, any kind of duties or accountability to exercise voting rights is
antithetical to the rights or entitlement-based understanding of share ownership. Hence,
shareholders cannot usually be obliged to exercise their voting rights in any manner, or at all.
This legal understanding of share ownership does not assist greater shareholder participation
in companies, the significance of which is shareholder passivity.
Although shareholders cannot be compelled to exercise their votes, regulatory authorities
have begun to adopt market-based approaches to address passivity among institutional
investors. In a move that is somewhat unconventional in the Indian context, SEBI has sought
to exhort a specific type of institutional investor, i.e. mutual funds, to exercise their voting
rights in investee companies in a responsible manner. In 2010, SEBI issued a circular to
mutual funds requiring them to play an active role in ensuring better corporate governance
of listed companies.33 Adopting a comply-or-explain approach,34 SEBI requires asset
management companies of mutual funds to disclose on their websites and in annual reports
31 Ministry of Corporate Affairs, Governance of India, Green Initiatives in Corporate Governance
Further Clarification regarding participation by Shareholders or Directors in meetings under the
Companies Act, 1956 through electronic mode authorization regarding e-voting, General Circular
No. 72/2011 (Dec. 27, 2011).
32 Cambridge Gas Transportation Corporation v. Official Committee of Unsecured Creditors of
Navigator Holdings plc, [2006] UKPC 26, [2007] 1 AC 508; Borland's Trustee v. Steel Brothers & Co
Ltd,[1901] 1 Ch 279.
33 Securities and Exchange Board of India, Circular for Mutual Funds, SEBI/IMD/CIR No 18 /
198647/2010 (Mar. 15, 2010) [hereinafter the SEBI Circular for Mutual Funds].

their general policies and procedures regarding the exercise of votes on listed companies. 35
Moreover, they are also required to disclose the specific exercise of voting rights in respect of
identified matters such as corporate governance, changes to capital structure, mergers,
takeovers, and the like.36
By imposing compulsory disclosure responsibilities and thereby improving transparency, this
requires mutual funds to take a more active and considered role while exercising their voting
rights on companies. It may no longer be possible for mutual funds to either abstain from
voting or to grant proxies in favour of managements or controlling shareholders without
following a reasoned decision making process. This is particularly relevant because
institutional investors such as mutual funds possess substantial shareholding (at least in the
aggregate, if not individually) with the power to tip the scales on key voting matters such as
mergers, change of control transactions, preferential allotments of securities and the like.
While SEBIs circular technically applies only to mutual funds, its broader message could
well pave the way for greater participation by other types of institutional shareholders.

D. Assessing the Reforms

The regulatory reforms discussed in this section have been fragmented in nature, but their
common theme has been to increase shareholder participation in meetings and voting. This
would strengthen the hands of minority shareholders, both of the retail and institutional
varieties, by removing various procedural hurdles that have impeded their extensive
participation in the past. By imposing stewardship responsibilities on institutional investors
such as mutual funds, SEBIs goal has become clearer.
At the same time, it would be imprudent to assume that such regulatory reforms would by
themselves instil greater shareholder participation. More specifically, institutional shareholder
34 In such an approach, although there is no compulsion to comply with such requirement, the
persons subject to it are required to make appropriate disclosures on whether they comply with the
requirement, or alternatively to explain the reasons for non-compliance. Anita Indira Anand, An
Analysis of Enabling vs. Mandatory Corporate Governance: Structures Post-Sarbanes Oxley, 31 DEL.
J. CORP. L. 229, 229-30 (2006)
35 The SEBI Circular for Mutual Funds, supra note 43 at 4(ii)
36 Id. at 4(ii).

activism must be self-generated, although a trend in India towards such activism appears to
be developing steadily.37
Despite these regulatory reforms, one significant area of concern continues to be the lack of
adequate information available with shareholders in order to enable them to exercise their
considered vote. While the Companies Act does contain elaborate provisions as to the notice
to be given to shareholders to convene meetings, both in terms of the time period and
information to be provided,38 the disclosure and transparency standards followed in practice
continue to be below par.39 While there has been a gradual increase in the amount and quality
of information disseminated to shareholders to elicit their franchise, it is arguably inadequate.
The lack of availability of quality information strikes at the heart of shareholder indifference
in the exercise of voting rights. Intermediaries such as proxy advisors and governance
analysts can bridge the informational disparity to some extent. 40 While such intermediaries
played a insignificant role, if at all, in Indian corporate governance in the past, they have
revolutionized the governance sphere in the last two years. In the next Part, I reflect the
impact of these intermediaries on shareholder activism in India.

37 See, infra, Part IV.

38 173, 393, Companies Act, 1956.
39 Umakanth Varottil, Corporate Governance in M&A Transactions, Luncheon Address at the
International Bar Association Conference on "The Indian Story in Global Mergers and Acquisitions",
Mumbai (Mar. 9, 2012).
40 Malini Goyal, How and why transparency in boardrooms helps both India Inc & investors, THE
ECONOMIC TIMES, September 30, 2012.

Chapter 4
Corporate Governance Intermediaries

4.1. Introduction
Globally, governance intermediaries such as proxy advisors play a significant role in
influencing corporate decision-making. Proxy advisory firms analyse corporate proposals and
make recommendations to their clients, who are primarily institutional investors, on the
manner in which they should exercise their votes. 41 The firms also put out public
recommendations, which can be utilized by retail shareholders for whom it is uneconomical
to specifically turn to proxy advisors. The proxy advisory industry is rather well established
internationally, and it is actively involved in corporate governance in jurisdictions such as the
US. For example, the industry leader, Institutional Shareholder Services (ISS) 42 controls
about 61% of the market, and is a force to estimate with, as its recommendations are capable
of fluctuating the votes at shareholders meetings and varying the outcome of the decision

Proxy Advisors in India: Their Influence

Since 2010, the proxy advisory industry has blossomed in India as well. Within a span of two
years, three proxy advisory firms have been established in India, and they have already
published hundreds of recommendations regarding corporate proposals pertaining to various
listed companies in India.43 Their recommendations cover companies proposals relating to
41 Jayati Sarkar & Subrata Sarkar, Large Shareholder Activism in Corporate Governance in
Developing Countries: Evidence from India (2000), available at, at 8.
42 Mathew, supra note 7, at 834.
43 Both SEBI and the Reserve Bank of India (RBI) have created a separate facility for investment by
FIIs into Indian companies. See, e.g., Securities and Exchange Board of India (Foreign Institutional

the appointment of directors (especially independent directors), the appointment of auditors,

and major corporate transactions such as mergers and takeovers.44 Where there are
governance concerns, the recommendations of proxy advisors have been against the
management proposals. For example, these firms have recommended against appointment of
independent directors who have served companies for a long period of time, although there is
yet no maximum tenure mandatorily prescribed for independent directors. 45 They have raised
similar concerns with respect to auditor appointments.46 They have also registered opposition
in the case of mergers and corporate restructurings where there is a likelihood value to the
public shareholders might be eroded.47
No longer can administrations and governing shareholders ignore the influence of minority
shareholders (both institutional and retail). The references of the proxy advisory firms have
the effect of shedding greater light on corporate proposals, and of rousing minority
shareholders to overcome joint action problems and shareholder apathy and to participate
more effectively in corporate decision-making. The fledgling nature of the proxy advisory
industry in India and the absence of systematic empirical evidence might not yet indicate
whether there has been greater exercise of minority franchise in Indian listed companies, but
the fact that the recommendations are discussed in the public domain in a transparent manner
(such as through the financial press) is expected to operate as a set of checks and balances
against managements and controlling shareholders from initiating proposals that might not
pass muster from a governance standpoint.
Another result effect of the proxy advisory industry is its ability to constantly enhance
governance standards. Although listed companies in India are required to comply with the
standards of corporate governance set out by law,48 the close monitoring of proxy advisory
firms will motivate companies to uplift their standards of administration. It is expected that
Investors), Regulations, 1995.
44 Bhuma Srivastava, Proxy advisory firms give a boost to shareholder activism, THE MINT, June
29, 2012; Naren Karunakaran, Proxy firms wade through proposed resolutions, THE ECONOMIC
TIMES, November 29, 2011.
45 Sucheta Dalal, Proxy advice: Check on misgovernance, MONEYLIFE, August 11, 2011.
46 Id.
47 KARUNAKARAN, supra note 55.

the industry will also help to instil global best criteria and practices amongst Indian
Proxy advisory firms also benefit institutional investors in other ways. For instance, it is no
longer necessary for institutional investors spend efforts and costs on research, as they can
simply outsource these functions to outside firms.49 The investors and their administrations
can train their resources on investment analysis and decisions, and minimize their focus on
governance decisions in their investee companies. Moreover, managers of institutional
shareholders tend to release their liabilities to their own investors by relying upon external
independent advice on voting and administration matters.50
While the advent of the proxy advisory industry signifies a whole new chapter in Indian
corporate governance as it produces the much need activism among public shareholders, it is
necessary to caution against some possible concerns that have been seen in other
jurisdictions. It is much too early to ascertain their impact in India notwithstanding, but
lessons from experiences in those jurisdictions would play a role in better moderating the
functioning of the industry in India so as to take full advantage of its benefits by addressing
any ill-effects along the way.

48 While some of the corporate governance standards are mandatory (e.g. Companies Act, 1956;
Clause 49 of the listing agreement), others are voluntary and to be adhered to on a comply-orexplain basis (e.g. Ministry of Corporate Affairs, Government of India, Corporate Governance
Voluntary Guidelines 2009).
49 ROSE, supra note 51.
50 Paul Rose, The Corporate Governance Industry, 32 J. Corp. L. 887, 926 (2007).

Chapter 5
Evaluating the Impact of Shareholder Activism

After considering the trends regarding shareholder activism that are emanating from India,
and assessing the possibilities and limitations within the Indian context, it is necessary to
evaluate the effectiveness of such activism as a measure of enhancing corporate governance,
both generally as well as in the specific context of India.

Distilling the Evidence

The present study finds palpable anecdotal evidence that showed a larger role on the part of
activist shareholders in India since 2011 than that witnessed in the past. This is due to the
exertions of the corporate regulators to enhance shareholder participation in corporate
decision-making through various standards such as e-voting, e-meetings and the imposition
of a stewardship roles on institutional investors such as mutual funds. Apart from being
nudged by the regulators, certain activist investors themselves have accepted along the
mantle of influencing corporate governance in companies in which they have placed. The
emergence of a strong set of informational intermediaries in the form of proxy advisories
signals a new era in shareholder activism in India.51
51 Reeba Zachariah & Partha Sinha, FII-PEs holdings set to change, TIMES OF INDIA, September
24, 2009; S. Murlidharan, Encourage GDRs, Not FIIs, THE HINDU BUSINESS LINE, January 18,

While some general trends in India can be gleaned from anecdotal evidence, there is little
track record to build any empirical evidence yet. Although there are empirical studies carried
out in other markets, they remain equivocal about the positive impact of shareholder activism
on corporate governance.52 A number of reasons have been offered, that range from the
methodological to the substantive. At the outset, there are difficulties in measuring the
effectiveness of shareholder activism.53 For instance, there is often no public evidence of the
interactive efforts of shareholders to influence corporate governance in investee companies.
Moreover, there are difficulties in establishing the causal link between activism and better
corporate governance.54 Even when measurable, the results have not been convincing, as the
impact appears to be quite feeble.55 As Gillan and Starks note:
The evidence provided by empirical studies of the effects of shareholder
activism is mixed. While some studies have found positive short-term market
reactions to announcements of certain kinds of activism, there is little
evidence of improvement in the long-term operating or stock-market
performance of the targeted companies.56
Concerns have also been expressed about the possible negative impact of some forms of
activism, such as the type pursued by hedge funds. 57 The natural assumption is that any value
created by activist shareholders is equally enjoyable by the other passive investors, which
arises due to the overall enhancement of governance standards in the company.58 But, that
assumption is not necessarily valid in all circumstances. Activist investors may likely pursue

52 For a discussion of several empirical studies, see, Gillan & Starks, supra note 9; Black, supra note
53 Gillan & Starks, supra note 9, at 16-17.
54 Id. at 17.
55 Black, supra note 10, at 15.
56 Gillan & Starks, supra note 9, at 35.
57 Gillan & Starks, supra note 9, at 34. See also, Henry T.C. Hu & Bernard Black, The New Vote
Buying: Empty Voting and Hidden (Morphable) Ownership, 79 S. CAL. L. REV. 811 (2006).
58 Briggs, supra note 15, at 722 (although empirical evidence to support this continues to be mixed).

agendas not shared by and often in clash with those of passive investors. 59 Moreover,
institutional investors are subject to inherent conflicts of interest. Although they may hold
shares for the benefit of their own investors (such as unit-holders in a mutual fund), it is the
managers who exercise voting rights in the investee companies. There is a risk that the
activist approach may be beneficial to the managers, but not necessarily in the interests of the
ultimate investors or unit-holders in the institution. While there is yet no evidence of such a
distinct conflict that has emanated in India, the importance of its adverse effect on
shareholder activism cannot be ignored.60

Effect on Controlled Companies

While evaluating the impact of shareholder activism, regard must be had to the ownership
structure of companies. Activism may have a different effect on companies with controlling
shareholders as opposed to those without. For example, in companies without controlling
shareholders, the influence of activist shareholders and increased voting by shareholders may
have a direct bearing on the outcome of proposals made by management. 61 On the other hand,
where controlling shareholders are dominant, it is unlikely that efforts on the part of the
regulators to promote shareholder voting or activist stances adopted by certain institutional
shareholders will have the same effect as in companies with diffused shareholding. As
Bebchuk and Hamdani note:
In [companies with controlling shareholders] , the rules governing voting
procedures are likely to be inconsequential. Controllers-unaffected by the
collective action and free-rider problems that discourage action by dispersed
shareholders-will exercise their voting power even without rules to facilitate
59 Bainbridge, supra note 10, at 1; Iman Anabtawi & Lynn Stout, Fiduciary Duties for Activist
Shareholders, 60 STAN. L. REV. 1255 (2008) (arguing that activist shareholders are susceptible to
greed and self-interest, which must be counterbalanced by foisting fiduciary duties upon them). See
also, Iman Anabtawi, Some Skepticism about Increasing Shareholder Power, 53 UCLA L. REV. 561
60 For an extensive discussion of the conflict issue in China, see Chao Xi, Institutional Shareholder
Activism in China: Law and Practice (Part 1), [2006] I.C.C.L.R. 251, 258-62.
61 However, even in such cases, the evidence is unconvincing. For example, a recent report indicates
that shareholders do not necessarily vote along with recommendations made by proxy advisory firms.
James R. Copland, Politicized Proxy Advisers vs. Individual Investors, THE WALL STREET
JOURNAL, October 8, 2012

shareholder voting. Furthermore, as long as a controller has enough votes to

determine voting outcomes, even rules that facilitate voting by minority
shareholders will not enable them to pass resolutions not favored by the
In insider economies such as India, due to the influence of controlling shareholders, activist
investors would not find it easy to alter the outcome of decisions made at shareholders
meetings. This may in turn reduce the incentives of activist investors to adopt stances that
operate to act as a check on management. As a corollary, controlling shareholders are less
likely to be deterred by the actions of activist shareholders.
In a study that is specific to India, Geis has conceptually and empirically demonstrated that
while independent block holding by institutional investors is generally useful in theory, it is
unlikely to have any impact on corporate governance in India due to the current ownership
structure of Indian companies with concentrated shareholding.63


This paper traces the evolution of shareholder activism in India. Hitherto non-existent, the
phenomenon has been ushered into Indian corporate governance within a span of the last two
years. It has been facilitated through regulatory reforms that enable greater participation of
shareholders in corporate decision-making. More than that, a market environment for activist
investors and corporate governance intermediaries has rapidly taken shape in India. The
proliferation of proxy advisory firms issuing recommendations in respect of hundreds of
Indian listed companies, and high-profile examples of institutional investors such as hedge
funds confronting Indian managements is emblematic of the trend.

62 Lucian A. Bebchuk & Assaf Hamdani, The Elusive Quest for Global Governance Standards, 157
U. Pa. L. Rev. 1263, 1291 (2009).
63 Geis, supra note 7.

However, the corporate structure and legal system in India offer considerable resistance that
prevents full utilization of the benefits of shareholder activism. The existence of controlling
shareholders in most Indian companies cushions the impact of activist investors. The legal
system is not conducive to shareholder litigation, which is a tool utilized by activist investors
in other jurisdictions, often successfully. At an overall level, there is also some pessimism
about the impact of shareholder activism on the long-term performance of companies and
shareholder value.
In building upon the present study, future efforts may be undertaken on two fronts. First,
there is a need for greater empirical research on the impact of shareholder activism in India,
which would help better understand its desirability and effect in the Indian context. Second,
more efforts must be taken to enhance the power of minority shareholders who are compelled
to act in the shadow of controlling shareholders. These include measures such as cumulative
voting for appointment of independent directors,64 prohibition on controller shareholder
voting in case of interested party transactions,65 and the like.66 If such an enabling regime
were created, it would provide the necessary incentives to activist shareholders to bring about
overall enhancement of corporate governance norms in the listed companies in which they
have invested, and also generally raise governance standards within the country.

Primary Sources
Companies Act, 1956

64 Umakanth Varottil, Evolution and Effectiveness of Independent Directors in Indian Corporate

Governance, 6 HASTINGS BUS. L.J. 281, 357-60 (2010).
65 Varottil, supra note 3, at 49. SEBI Press Release, Recommendation to MCA on related party
transactions (Feb. 7, 2011).
66 A detailed menu of recommendations to enhance institutional shareholder participation is
contained in Paranjpe & Shorewala, supra note 93 at 146-47.

Secondary Sources
Articles Referred:
Varottil Umakanth, The Advent of Shareholder Activism in India, Journal on Governance,
Vol. 1 No. 6, 2012.

Books Referred:
Singh Avtar, Company Law, 16th Edition, Eastern Book Company, Lucknow, India, 2013.
Dr. Saharay, H.K., Company Law, Universal Law Publishing Co., New Delhi, 2013.
Dr. Tripathi, S.C., Modern Company Law, Central Law Publications, Allahabad, 2012.
Jain, N.K., Company Law: Law and Practice, Deep & Deep Publications Pvt. Ltd., New
Delhi, 2011