Investor Protection and Corporate Governance-Dissertation For Seminar Paper I

INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM
CHAPTER I: INTRODUCTION
Corporate Governance entails conducting the affairs of the companies in such a manner that the corporate entity is accountable and fairness would be assured to all the stakeholders. It may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. The elements of good corporate governance include maintenance of transparency, accountability, disclosures, compliance with the legal framework, shareholders value, etc. The legal and regulatory framework of corporate governance should aim at protection of investors. Since maintenance of transparency in dealings of the company is the most important facet of corporate governance in India, the same shall be ensured in order to provide a mechanism for protection of the investors. The need to protect the investors arises because the companies indulge in unfair trade practices and corporate frauds. When such corporate frauds are committed, the investors are the class of stake holders who are most adversely affected. The companies shall also consider that in case they go beyond the corporate governance norms, the confidence of the shareholders in the company would be instilled; which is indirectly beneficial for the company. Hence, the corporate governance mechanism shall be viewed as a mode by which the companies can gain the confidence of the shareholders. The need for making adequate disclosures rises because only adequate disclosures enable the shareholders in taking an informed decision. Also, the Companies Act, 2013 has for the first time included various aspects relating to corporate governance. This would further ensure that the companies follow good corporate governance practices. Investor Protection is the most significant facet of corporate governance. However, it is neglected. In the wake of various corporate scams and accounting scandals, insider trading, non-disclosure by companies, vanishing companies and other such practices of corporate; the relevance of investor protection has increased. On account of such corporate frauds, the investors are the segment of the stakeholders who are most gravely affected. Hence, the framework of Corporate Governance in India should aim at protection of the investors. Shareholder Activism is a modern trend which triggers the corporates to follow good corporate governance practices and ensure investor protection. The Securities and Exchange Board of India plays a pivotal role in protecting the investors in India. The Kumar Mangalam Birla Committee recommendations led to introduction of Clause 49 in the Listing Agreement which is the bedrock of Corporate Governance in India. A mandatory requirement under Clause 49 of the Listing Agreement is formulation of the Investors Grievance Committee, which shall entertain the complaints of the investors and ensure that such grievances are redressed. Later the Narayana Murthy Committee made
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM recommendations to enhance investor protection by improving the disclosure requirements and widening the roles of the directors in Corporate Governance. However, there seems to be a vacuum in the requirement of the unlisted companies to follow corporate governance practices. The Corporate Governance Voluntary Guidelines, 2009 can be followed by the unlisted companies, while since the guidelines are not mandatory, the purpose remains unserved. Corporate Governance plays a significant role in investor protection. The researcher seeks to analyse whether good corporate practices have the potential of safeguarding the investors. The researcher would trace the evolution of corporate governance in India and the changing face of investor protection. In the past, India has witnessed various corporate frauds, which reflect loopholes in the current framework of the corporate governance. The researcher would analyse whether good corporate governance practices have the potential to curb corporate frauds and thereby lead to protection of investors. The researcher would also throw some light on the corporate governance provisions in India under the Companies Bill, 2012. Clause 49 of the Listing Agreement is the basis of corporate governance framework in India and it focuses majorly on the aspect of disclosure by the Company. Apart from the Clause 49 of the Listing Agreement, the Companies Act, 1956 and various regulations of the SEBI reflect the importance of disclosures to the shareholders. The researcher shall examine the relation between corporate governance and investor protection. The manner in which Clause 49 of the Listing Agreement furthers corporate governance in India shall be highlighted. The Corporate Governance Voluntary Guidelines, 2009 provides a set of disclosures that shall be made to the shareholders. The researcher would analyze the role that these guidelines would play in protecting the interests of the investors. Investor protection may be seen as a manifestation of good Corporate Governance. If the company concerned makes the adequate disclosures to the Shareholders and ensures that the investors interest is protected, it would imply that the Company follows good governance practices encompassing investor protection. The Satyam Fiasco displayed that a companys inadequate corporate governance framework may defeat the interests of the investors. The Reebok Fraud Case brought the issue of the requirement of adequate corporate governance measures in the unlisted companies. The unlisted companies do not have any mandate to follow corporate governance practices and this may defy the interests of the investors. The researcher would scrutinize the Reebok Fraud case and the Satyam Fiasco in order to analyze the failure of corporate governance mechanisms. In unlisted companies, the shareholders have various rights such as proceeding against the company for oppression or mismanagement and proceeding towards winding up of the company, while they do not have any statutory right to mandate the company to make disclosures to them as required under the Corporate Governance mechanism. Thus, the
INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM inadequacy of the rights to the shareholders in unlisted companies shall be addressed only by formulating a legal framework in order to provide that the corporate governance shall be mandatorily followed by the unlisted companies. The issue of rights of minority shareholders shall also be examined with respect to the corporate governance mechanism in India. The Companies Act, 2013 has provided for class action suits and thus has taken a leap in protecting the interests of minority shareholders. The role of institutional investors in mandating the company to follow corporate governance practices has come to the fore in recent past. The institutional investors can play a significant role in influencing the company to follow good corporate governance practices. The concept of shareholder activism is also a significant issue in terms of corporate governance practices. Shareholder Activism entails that the shareholders shall take a proactive role in formulating a dialogue with the management of the company on a regular basis. The reforms in India which highlighted the aspect of shareholder activism have also been discussed. Corporate Governance in India is based on the maintenance of transparency in the company and the same leads to the protection of investors. The researcher would also bring out the need of shareholder activism in India in terms of corporate governance. The essence of the research shall be examining the adequacy of the legal and regulatory framework in India with regard to corporate governance in protecting the interest of the investors.
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CHAPTER II LEGAL AND REGULATORY FRAMEWORK OF CORPORATE GOVERNANCE IN INDIA

CORPORATE GOVERNANCE Corporations receive huge pool of capital from an investor base in domestic as well as international markets. Investment by the shareholders may thus be termed as an act reflecting faith of the investors in the ability of the management. The investors expect the management to act as trustees of the investment and earn a higher rate of return as compared to the cost of capital. Hence, the investors expect the management to adopt good corporate governance practices and act in the best interests of the investors. The Narayana Murthy Committee defined Corporate Governance as the acceptance by the corporation's management of the inalienable rights of the shareholders as the owners of the corporate entity and the role of the management as trustees of the investment of the shareholders. Hence, corporate governance is about conducting the business in an ethical manner, commitment towards values and drawing a distinction between personal and corporate funds in the management of a company.1 Corporate Governance may be defined in terms of bringing the interests of the investors and managers into line and ensuring that the corporate entity functions in the best interests of the investors.2 It deals with the interrelationship of the internal governance of the corporation and corporate accountability towards the society.3 It lays down the procedures and processes in accordance with which a corporate entity may be directed and controlled. The structure of corporate governance defines the distribution of rights and responsibilities of the managers, stakeholders, shareholders and other participants and specifies the rules and procedure of decision making.4 Promotion of corporate fairness, accountability and transparency is the aim of corporate governance.5 In simple terms Corporate Governance can be defined as a set of laws, rules, regulations, systems, principles, process by which a company is governed.6
1
Consultative Paper on Review of Corporate Governance Norms in India, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf 2 Colin Mayer, Corporate Governance, Competition, and Performance, Journal of Law and Society Volume 24, Issue 1, March 1997 available at http://onlinelibrary.wiley.com/doi/10.1111/1467-6478.00041 3 Simon Deakin, Alan Hughes, Comparative Corporate Governance: An Interdisciplinary Agenda, Journal of Law and Society Volume 24, Issue 1, March 1997, available at http://heinonline.org/HOL/Page?handle=hein.journals/jlsocty24&div=2&g_sent=1&collection=journals 4 ibid 5 World Bank, Managing Development - The Governance Dimension, 1991, Washington available at http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2006/03/07/000090341_200 60307104630/Rendered/PDF/34899.pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM The need for corporate governance lies in the fact that every corporation should be fair and transparent in its dealings. Maintenance of transparency and an ethical conduct is essential for attracting and retaining capital investment from the stakeholders.7 EVOLUTION OF CORPORATE GOVERNANCE IN INDIA The Securities and Exchange Board of India (SEBI) had set up a Committee in 2000 under the Chairmanship of Kumar Mangalam Birla to promote and raise standards of corporate governance. The Kumar Mangalam Birla Report was the first formal and comprehensive attempt to evolve a Code of Corporate Governance, considering the governance in Indian companies, as well as the state of capital markets at that time. The recommendations of the report led to the inclusion of Clause 49 in the Listing Agreement in the year 2000. These recommendations had the aim of improving the standards of corporate governance in India and were classified as mandatory and non-mandatory recommendations. These recommendations were made applicable to listed companies with paid up capital of Rs 3 crores and above or companies having a networth of Rs. 25 crores at any time. The responsibility of brining the recommendations into force lied with the Board of Directors of the Company8. According to the report, the Board should have an optimum combination Executive and Non-Executive Directors and not less than 50 per cent of the Board should comprise of Non-Executive Directors. In case of the Chairman is a Non-Executive Director, one-third of the Board should compose of non-executive directors. The companies shall conduct Board Meetings at least four times in a year and a time gap of four months should exist between two meetings. A director should not be the member of more than 10 Committees or act as a Chairman of more than 10 Committees..9 The Report also recommended that the Companies shall set up an Audit Committee. The Report discussed the composition of the Committee, other aspects such as quorum, frequency of meeting, powers of audit committee and functions of the Committee. The Committee was to be composed of atleast three members, all being non-executive directors, and atleast one director shall have knowledge in finance and accounting. Also, the Committee shall be headed by an independent director. The functions of the audit committee include oversight of the companys financial reporting process and the disclosure of its financial information in order to ensure that the financial statements are credible and
6
Prabhash Dalei, Paridhi Tulsyan and Shikhar Maravi, Corporate Governance in India: A Legal Analysis, International Conference on Humanities, Economics and Geography (ICHEG'2012) March 17-18, 2012 Bangkok, available at http://psrcentre.org/images/extraimages/312018.pdf 7 ibid 8 Prabhash Dalei, Paridhi Tulsyan and Shikhar Maravi, Corporate Governance in India: A legal Analysis, available at http://psrcentre.org/images/extraimages/312018.pdf 9 Santosh Pande and Kshama V Kaushik, Study on the State of Corporate Governance in India , http://www.iica.in/images/Evolution_of_Corporate_Governance_in_India.pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM accurate. The committee can also recommend on aspects such as appointment and removal of external auditor, fixation of audit fee and approval for payment for any other services. The committee can also review the annual financial statements before submitting to the Board. The Remuneration Committee was another body which the Report recommended to be set up by the Company. This was a non-mandatory recommendation. The Committee was assigned the task of determining the remuneration of the non-executive director and the Annual Report shall make disclosures about the remuneration paid to the Directors. The Report also recommended that the Company should set up a Shareholders Grievance Committee to redress the issues of the shareholders10. The Report also made recommendations pertaining to Disclosures. The details on noncompliances with regard to capital market related issues in the past three years and the penalties imposed shall be disclosed. Also, half-yearly report shall be sent to the shareholders and quarterly report shall be sent to the institutional investors. Various details which are vital for awareness of the shareholders shall be disclosed in the Annual Report. Auditors certificate on Corporate Governance shall also be annexed with the Annual Report. Companies shall also disclose the consolidated accounts of their subsidiary companies in which they hold atleast 51 per cent or more capital. Shareholders should use the General Meetings as a platform to ensure that the affairs of the company are being conducted in the best interests of the investors11. The Half-yearly declaration of financial performance including the summary of important events in the past six months shall be disclosed to the shareholders. The Report also threw light on the role institutional investors in corporate governance. It was recommended that the institutional shareholders shall take active interests in composition of the Board; they shall be vigilant and maintain systematic and regular contact with the management to examine the performance and quality of management and also to ensure that the voting intentions are translated into practice12. In May 2000, the Department of Company Affairs formed a broad based study group under the Chairmanship of Dr. PL Sanjeev Reddy. The group was given the task of examining ways to operationalise the concept of corporate excellence on a sustainable basis so as to sharpen Indias Global competitive edge and to further develop corporate culture in the country. In November 2000, a Task Force on Corporate Excellence13 set up by the group came out with a report comprising of various recommendations for raising governance
10 11
ibid Report of the Kumar Mangalam Birla Committee on Corporate Governance, available at http://www.sebi.gov.in/commreport/corpgov.html 12 ibid 13 Report on Corporate Excellence on A Sustained Basis to Sharpen Indias Global Competitive Edge and to Further Develop Corporate Culture in the Country, available at http://www.acga-asia.org/public/files/IndiaReddyreport2000.doc.
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM standards among all companies in India. It also suggested the setting up of a Centre for Corporate Excellence. One of the recommendations of the report was that there shall be higher delineation of independence criteria and the probability of conflict of interest shall be minimized. The commitment and accountability of the Directors shall be ensured by fewer and more focused board and committee membership. There shall be a meaningful and transparent accounting and reporting by disclosing various details in order to ensure informed participation by shareholders. Introduction of formal recognition of Corporate Social Responsibility was also recommended in the report.14 It was also recommended that there shall be a clear demarcation between policy making and oversight responsibilities. The Task Force on Corporate Excellence recommended that there shall be highest standards of corporate governance that shall be followed by the companies. The Naresh Chandra Committee was established in 2002. It is believed that the Committee was established by the Indian Government in response to the Enron debacle in 2000, various scams in the US involving the fall of various corporates like Xerox, WorldCom etc and the subsequent enactment of the Sarbanes Oxley Act, which is regarded as a stringent legislation. The Naresh Chandra Committee made various recommendations in line with international best practices15. The recommendations stipulated that the audit assignments should be carried out in a transparent manner and thus there should not be any financial interest of the auditor in the company nor should the auditor and company have any personal relationship. Various aspects such as appointment of auditor, auditors disclosure of qualifications and of contingent liabilities, auditors annual certification of independence etc were discussed in the report; the focus of which was to ensure that the process of auditing is transparent. The report also recommended the setting up of Independent Quality Review Board, appointment of an independent director, the percentage of independent directors in the Board, minimum board size of listed companies etc.16 The aspect of disclosure of duration of board meetings, additional disclosure to directors, and appointment of independent director on the audit committee was also emphasized. Remuneration to the independent directors, exemption of independent directors from certain liabilities, training of independent directors were amongst some other recommendations. In 2002, SEBI analyzed the statistics of compliance with the clause 49 of Listing Agreement by the listed companies and realized that there was a need to look beyond the mere systems and procedures if corporate governance was to be made effective in protecting the interests of the investors. Hence, SEBI constituted a Committee under the chairmanship of NR Narayana Murthy. The Narayana Murthy Committee was assigned the task of reviewing the implementation of corporate governance code by listed companies and for issue of revised
14 15
ibid http://finmin.nic.in/reports/chandra.pdf 16 ibid
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM clause 49 based on its recommendations. Clause 49 of the Listing Agreement forms the bedrock of corporate governance in India. OECD PRINCIPLES ON CORPORATE GOVERNANCE In its endeavors to improve the governance practices, the Organization for Economic Cooperation and Development (OECD) had published its principles of corporate governance in 2002. The OECD principles on corporate governance are considered as a benchmark by policy makers, stakeholders, investors and corporations round the globe. These principles have advanced corporate governance agenda and act as guidelines for member and nonmember countries with respect to legislative and regulatory framework on corporate governance17. Following is an overview of the OECD principles on corporate governance: Principle I of the OECD Principles on Corporate Governance stipulates that the basis of an effective corporate governance framework shall be ensured. The framework should lead to promotion of transparent and efficient markets. It should be consistent with the rule of law and shall articulate the division of responsibilities amongst the supervisory, regulatory and enforcement authorities. Principle II of the OECD Principles on Corporate Governance provides that the rights of the shareholders should be protected and exercise of shareholders rights should be facilitated. Principle III lays down that there should be equitable treatment of the shareholders and the shareholders should be given an opportunity to redress their grievances in terms of violation of shareholder's rights. Principle IV stipulates that the role of the stakeholders in corporate governance shall be recognized and co-operation between the stakeholders and corporations shall be encouraged. Principle V provides a mandate to the corporate entities to maintain disclosure and transparency. Timely and accurate disclosure shall be made with respect to governance of the company, financial position of the entity, performance of the corporate entity and particulars of ownership. Principle VI enumerates the responsibilities of the Board and accountability to the shareholders. The Board should ensure strategic guidance of the company, the Board shall ensure effective monitoring of the management and the Board shall remain accountable to the company and shareholders.
17
Consultative Paper on Review of Corporate Governance Norms in India, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM It may be observed that the Indian Corporate Governance Framework is in compliance with the Corporate Governance principles of OECD. LEGISLATIVE FRAMEWORK OF CORPORATE GOVERNANCE IN INDIA The Listing Agreement Clause 19 of the Listing Agreement provides that a prior intimation shall be made to the Stock Exchange about the conducting the meeting in which the proposal for buy back of securities or declaration regarding rights issue shall be made. Under clause 20 of the Listing Agreement, the Board shall disclose matters such as payment of dividend, total turnover of the company, declaration regarding buyback of securities within 15 minutes of closure of the Board meeting. According to Clause 22 of the Listing Agreement, the particulars regarding increase of share capital by issue of bonus shares, reissue of forfeited shares, alteration of share capital and any such matter shall be disclosed to the stock exchange within 15 minutes of the closure of the Board Meeting. Clause 29 provides that any decision relating to change in nature of the business shall be disclosed to the stock exchange. Clause 30 of the Listing Agreement provides that the Board shall disclose issues relating to change in the director, auditor or secretary of a company to the Stock Exchange promptly. Clause 31 of the Listing Agreement provides that various documents such as the proceedings of the Annual or Extraordinary General meetings.18 Clause 32 provides that the Company shall circulate the Balance sheet, Profit and Loss Account, and Directors report to each shareholder. Clause 36 of the Listing Agreement provides that the Company shall keep the Exchange informed about strike, lockout and closure of accounts. Clause 41 of the Listing Agreement provides that the Company shall submit the quarterly and financial reports within 45 days from the end of each quarter.19 SEBI appointed the Committee on Corporate Governance under the Chairmanship of Kumar Mangalam Birla, to enhance the corporate governance standards in India. The objectives of establishing the Committee were to propose amendments to the Listing agreement, to draft a code containing the corporate governance international best practices and suggest safeguards against the insider trading practices. The Committee recognized that the major aspects of Corporate Governance include Transparency, Accountability and Equal Treatment of all stakeholders. The disclosure requirements under Clause 49 of the Listing Agreement include mandatory and non mandatory requirements. The mandatory and non mandatory disclosure requirements facilitate transparency in conduct of affairs of the management. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009
18 19
http://www.sebi.gov.in/cms/sebi_data/pdffiles/21168_t.pdf ibid
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM The SEBI (ICDR) Regulations, 2009 provide that the issuer cannot make a public issue or rights issue unless a draft offer document with the requisite fee is submitted to the SEBI through a lead merchant banker, thirty day prior to registration of the prospectus. The Regulations also provide that the copies of the offer documents shall be at the disposal of the public. The offer documents shall contain all material disclosures that are true and adequate and enable the potential investors to make an informed decision. The Company shall make a pre-issue advertisement for public issue in one English daily, one Hindi national daily and one regional language newspaper. The issuer shall make advertisements in relation to the issue opening and closing for public issue. The lead merchant banker is responsible for submitting post issue reports to the SEBI. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 The SEBI recently came out with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 201120, also known as the Takeover Code. Shareholders acquiring shares in the company are required to publicise their acquisitions so that their shareholding becomes transparent to the public21. The Takeover Code requires persons crossing certain shareholding threshold limits to make a mandatory public offer to also acquire the shares from all public shareholders of the company on similar terms and conditions. Any acquirer crossing 25% shares (with voting rights) in the company must make a public offer; and any acquirer holding between 25% and the maximum permissible nonpublic shareholding in the company must make a public offer if it acquires more than 5% shares (with voting rights) in any financial year. Apart from mandatory offers, an acquirer may also make a voluntary or unsolicited offer to other shareholders through the procedure under the Takeover Code. SEBI (Prohibition of Insider Trading Regulations) 1992 The SEBI (Prohibition of Insider Trading Regulations), 1992 were amended in the year 2002. The Insider trading regulations facilitate the maintenance of transparency within the company; which is the basis of corporate governance.22 These Regulations provide for disclosure interest or holdings by the directors and officers and substantial shareholders in listing companies. These regulations also provide for disclosures on a continual basis and also emphasize on the disclosure by the company to the stock exchange. The Companies Act, 2013 The new Companies Bill has received President's assent that will make it into a law replacing the nearly six-decade old regulations that govern corporates in the country.23 The Companies
20 21
http://www.takeovercode.com/uploads/regulations/New%20Takeovercode_23092011.pdf Regulations 28-31 of the SEBI Takeover Code 22 http://www.sebi.gov.in/acts/insideregu.pdf 23 http://www.indianexpress.com/news/companies-bill-2013-receives-presidents-assent/1162742/
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM Act, 2013 provides a framework of corporate governance in India. Under the Companies Act, 1956 there was no specific provision in relation to independent directors. Clause 49 of the listing agreement was considered as the basis of legal provision with respect to appointment of independent director in a Company. However, the Companies Act, 2013 deals extensively with the aspect of independent directors. Independent director is defined under Section 2(47) of the Companies Act, 2013. The Companies Act, 2013 makes a provision that every company to mandatorily appoint one-third of the total strength of the directors as independent directors.24 The qualities of an independent director are also laid down under the Act and such qualities include being a person of integrity, such person shall not be related to the promoters or directors of the Company, the independent director should not have any pecuniary interest in the Company, he should not have held the position of a key managerial in the company and many such qualities are enumerated under the Companies Act, 2013. The Act also lays down the manner of selection of independent directors in the Company. The Companies Act, 2013 specifically provides that the Board of Director's Report shall consist of separate section titled Corporate Governance, which shall be attached to the financial statement and include various aspects such elements of remuneration package such as salary, benefits, bonuses etc shall be disclosed. Details of performance linked incentives, stock option details and service contracts etc shall be included in this section. This is the first time that company legislation has included the aspect of Corporate Governance explicitly. The Companies Act, 2013 provides that related party transactions shall be approved by the Board of Directors and the Director's report shall contain justifications regarding the related party transactions. The shareholders are now empowered under the Companies Act, 2013 because various proposals that impact the shareholders such as issue of securities, granting if loans, taking over another company shall be approved by the shareholders. A special resolution needs to be passed in order to approve a loan to a director or associated parties. The Remuneration Committee shall be responsible for overseeing the remuneration policy of the company and the remuneration shall be disclosed to the shareholders. Under Section 177 of the Companies Act, 2013 the Company shall set up an audit committee to recommend the appointment of the auditor, review the independence of the auditors and examine the financial statements and reports of the auditors, review the inter corporate loans etc. Hence, it may be concluded that the Companies Act, 2013 has taken a great leap towards setting up a corporate governance framework in India.25
24 25
Section 149 of the Companies Act, 2013 http://articles.economictimes.indiatimes.com/2013-02-01/news/36684552_1_independent-directorscorporate-governance-shareholders
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CHAPTER III ROLE OF CORPORATE GOVERNANCE IN PROTECTION OF INVESTORS

THE INTERRELATION BETWEEN CORPORATE GOVERNANCE AND INVESTOR PROTECTION A strong investor protection is associated with effective corporate governance. According to Fernando AC when an investor invests his hard earned money in the securities of a corporate entity, he has certain expectations of it performance of the organization and the corporate benefits that would accrue to him and the prospects of capital growth of securities he holds in the organization.26 Recent research has reflected that an essential feature of good corporate governance is strong investor protection.27 According to Rafael La Porta, corporate governance may be referred as a set of mechanisms through which the shareholders protect themselves against expropriation by insiders28. Hence, the Management of an organization is entrusted with the duty of protecting the investors. There is a probability of a mismatch between the objectives of the shareholders and investors. However, the shareholders may use the mechanism of corporate governance to ensure that their interests are protected and the management of the organization does not indulge in abuse of their power. Corporate Governance can thus be termed as an instrument in the hands of the shareholders of a company to ensure checks and balances. Investor confidence can be achieved only in the basis of the standards of transparency and fairness maintained by the company and the organizations willingness to implement effective corporate governance mechanisms29. The core substance of corporate governance lies in designing and putting in place the mechanism such as Disclosure, Monitoring, Oversight and Corrective action. Investor Protection is crucial because the expropriation of minority shareholders and creditors may take place at the hands of controlling shareholders. The phenomenon of insider trading poses greater threats to the interests of the shareholders30.
26
AC Fernando, Corporate Governance: Principles, Policies and Practices, available at http://books.google.co.in/books?id=al6zP7foCSEC&pg=PT172&lpg=PT172&dq=fernando+ac+investor+p rotection&source=bl&ots=6AHt2RJZkP&sig=vCRHNZp8CqhXvfpJ5FbkgFJB4c8&hl=en&sa=X&ei=O8zUqbvG4uzrgeu0YH4Aw&ved=0CFIQ6AEwCQ#v=onepage&q=fernando%20ac%20investor%20prote ction&f=false 27 ibid 28 Rafael La Porta, Florencio Lopez-de Silanes, Andrei Shleifer and Robert Vishny, Investor Protection and Corporate Governance, Journal of Financial Economics 58 (2000) http://leedsfaculty.colorado.edu/bhagat/InvestorProtectionCorporateGovernance.pdf 29 Pratip Kar, Corporate Governance and the Empowerment of the Investors ADB/OECD/WORLD BANK 2nd ASIAN CORPORATE GOVERNANCE ROUND TABLE, http://www.oecd.org/daf/ca/corporategovernanceprinciples/1930766.pdf 30 ibid
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM The investors confidence shall be rebuilt based on better transparency in the organization, market integrity and market efficiency, and undertaking measures to enhance investor protection.31 Corporate Governance mechanism depends on the general legal, contractual and enforcement processes in any jurisdiction and investor protection is directly affected by the quality of enforcement environment.32 The Committee opined that a separate legislation was not essential for the protection of investors and it was necessary to ensure safeguarding the interests of the investors through proper articulation of corporate governance in such a manner that transparency and accountability is ensured.33 It is also pertinent to examine the extent of relevance the Birla Committee Recommendations placed on the importance of corporate governance and investor protection in India. The Committee in its report observed that the strong Corporate Governance is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure.34 It may thus be inferred that the aspect of protection of investors in terms of corporate governance is indispensible. Hence, investor protection is essentially the reflection of strong corporate governance practices in an organization. SHAREHOLDERS RIGHTS UNDER THE COMPANY LAW The Companies Act, 1956 had granted various rights to the shareholders. The following rights are available to the shareholders: (1) Right to receive copies of the following documents from the company: (a) Abridged balance sheet and profit and loss account in the case of listed company and balance sheet and profit and loss account of the company otherwise.35 (b) Report of the Cost Auditor, if so directed by the Government. (c) Contract for the appointment of managing director or manager.36
31
Recommendations on Capital Markets Governance & Investor Protection , available at http://www.icsi.edu/WebModules/LinksOfWeeks/CAPITAL%20MARKETS%20WEEK%20SUGGESTIO NS.pdf 32 Kshama Kaushik and Rewa Kamboj, Study on the State of Corporate Governnace in India-Gatekeepers of Coprorate Governance, http://www.iica.in/images/Prologue_Gatekeepers.pdf 33 Investor Education and Protection, Report of the Expert Committee on Company Law, 2005, available at http://www.mca.gov.in/Ministry/chapter7.html 34 C. Udaya Kumar Raju; M. Subramanyam; Himachalam Dasaraju, Emergence of Corporate Governance in India, International Journal of Multidisciplinary Management Studies Vol. 2 Issue 5, May 2012, ISSN 2249 8834 http://zenithresearch.org.in/images/stories/pdf/2012/May/EIJMMS/7_EIJMMS_MAY12_VOL2_ISSUE5.. pdf 35 Section 219 of the Companies Act, 1956 36 Section 302 of the Companies Act, 1956
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM (d) Notices of the general meetings of the Company37 (2) Right to inspect statutory registers/returns and get copies thereof on the payment of prescribed fee. The members have been given the right to inspect documents such as Debenture Trust Deed, Register of charges, shareholder Minutes Book etc. (3) The members have a right to attend the meetings of the shareholders and exercise voting rights of these meetings either personally or through proxy. (4) Apart from the aforementioned rights, the shareholders have the right to: Receive share certificates as title of their holdings. To transfer shares To resist and safeguard against increase in his liability without the written consent To have rights shares etc Annual General Meeting In terms of Section 166, every company shall in each and every year hold in addition to any other meetings a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it, and not more than fifteen months shall elapse between the date of one annual general meeting and that of the next. The shareholders have the right to participate in the annual general meeting and cast their vote. Power and duty to acquire shares and shareholders dissenting from the scheme or contract approved by majority Where a scheme or contract involving the transfer of shares or its class, in a company has, within four months from after the making of the offer in that behalf by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved, the transferee company may, at any time within two months after the expiry of the said four months, give notice to any dissenting shareholder that it desires to acquire his shares; and when such a notice is given, the transferee company shall, unless on an application made by the dissenting shareholder within one month from the date on which the notice was given, unless the Company Law Boardthinks fit to order otherwise, be entitled and bound to acquire those shares. Application to Company Law Board for relief in case of oppression Any member of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members may apply to the Company Law Board for an order38. Lack of probity
37 38
Sections 171 to 175 of the Companies Act Section 397 of the Companies Act, 1956
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM and fair dealing on the part of the Company which causes prejudice to the members or which may be against public interest may amount to oppression39. If the Company Law Board is of the opinion that the companys affairs are conducted in a manner prejudicial to public interest and or in any manner oppressive to any member or members; and that to wind up the company would unfairly prejudice such member or members but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up; Company Law Board may, with a view to bring to an end the matters complained of, make such orders as it thinks fit. Application to the Company Law Board for relief in cases of mismanagement Any member of a company who complains that the affairs of the company are being conducted in a manner prejudicial to the public interest of the company; or that a material change has taken place in the company, whether by alteration in its Board of Directors or managers or in the ownership of the companys shares, and that by reason of such a change it is likely that the affairs of the Company will be conducted in a manner prejudicial to the public interest or prejudicial to the interest of the company. Courts have also ruled that erosion of a companys substratum40, abuse of fiduciary duties41, and misuse of funds42 are all instances of mismanagement that come within the ambit of 398.In case the Company Law Board is satisfies about the existence of such circumstances, it may make an order as deem fit. Winding up Shareholders have the right to pass a resolution, resolving that the company would be wound up by the Tribunal. According to Section 484 of the Companies Act, 1956 the circumstances in which the company may be wound up voluntarily are as follows: When the period, if any fixed for the duration of the company by the articles of association has expired, or in the event, if any, has occurred, on the occurrence of which the articles provide that the company is to be dissolved, and the shareholders in general meeting pass a general resolution requiring the company to be wound up voluntarily.
39 40
Scottish Co-operative Whole Sale Society Ltd. v. Meyer(1958) 3 All ER 66 (HL) Asiatic Ltd. Re (1994) 3 Comp LJ 294 (CLB 41 Hemant D. Vakil v. RDI Print and Publishing P. Ltd . (1995) 84 Com Cases 838 42 Narain Das (K.) v. Bristol Grill (P.) Ltd. (1997) 90 Com Cases 79
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM If the shareholder passes a special resolution that the company be wound up voluntarily.
INVESTOR PROTECTION AND CORPORATE GOVERNANCE VOLUTARY GUIDELINES, 2009: THE CORPORATEGOVERNANCE FRAMEWORK FOR UNLISTED COMPANIES The Corporate Governance framework in India has been derived from its Anglo-American counterpart. However, in Anglo-American regime, the focus is disciplining the management, while in India; the focus of the corporate governance framework is protection of minority shareholders.43 Good corporate governance practices are a sine qua non for sustainable business that aims at generating long term value to all its shareholders and other stakeholders.44 Sound and efficient corporate governance practices are the basis for stimulating the performance of companies, maximizing their operational efficiency, achieving sustained productivity as well as ensuring protection of shareholders interests.45 Good Corporate Governance practices enhance companies value and stakeholders trust resulting into robust developmen t of capital market, the economy and also help in the evolution of a vibrant and constructive shareholders activism.46 The Corporate Governance Voluntary Guidelines 2009 apply to Companies in India and may also be interpreted as being applicable to unlisted companies. As per the Corporate Governance Voluntary Guidelines, the Companies shall disclose the reasons for not adopting the Corporate Governance Voluntary Guidelines, 2009 either wholly or partially. The Companies should issue formal letters of appointment to Non Executive Directors specifying the term of appointment and expectations of the Board from the Non Executive Director, the fiduciary duty, remuneration including sitting fee etc. Such formal letter of appointment shall be disclosed to the shareholders at the time of ratification of his/her appointment or reappointment. The Board of Directors shall formulate a policy reflecting the attributes expected of an independent director. Such attributes may include integrity, experience, expertise, foresight,
43
Corporate Governance Voluntary Guidelines: A New Beginning, February 3, 2011 available at http://www.business-standard.com/article/companies/corporate-governance-voluntary-guidelines-a-newbeginning-111020300106_1.html 44 Salman Khurshid, Foreword to Corporate Governance Voluntary Guidelines, available at http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf 45 R. Bandyopadhyay, Preface to Corporate Governance Volunatry Guidelines, available at ibid 46 Preamble of the Corporate Governance Voluntary Guidelines, 2009 available at http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM managerial qualities and ability to read and understand financial statement etc. Such a policy shall be mandatorily approved by the shareholders. The policy so formulated shall be disclosed in the Board's Report and shall be circulated to the shareholders. The remuneration based on performance form significant portion of the total remuneration package to the directors and the same shall be decided in alignment with the shareholder's interests. The elements of remuneration payable to the Non Executive Directors may include Fixed Component, Variable Component and Additional Variable payments. The structure of compensation payable to the Non Executive directors shall be disclosed to the shareholders in the Annual Report. The Remuneration Committee has the duty to determine the principles, criteria and the basis of remuneration policy of the company. The remuneration policy of the company shall be disclosed to the shareholders and their suggestions shall be considered. In case there is any deviation from the remuneration policy, the same shall be adequately disclosed. The Remuneration Committee shall adequately disclose its role, authority delegated by the Board and terms of reference for the perusal of the shareholders. So as to protect the investors investment and companys assets, the Board shall conduct a review of the company's system and internal controls. The Board shall also intimate the shareholders about the conduct of such review. The review shall peruse all material controls and scrutinize the financial, operational and compliance controls and risk management systems Whenever the Company conducts a Board meeting, the agenda of the Board meeting should be accompanied by an Impact Analysis on Minority Shareholders whereby it shall be proactively state the impact that the agenda of the Board meeting may have on the interests of the minority shareholders. The Independent directors shall also discuss the impact of the agenda of the Board meeting on the minority shareholders. The Company shall also conduct a secretarial audit in order to facilitate examination of the transparency, ethical and responsible governance of the company. The Board shall come out with a report and give its comments on the Secretarial audit, which shall be disclosed to the shareholders. The Corporate Governance-Voluntary Guidelines 2009 provides for partial participatory approach to address the contemporary corporate governance issues in India.47 The Guidelines provide a set of good governance practices, which would facilitate the companies to enhance their internal governance processes and may be voluntarily adopted by the Indian Public Companies.48 It is however, evident that the Corporate Governance Voluntary Guidelines are not mandatory to be adopted by the Companies, thus hindering the efficiency of the guidelines
47 48
ibid Consultative Paper on Review of Corporate Governance Norms in India, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM in the very first place. Moreover, a scrutiny of the Voluntary Guidelines places emphasis on the aspect of disclosure to the shareholders so as to ensure their protection. INVESTOR PROTECTION AGREEMENT UNDER CLAUSE 49 OF THE LISTING
The Emergence of Code of Best Corporate Governance practices all over the country were considered and in 1999 SEBI constituted a Committee on Corporate Governance under the chairmanship of Shri Kumar Mangalam Birla, with the aim of raising the standards of Corporate Governance in India with regard to the listed companies. SEBI's Board, held a meeting on February, 2000 for considering the recommendations of the Kumar Mangalam Birla Committee and incorporating them by inserting Clause 49 of the Listing Agreement. Subsequent to the Enron, WorldCom and other governance catastrophes, the SEBI realized the need to enhance the level of corporate governance standards in India and thus constituted another committee for reviewing the corporate governance in India chaired by Narayan Murthy. Clause 49 of the Listing Agreement was revised after considering the recommendations of Narayana Murthy Committee.49 The objectives of the Listing agreement are to provide liquidity to securities, mobilize savings for economic development and protect the investors by ensuring disclosures by the organization. As per Clause 49 of Listing Agreement the following disclosures shall be made to the shareholders: Significant Related Party Transactions that may be in potential conflict with the interests of the company at large and the basis of the related party transaction shall be disclosed50. Details of non-compliance by the company; penalties imposed by the SEBI or any statutory authority with respect to capital market matters. Whistle Blower Policy and an affirmation that no person has been denied access to the audit committee of the company. Details of compliance with mandatory requirements under Clause 49 of the Listing Agreement and implementation of the non-mandatory requirements.51
The disclosures that are to be made shall be discussed in detail. Disclosure regarding compensation to Non Executive Director
49
Consultative Paper on Review of Corporate Governance Norms in India, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf 50 Clause 49IV(A)) of Listing Agreement 51 ibid
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM The fees or compensation payable to the Non-Executive Directors including the independent directors shall be determined after the previous approval of the shareholders in general meeting. The resolution of the shareholders should ascertain the maximum number of stock options that the Company can grant to the Non-Executive Director. The Chairman of the Audit committee shall be present in all the General Meetings to address the issues of shareholders.52 The pecuniary relationship of the independent director with the company shall be shall be disclosed in the Annual report of the Company.53 The disclosure of the remuneration should include all the elements of the remuneration should include all elements such as payment of fixed component and performance linked incentives, bonuses, benefits etc. Disclosure of Basis of Related Party Transactions Transactions with the related party in the ordinary course of business shall be disclosed to the Audit Committee for reviews54. The details of the transactions with the related parties which are not in the ordinary course of business shall also be disclosed to the audit committee for review. The Audit Committee has the discretion to decide the frequency of disclosure of the information relating to the related party transactions. Also, the Board shall be disclosed about the personal interest of any members of senior management in any particular transaction.55There shall also be a disclosure to the Board regarding the relationships between the Board in the annual report of the Company, prospectus etc56 Disclosure of Accounting Treatment In case an accounting treatment followed for preparation of financial statements is distinct from the prescribed accounting standards, the same shall be duly disclosed and it shall contain an explanation of the directors for following a different accounting standard.57 Certification of the CEO/CFO The CEO, i.e the Managing Director of the Company shall be under an obligation to certify to the Board that they have undertaken a review of the financial statements of the company and the financial statements do not contain any materially untrue statement and depict a fair view of the company. They shall also mention that the transactions undertaken by the company are not fraudulent or illegal. Circulation of Directors Report
52 53
http://www.nseindia.com/getting_listed/content/clause_49.pdf Clause 49-IV(E) of the Listing Agreement 54 Clause 49 IV (A) of Listing Agreement 55 Clause 49 IV (F)(ii) of the Listing Agreement 56 Clause 49 IV (G) (ia) of the Listing Agreement 57 Clause 49 IV (B) of the Listing Agreement
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM A Directors report shall be circulated amongst the shareholders and it shall also comprise of a Management Discussion and Analysis report encompassing various aspects such as industry structure and developments, risks and concerns, opportunities and threat, performance in terms of segment and products, internal control system and its adequacy, discussion of financial performance etc. In case a new director is appointed or a director is reappointed, the shareholders shall be given information with regard to resume of the director, nature of his expertise, shareholding of non-executive director, names of the company in which he holds directorship.58 The Report on Corporate Governance shall also include details of the Shareholder Grievance Committee such as name of the non-executive director, name and designation of the compliance officer, number of shareholder complaints received, number of shareholder complaints that are pending and those complaints which have not been resolved to the satisfaction of shareholders.59 Disclosure to Shareholders The disclosures to shareholders shall include the information relating to the appointment of the directors or reappointment of the director in terms a brief resume of the Director, nature of the directors experience, names of the companies in which he held directorship and the extent of shareholding of the director.60 Disclosure of proceeds from public issue, rights issue and preferential issue When the company raises funds through the public issue, rights issue and preferential issue; the particulars of application of these funds shall be disclosed to the audit committee for its review on a quarterly basis. A statement of the utilization of funds shall be disclosed in the offer document or the prospectus and such a statement shall receive the approval of the auditor.61 Compliance with the Corporate Governance Norms in India The Companies shall obtain a certificate regarding the compliances and the state of corporate governance in the Company. The certificate shall be obtained from an auditor or a practicing company secretary. The certificate shall be annexed with the directors report and circulated amongst the shareholders annually.62
58 59
ibid http://www.nseindia.com/getting_listed/content/clause_49.pdf 60 Clause 49 IV (G)(i) of the Listing Agreement 61 Clause 49 IV (D) of Listing Agreement 62 N K Jain, New Corporate Governance Norms: An Analysis of Revised Clause 49 of The Listing Agreement, available at: http://www.icsi.edu/docs/webmodules/Programmes/31NC/NEWCORPORATEGOVERNANCENORMSNKJAIN.doc.
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM The Shareholders should also be intimated the General Shareholder information such as the date, time and venue of the Annual General Meeting, financial year, date of book closure, market price data, listing of stock exchanges etc. A non-mandatory requirement of the Listing agreement is that a remuneration committee shall be set up to determine the company's policy of remuneration packages for executive directors. As per this nonmandatory requirement, the shareholders shall approve the said remuneration policy. Another non-mandatory requirement under Clause 49 of the Listing Agreement is that a half-yearly declaration of financial performance including an overview of the significant events in the past six months shall be sent to each shareholder.63 Setting up of the Shareholder Grievance Committee Clause 49 of the Listing Agreement provides for constitution of a board committee under the chairmanship of a non-executive director. The Committee shall be entrusted with the duty of redressing the shareholder grievances. The Committee would be required to look into complaints such as transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee shall be designated as the Shareholders/Investor Grievance Committee. The provision for setting up of Shareholder Grievance Committee is the most significant feature of Clause 49 of the Listing Agreement in direction of protection of the investors. Apart from Clause 49 of the Listing Agreement, the Listing Agreement provides for other vital disclosures that shall be made in order to protect the interests of the minority shareholders. These disclosures include disclosure of shareholding pattern, maintenance of minimum public shareholding, disclosure and publication of periodical results. Disclosure of price sensitive information; and open offer requirements under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 PROTECTION OF MINORITY SHAREHOLDERS RIGHTS The corporate are characterized by the separation of ownership and control and this gives rise to the conflict of interest between the managers and the shareholders. In such context, it is important that the corporate governance mechanism shall lead to maximization of the shareholder's wealth by monitoring the management. However, in the Indian context, the issue of protection of the interests of the minority shareholders is also significant because the minority shareholders are prone to be expropriated by the majority shareholders. The law in India with regard to protection of the minority shareholders is inadequate as its effectiveness and enforcement is an issue. The corporate governance regulatory framework
63
Bhanumurthy, I. and Sawant Dessai, Dr. Sanjay, Corporate Governance in India Clause 49 of Listing Agreement (August 17, 2010). Available at SSRN: http://ssrn.com/abstract=1660285 or http://dx.doi.org/10.2139/ssrn.1660285
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM does not adequately address the issue of protection of interests of minority shareholders. The efficacy of corporate governance depends on how the shareholders in an organization are protected. According to an estimate shareholder and investors have lost not less than $2.8billion in the Satyam fiasco64. In India, the conflict arises between the controlling shareholders and minority shareholders.65 In India, the minority shareholders may be expropriated by the dominant shareholders by diverting the resources of the firm through self-dealing transactions. The Satyam case is a typical example of the fact that the firms resources were attempted to be expropriated for the private benefits of the promoters. SEBI cancelled the IPOs of various firms for specifying misleading and untrue material in the offer document.66 Following is an account of various provisions of the Companies Act, 1956 which may not address the needs of the minority shareholders. Issue of Equitable Treatment of the Shareholders Minority shareholders have been proffered protection under Section 397 and 398 of the Companies Act, 1956. However the minority shareholders can approach the Company Law Board only if 100 shareholders or atleast holders of 10% of the shareholding of the Company are aggrieved and seek redressal. They may file an appeal to the High Court in case they are aggrieved by the decision of the Company Law Board. The protection of the minority shareholders is however not efficacious and adequate.67 The provisions of the Companies Act, 1956 come to the aid of the minority shareholders only in the event on extreme mismanagement or winding up.68 The redressal mechanism in India is also very time taking; this furthers hinders the protection of the minority shareholders. Clause 49 of the Listing Agreement provides for the Shareholder Grievance Committee. However, the efficacy of the Shareholder Grievance Committee may not be treated as efficacious enough
64
Varottil, Umakant., A Cautionary Tale of the Transplant Effect on Indian Corporate Governance , National Law School of India Review, Vol. 21, No. 1, 2010 available at papers ssrn com sol papers cfm abstract id 65 Kumar Naveen and Singh JP, Corporate Governance in India: Case for Safeguarding Minority Shareholders Rights, International Journal of Management & Business Studies Vol. 2, Issue, June 2012, available at http://www.ijmbs.com/22/naveen.pdf 66 SEBIs Tough Stand Against IPO Cheats Sends Out Right Signals , Economic Times (2012), January 2, Available: http://articles.economictimes.indiatimes.com/2012-01-02/news/30587433_1_ipo-marketipoprocess-merchant-bankers 67 Varottil, Umakant.,A Cautionary Tale of the Transplant Effect on Indian Corporate Governance , National Law School of India Review, Vol. 21, No. 1, 2010, referred in Kumar Naveen and Singh JP, Corporate Governance in India: Case for Safeguarding Minority Shareholders Rights, International Journal of Management & Business Studies Vol. 2, Issue, June 2012, available at http://www.ijmbs.com/22/naveen.pdf 68 Varma, J R ,Corporate Governance in India: Disciplining the Dominant Shareholder, IIMB Management Review, Vol. 9, No. 4, 1997 referred in Kumar Naveen and Singh JP, Corporate Governance in India: Case for Safeguarding Minority Shareholders Rights, International Journal of Management & Business Studies Vol. 2, Issue, June 2012, available at http://www.ijmbs.com/22/naveen.pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM because it may be hindered by the allegiance of the independent director. SEBI also is not prompt to take actions against companies which do not provide for effective grievance redressal.69 Insider Trading and Self Abusive Dealings The SEBI (Prohibition of Insider Trading) Regulations, 2002 deal with the aspect of insider trading in India. Clause 49 of the Listing Agreement provides that disclosures shall be made by the Board regarding all the material information in relation to related party transactions. Also, the directors are under an obligation to disclose their shareholdings in case it exceeds the threshold limit. In cases of takeovers, the dominant shareholders are involved in the practice of insider trading.70 Disclosure of information relating to related party transactions Section 297, 299 and 300 of the Companies Act, 1956 deals with the aspect of related party transaction, although these provisions have no teeth in terms of the protection of investors. Clause 49 of the Listing Agreement provides that the Audit Committee shall review the related party transactions. However, the Satyam-Maytas failed deal reflects that the related party transactions are still prevalent.71 An assessment of the Companies Act, 1956 provides that the minority shareholder protection is not adequate enough. However, the Corporate Governance mechanism attempts to fill the gap and safeguard the interests of the minority shareholders. ROLE OF INSTITUTIONAL INVESTORS IN CORPORATE GOVERNNACE The institutional oversight by the institutional investors is necessary because the product, labor and corporate control market constraints shall be imposed on the management discretion.72 The Kumar Mangalam Birla Committee observed that the institutional investors have acquired a large stake in equity share capital of listed companies. In some of the listed companies they form the major shareholders and own shares on behalf of the retail
69
World Bank, Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment: India, World Bank-IMF, Washington, DC, USA, 2004. 70 Supra, footnote number 44 71 Sharma, J.P, Corporate Governance, Business Ethics and Corporate Social Responsibility, Ane Books, New Delhi, India, 2011 72 Bernard S. Black, Shareholder Passivity Reexamined, 89 Mich. L. Rev. 520, 575-91 (1990) referred in lawreview law ucdavis edu issues DavisVol o Velasco pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM investors. They have a significant responsibility as the retail investors expect the institutional investors to make positive use of their voting rights. As per the Committee recommendations, the institutional investors shall be at an arms length distance with the management of the Company73. The institutional investors have a major influence on the management of the corporation as they are entitled to exercise their voting rights. The institutional investors can hugely impact the manner in which the company may function74. The committee therefore recommended that the institutional investors shall play the following role in corporate governance: Take active interest in the aspect of composition of the Board of Directors, Act vigilantly Maintain contact at senior level for exchange of views on management, strategy performance and quality of management Ensure that the voting rights are exercised Evaluate Corporate Governance performance of the company
The institutional investors should enter into a dialogue with the companies based on mutual understanding of objectives. In course of evaluating the corporate governance performance of the company, the institutional investors shall give due weightage to the aspects such as composition of Board Structures and other such aspects. The institutional investors are expected to make considerable use of their voting rights. The ICSI Recommendation 22 is that it should be made mandatory for the equity based mutual funds to make disclosure with respect to the corporate governance and voting policies and such disclosures shall be made in the websites of the mutual funds. They shall also disclose the procedure in deciding the voting rights. The records of their voting shall also be disclosed in the websites.75 The ICSI recommendation 24 is that a directive shall be issued to clarify the nature of the information that is can be exchanged at meetings between the institutional investors and companies in compliance with the Insider Trading Regulations of 1992 and its amendment in 2002. The directives shall specify that it does not condone the selective disclosure of information by companies to institutions and clearly set the principles of equality of treatment of all shareholders by corporations76. Thus, the role of institutional investors has been recognized by the Kumar Mangalam Birla Committee India. The institutional investors role in terms of shareholder activism has also
73
Report of the Kumar Mangalam Birla Committee on Corporate Governance, http://www.sebi.gov.in/commreport/corpgov.html 74 ibid 75 ICSI Recommendations to Strengthen Corporate Governance Framework, http://www.icsi.edu/docs/webmodules/LinksOfWeeks/Recommendations%20Book-MCA.pdf 76 ibid
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM gained prominence. The institutional investors form a mechanism to oversee the corporate governance norms in India. INVESTOR PROTECTION UNDER THE COMPANIES ACT, 2013 The Companies Act, 2013 provides for enhanced corporate governance norms, improved disclosures and transparency, facilitates responsible entrepreneurship, increases the accountability of a company management and auditors, protection of investors, provides for better shareholder democracy, Corporate Social Responsibility and stringent enforcement processes.77 The Companies Act, 2013 provides for a mechanism of protection of the investors. Following is an account of the important provisions which aim at protection of investors. According to Section 24 of the Companies Act, 2013 the SEBI is empowered to make regulations with regard to issue and transfer of securities and non-payment of dividend by listed company. Section 36 of the Companies Act, 2013 provides that the act of fraudulently inducing a person to make investment is punishable with imprisonment for a term which may extend to ten years and with fine which shall not be less than three times the amount involved in fraud. Section 37 of the Companies Act, 2013 provides that a suit may be filed by a person who was fraudulently induced to make investment in a corporate entity on account of the misleading statement in a prospectus or inclusion or omission of any material fact. The Companies Act also provides for class action suit. Such a provision has been included for the very first time. As per this provision, a specified number of members or depositors or any class of them may file an application before the Tribunal on behalf of the members or depositors on the basis that the management or control of the affairs of the company are prejudicial to the interests of the company or its members. In case the investors were defrauded on account of improper or misleading particulars of the company in the audit report, the liability would vest on the audit firm and class action suit can be brought against the audit firm. The Companies Act, 2013 defines fraud under Section 447 and provides that any person engaged in fraud shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. Where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.78
77
ICSI welcomes passage of Companies Bill, 2012 by Parliament, Aug 9, http://www.aninews.in/newsdetail3/story124934/icsi-welcomes-passage-of-companies-bill-2012-byparliament.html 78 Highlights of the Companies Bill (as passed by the Lok Sabha on 18.12.12 and by the Rajya Sabha on 08.08.13), available at http://www.icsi.edu/WebModules/Linksofweeks/Cos%20bill%20highlights.pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM Section 211 of the Companies Act provides for Serious Fraud Investigation Office (SFIO) and stipulates that the SFIOs report shall be treated as a report filed by a police officer and the SFIO has the power to arrest a person who is guilty of the offence of fraud as defined in the Companies Act, 2013. Section 195 of the Companies Act, 2013 deals with the prohibition of insider trading and Section 194 of the Companies Act, 2013 stipulates that the Directors and key managerial personnel of a company are prohibited from forward dealings in securities of the company.79 Further, the Companies Act, 2013 also provides for protection of whistle blowers who may bring the activities of the companies to the fore and ensuring that the whistle blowers are not victimized. In certain exceptional circumstances the whistle blower may be permitted to directly contact the Chairperson or Audit Committee. The promoters have an obligation to provide the dissenting shareholders with an exit opportunity in the event the Company proposes to change the terms of contract or objects of the prospectus. The Companies Act, 2013 provides for a mechanism wherein the shares of minority shareholders may be purchased in the event of acquisition of the Company in which the shares are held. 80 Section 236 of the Companies Act, 2013 provides an option to the acquirers or the persons acting in concert holding 90% or more of the issued equity share capital to notify the company of their intention to squeeze out the remaining equity shareholders. It thus obligates the majority shareholders to notify their intention to purchase the shares of the company thereby preserving the right of the minority shareholders. The Companies Act, 2013 substantially empowers the investors and protects their interests.81 A bare perusal of the aforementioned provisions of the Companies Act, 2013 reflects that investor protection has been given a specific emphasis under the new legislation. The rights of the minority shareholders have also been recognized under the Act. Hence, it may be inferred that the Companies Act, 2013 embodies various provisions which may go a long way in the protection of the investors.
79 80
ibid Investor protection will get a big boost under new company law, December 19, 2012, http://www.business-standard.com/article/companies/investor-protection-will-get-a-big-boost-under-newcompany-law-112121900046_1.html 81 The Impact Areas of the new Companies Bill: A Primer, 10 August, 2013, http://www.livelaw.in/theimpact-areas-of-the-new-companies-bill-a-primer/
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CHAPTER IV ANALYSIS OF CORPORATE FRAUDS AND UNFAIR PRACTICES IN INDIA: FROM THE PERSPECTIVE OF CORPORATE GOVERNANCE
REEBOK INDIA FRAUD CASE: INDICATION OF THE NEED OF CORPORATE GOVERNANCE IN UNLISTED COMPANIES In India, the unlisted companies are prone to corporate frauds and malpractices; further leading to exploitation of the investors. Reebok Fraud case is a glaring example of corporate fraud in India. The Reebok Fraud came to the fore in course of merger between Adidas India and Reebok India. Under Section 234 of the Companies Act, investigation was conducted by the Registrar of Companies and alleged irregularities were observed in the books of accounts of Reebok. An approximate of more that Rs 870 crores is estimated to have been involved in the scam. On account of the irregularities in the books of accounts, the Managing Director Subhinder Singh Prem and the Chief Operating Officer Vishnu Bhagat had been arrested and the matter was taken up by the Serious Fraud Investigation Officer. This corporate fraud would affect the shareholders of the Adidas India, the parent company of Reebok.82 It was alleged that the Company was indulged in over invoicing to the tune of Rs 147 Crore, it maintained four secret warehouses, to which the company's goods were diverted. It raised fake invoices to the tune of Rs 98 Crores83. The authorities probing into the Reebok India Fraud case have observed that a systematic mismanagement paved way for the corporate fraud. There was mismanagement of the governance and operations of the company. The bills were not recorded correctly and were inflated; the Company falsified sales receipts, faked storage facilities, and circular trading. The guidelines laid down in the companies act were not followed properly and this also led to tax evasion84. The SFIO played a significant role in dealing with the Reebok India Fraud case. The SFIO reported that Reebok India lacked corporate governance and has weak internal processes that facilitated the MD and COO of the Company to commit such a
82
Sahil Arora and Utkarsh Soni, Investor Protection In The Aftermath of The Reebok Fraud Case: An Appraisal of the need for corporate governance in Non-Listed Companies, XI Capital Markets Conference (December 21 - 22, 2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263081 83 An Update of Adidas India Euro 125 Million Fraud Story , 28 May, 2012, http://soniajaspal.wordpress.com/2012/05/28/an-update-of-adidas-india-euro-125-million-fraud-story/ 84 Reebok India case: Corporate mismanagement led to Scam, September 23, 2012, The Economic Times, http://articles.economictimes.indiatimes.com/2012-09-23/news/34040662_1_conspiracy-and-fraudulentpractises-reebok-india-gurgaon-police
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM corporate fraud. The report confirmed that the company had falsified the accounts and inflated the sales.85 A perusal of the Reebok Fraud case reflects that there is a need for corporate governance mechanism in India so as to protect the investors.86 An effective legal protection is necessary for good corporate governance.87 Various Committees were set up in India for making recommendations with regard to the corporate governance framework in India by reviewing the international best practices88, while none of these committees deal with the aspect of corporate governance for unlisted companies. Even Clause 49 of the Listing Agreement, which is the bedrock of corporate governance in India, regulates only the Listed Company. SFIO is a body that deals with corporate frauds in cases where complex investigation is involved, or when the case at hand may have international ramifications or involves public interest. However, it was felt that the SFIO does not have the necessary teeth to deal with the matters and lacks statutory recognition. With the enactment of the Companies Act, 2013 the SFIO has been embodied with the statutory recognition and the necessary powers.89 Corporate governance is based on the corporate ownership structure.90 Hence, the principles of best practices that are followed in the case of listed companies may not be applicable for unlisted companies. Also, the unlisted companies generally are sole proprietorships or private companies and may not have shareholders. However, corporate governance is not restricted to the aspect of protection of investors. Accountability and monitoring functions of the company is the essential tenet of corporate governance.91 The Reebok India fraud has reflected that the management of the company and the auditors may be involved in corporate scams. In light of such a revelation, it is
85
SFIO report finds Reebok guilty of fudging A/Cs: Sources , June 10, 2013 http://www.moneycontrol.com/news/cnbc-tv18-comments/sfio-report-finds-reebok-guiltyfudging-acssources_895198.html?utm_source=ref_article 86 Sahil Arora and Utkarsh Soni Investor Protection In The Aftermath of The Reebok Fraud Case: An Appraisal of the need for corporate governance in Non-Listed Companies, XI Capital Markets Conference (December 21 - 22, 2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263081 87 Shleifer, Andrei; Vishny, Robert W, A survey on Corporate Governance, 52 JOURNAL OF FINANCE 737-783 (1997) available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1997.tb04820.x/full 88 India: An Overview of Corporate Governance of Non-Listed Companies, Corporate Governance of Non Listed Companies (OECD 2005), available at http://www.oecd.org/corporate/corporateaffairs/corporategovernanceprinciples/37190767.pdf 89 India Seeks to Overhaul a Corporate World Rife With Fraud, http://dealbook.nytimes.com/2013/08/15/india-seeks-to-overhaul-a-corporate-world-rife-with-fraud/?_r=0 90 Sahil Arora and Utkarsh Soni Investor Protection In The Aftermath of The Reebok Fraud Case: An Appraisal of the need for corporate governance in Non-Listed Companies, XI Capital Markets Conference (December 21 - 22, 2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263081 91 CADBURY, A., REPORT ON THE COMMITTEE OF THE FINANCIAL ASPECTS OF CORPORATE GOVERNANCE (Gee Publishing, London 1992) referred in www cbr cam ac u pdf wp pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM extremely important to protect the stake holders of the unlisted company. And in cases such as the Reebok India Fraud case, the shareholders of the parent company may be affected. Hence, the legal and regulatory framework for listed companies in terms of corporate governance shall focus on the aspect of accountability and monitoring function of the Company so that corporate scams could be avoided in unlisted companies. THE SATYAM FIASCO AND STATE OF CORPORATE GOVERNANCE IN INDIA Satyam Computer Services Limited is a global information technology service provider. The Satyam scandal can be traced back to the announcement of the World Bank that a few employees of the Satyam has hacked the system and retrieved price sensitive information. Hence, World Bank did not renew its 5 year contract with Satyam and severed all the ties with the Company. Later, Ramalinga Raju announced that the the Company would acquire Maytas Infrastructure and Maytas Properties and an influx of $ 1.6 billion. However, on account of pressure from the shareholders, the Company had to withdraw the proposal of acquisition. The value of ADR of Satyam fell by 50% overnight. There was a pending complaint against Satyam by Upaid Sytems. The case was decided and Satyam was held responsible for an intellectual fraud and forgery and a claim $1 Billion was made against the Satyam. Ramalinga Raju then wrote a letter to the Board of Satyam and forwarded the same to the SEBI regarding the accounting fraud that was committed. he outlined that the companys balance sheet for the quarter ending on 30 September 2007 had inflated cash and bank balances of upto 50.4 billion rupees (AU $ 1.44 billion). With a quoted cash reserve of 53,610, the actual cash reserves stood at 3,210 million which is just about 5% of the declared value. The letter also stated that the financial statements consist of understated liabilities worth 12,300 million rupees and non-existent accrued income of 3,760 million rupees92. Pricewaterhouse Coopers acted as the external auditor of the Company and they approved the balance sheets of the Company year after year. Ramalinga Raju was willing to cover up the gap between the actual accounts and the reported accounts by showcasing that an investment would be made in Maytas Infrastructure and Properties. However, the shareholders did not approve of the investment and raised a concern. The failures on the front of corporate governance that paved the way for the corporate fraud of Satyam would be analyzed. The Decision regarding Acquisition of Maytas Infrastructure and Properties was not approved by the shareholders, while Ramalinga Raju held a meager 8.5% of shareholdings in the company. Maytas Infrastructure was a company in the name of the sons of Ramalinga Raju, acquisition of such a Company may be termed as a related party transaction in which the Chairman of the Company has a vested interest. However, the
92
Shivanna, Manoj, The Satyam Fiasco - A Corporate Governance Disaster! (May 2010). Available at SSRN: http://ssrn.com/abstract=1616097 or http://dx.doi.org/10.2139/ssrn.1616097
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM Board approved the decision and the Independent directors also did not raise objections to the decision. Item 16A of Form 20F which was submitted to the Securities Exchange Commission, Satyam Company admitted that noone in the Audit Committee had the qualifications of an Audit Committee Financial Expert as required by the Securities Exchange Commission. The Satyam did not compose of independent directors in the real sense. The shareholders have a right to know the credibility of the directors.93 The independent directors of Satyam were serving as directors in the Board of Directors of eight other companies. The Board did not comprise of any person who was financially literate, that is one who could read and interpret the Financial statements of the Company. The Board of Satyam was not a well rounded Board. The Board of Directors did not have any independent Board leadership. Satyam did not have a Corporate Governance Committee, which is a deviance from international best practices of corporate governance. Ironically enough, Satyam was endowed with the with the Golden Peacock Award by the WCFG, which is the highest honor in Corporate Governance and Satyam was recognized as a Global Leader in the arena of Corporate Governance.94 First Global, a Mumbai Based brokerage house has estimated that the Indian shareholders have lost close to $2 billion since 2003 prior to the Satyam Scandal due to issues stemming out of Corporate Governance failures.95 INSIDER TRADING AS AN UNFAIR TRADE PRACTICE: AN EXAMINATION OF THE LEGAL AND REGULATORY FRAMEWORK AND SIGNIFICANT INSTANCES Section 12A of the Securities and Exchange Board of India, 1992 prohibits manipulative and deceptive devices, insider trading and substantial acquisition of shares. SEBI (Prohibition of Insider Trading) Regulations, 2002 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 also form a part of the legislative framework relating to Insider Trading in India. Insider trading in securities refers to dealing in securities by an insider who has the knowledge of material inside information which is not known to the general public. It may be pertinent to trace out the history and evolution of regulations relating to insider trading in India. In the year 1979, the Sachar Committee recommended that amendments
93
Lessons from Satyam fiasco that can help improve corporate governance in India , Jan 02 2009, http://www.livemint.com/Companies/OqLofvAsyiwHkEBlLJaoOL/Lessons-from-Satyam-fiasco-that-canhelp-improve-corporate-g.html 94 id 95 Shivanna, Manoj, The Satyam Fiasco - A Corporate Governance Disaster! (May 2010). Available at SSRN: http://ssrn.com/abstract=1616097 or http://dx.doi.org/10.2139/ssrn.1616097
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM shall be made to the Companies Act, 1956 in order to restrict the dealings in shares by the employees of the respective company so as to prevent insider trading. In 1986 the Patel Committee made a recommendation that the Securities Contract Act, 1956 should be amended so as to prevent unfair stock deals and prohibit insider trading96. Abid Hussain Committee recommended that the SEBI shall formulate regulations and governing codes to prohibit insider trading. It also recommended that insider trading activities shall attract civil and criminal proceedings and penalties shall be imposed for insider trading. SEBI regulations on insider trading were introduced in 1992. These regulations were amended in 2002 and Chapter VA was inserted in the SEBI Act for stipulating the provisions regarding insider trading.97 Regulation 2(e) of the SEBI (Prohibition of Insider Trading) Regulations, 200298 defines an insider as a person who is connected with the company and may have access to unpublished price sensitive information or could receive the information from any person in the company. Regulation 2(h)(a) of The Regulations define price sensitive information as any information that is directly or indirectly connected with the company and has the potential of materially affecting the prices of the securities of the company in case such information is published. Regulation 3 of SEBI (Prohibition of Insider Trading) Regulations, 2002 prohibits an insider from dealing in the securities of a company when he is in possession of price sensitive information and he shall also not communicate such information to anyone either directly or indirectly. Regulation 4 of SEBI (Prohibition of Insider Trading) Regulations, 2002 stipulates that any person who deals in securities while in possession of unpublished price sensitive information shall be held guilty of insider trading. Regulation 4A of the aforesaid Regulations provides that the Board can make inquiries and conduct inspection in case it has formed a prima facie opinion that the regulations have been violated. Regulation 5 of SEBI (Prohibition of Insider Trading) Regulations, 200299 provides for the power of SEBI to conduct an investigation with regard to breach of the insider trading regulations. The model code of conduct for prohibition of insider trading purports that a compliance officer shall be appointed by the company. Also, there shall be a pre-clearance of trade by the officer of designated employees. SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003100 is another set of regulations which prohibit unfair and fraudulent trade practices in the capital markets. According to Regulation 3 of the a prohibition of dealing directly or indirectly in dealing with securities in a fraudulent manner, no manipulative or deceptive devices shall be employed to contravene the SEBI Act or rules and regulations or employ any device to defraud the investors.
96
Deemed to be Insiders: Major players of Insider Trading, available at http://nmims.edu/wpcontent/uploads/2012/p3/MPSTME/Insider%20%20Trading-Abhay%20Kumar.pdf 97 ibid 98 www.sebi.gov.in/acts/insideregu pdf 99 ibid 100 http://www.sebi.gov.in/acts/futpfinal.html
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM Regulation 4 provides for prohibition of manipulative, fraudulent and unfair trade practices. The regulations also define fraud as any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss. A few decided cases of the SEBI may be analyzed so as to scrutinize the aspect of insider trading as an unfair trade practice. The Hindustan Lever Limited Brooke Bond Lipton India Ltd. (BBLIL) SEBI had suspected that Hindustan Lever Limited was indulged in insider trading. In August 1997, SEBI charged Hindustan Lever Limited for having indulged in insider trading by making use of unpublished price sensitive information. HLL purchased shares of Brooke Bond Lipton India Ltd (BBLIL) worth Rs 8 lakhs from UTI at Rs 350.35 per share two weeks prior to the prior to the formal announcement of the merger between BBIL and HLL. SEBI ruled that HLL made use of unpublished price sensitive information and is thereby guilty of insider trading. In March, 1998 SEBI passed an executive order holding HLL guilty of insider trading whereby it directed HLL to pay compensation to UTI to the tune of Rs 3.4 crores and also initiated criminal proceedings against the directors of HLL and BBIL. 101 HLL filed an appeal against the executive order of the SEBI. The contention of HLL was that the merger between HLL and BBIL was speculated by the market and media and henceforth cannot be termed as unpublished price sensitive information. Also, after the merger of BBIL and HLL was formally announced, the press articles specified that said merger was expected. HLL also argued that it was a transferee company and hence cannot be treated as an insider. Also, the rise of share price of BBIL from Rs. 242 to Rs 320 between January and March before the proposed transaction was an information which was generally known to the public.102 HLL also argued that it did not have any price sensitive information about BBIL and the shares were purchased in order to facilitate Uniliver to acquire 51% shares of BBIL. The Appellate Authority of the Finance Ministry dismissed the SEBI order. In the case of Rakesh Aggarwal verus SEBI103, Rakesh Agarwal, the Managing Director of ABS Industries Limited was involved in negotiations with the Bayer AG with respect to their intention takeover ABS Industries. SEBI alleged that Rakesh Agarwal made use of this unpublished price sensitive information had purchased shares of ABS through his brother in
101
Executive order passed by SEBI available at http://www.watchoutinvestors.in/Press_Release/sebi/1998050.asp 102 http://corporateinsiderstrading.wordpress.com/2012/02/02/case-of-insider-trading-hindustan-leverlimited-hll-brooke-bond-lipton-india-limitedbblil/ 103 (2004) 1 CompLJ 193 SAT, 2004 49 SCL 351 SAT
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM law and tendered the said shares in the open offer made by Bayer. Rakesh Agarwal contended that such purchase of shares was done in the interest of the company. However, the SEBI directed Rakesh Agarwal to make a deposit of Rs. 3400000 in the Investor and Education Fund of Stock Exchange Mumbai and National Stock Exchange. SAT held that SEBIs order was not sustainable in the eyes of law since the same was done in the interest of the company. In the case of Samir Arora versus SEBI104, April 2003, there were stipulations that there would be consolidation of Digital Global Soft Limited and Hewlett Packard Indian Software Operations. In August 2003, SEBI charged Samir Arora of insider trading under Section 11B and Section 11(4)(b) of the SEBI Act. SEBI initiated action against Samir Arora on the grounds that he traded the shares of Digital Global Soft Limited on the basis of unpublished price sensitive information. He also did not make disclosures about crossing the 5% limit of acquisition of shares in various companies. He also caused panic in the market by announcing his decision to quit Alliance Capital. SEBI also debarred Samir Arora from dealing in the securities market for a period of 5 years. SEBI imposed a penalty of Rs 15 crores on Alliance capital. In October 2004, the Securities Appellate Tribunal set aside the order of SEBI on the ground on insufficient evidence on place to prove that Samir Arora indulged in insider trading. After this case, it was observed that overturning of the order of the SEBI by the Securities Appellate Tribunal almost became a norm.105 The aspect of unfair trade practices followed by the unlisted companies shall also be examined. In the case of Sahara India Real Estate Corporation Limited & Ors Versus Securities and Exchange Board of India & Anr106, Sahara Real Estate Corporation Limited had violated the SEBI (Issue of Capital and Disclosure Requirements) Guidelines, 2009 and the SEBI (Disclosure for Investor Protection) Guidelines, 2000. The Supreme Court held that the SEBI can intervene with the issuance of shares through private placement when the interest of the investors is concerned. Hence, the SEBI was held to have wide powers for the protection of investors even in unlisted companies in case the issue is pertaining to the protection of the investors.
104 105
2005 60 SCL 377 S. Vaidya Nathan, The Samir Arora case: A setback for SEBI, Business Line, http://www.thehindubusinessline.in/bline/iw/2004/10/17/stories/2004101700530600.htm 106 http://www.sebi.gov.in/cms/sebi_data/attachdocs/1351500106870.pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM PREVENTION OF CORPORATE FRAUDS: THROUGH THE LENS OF COMPANIES ACT, 2013 The Companies Bill, 2012 was passed by the upper house of the Parliament 107 and received Presidential assent. In the wake of the Satyam scam wherein shareholders were defrauded by the Chairman of the Company, inspite regular audits, the need for a stringent oversight corporate legislation was felt. Although no major developments took place since the Satyam scam, the adoption of the Companies Bill, 2012 can be seen as a major step in the Indian Corporate sector. The Companies Act, 2013 is believed to be a legislation that would impose checks and balances and lead to prevention of corporate frauds in India. The most significant characteristic feature of the Companies Act, 2013 in this regard is that the Act has laid down stringent punishment for the act of committing a fraud as defined in the Companies Act. The punishment may be to the tune of huge penalty and imprisonment. The Act provides for the establishment of the National Financial Reporting Authority in order to lay down and monitor the accounting standards.108 The Serious Fraud Investigation Office has now been given statutory recognition and have been given various powers including the power to start investigation and frame charges.109 Earlier, the SFIO was considered as a toothless tiger since it did not have the requisite statutory recognition and powers. However, the Companies Act, 2013 has overcome this problem and such a step would go a long way in prevention of corporate frauds and enabling smooth investigation of the corporate frauds. The Companies Act, 2013 has also introduced the aspect of introduction of class action suits110 and provisions for prevention of insider trading111. The Act also provides for class action suits through which the minority shareholders can get empowered and take action against the companies that are indulging in frauds112.
107
India Seeks to Overhaul a Corporate World Rife With Fraud , AUGUST 15, 2013http://dealbook.nytimes.com/2013/08/15/india-seeks-to-overhaul-a-corporate-world-rife-withfraud/?_r=0 108 Section 132 of the Companies Act, 2013 109 Section 211 and 212 of the Companies Act, 2013 110 Section 245 of Companies Act, 2013 111 Section 195 of Companies Act, 2013 112 Section 245 of the Companies Act, 2013
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CHAPTER V: SHAREHOLDER ACTIVISM AND CORPORATE GOVERNANCE

THE CONCEPT OF SHAREHOLDER ACTIVISM Shareholder Activism can be traced back to eighty years when Henry Ford chose to cancel a special dividend and instead spend the money on advancing social objectives. The court ultimately sided with the dissented shareholders, reinstated the dividend, sparking a new paradigm in shareholder activism. In 1990s shareholder activism found mainstream pension fund managers like CalPERS pushing for the repeal of staggered boards and the poison pills. These players used a form of quiet activism favoring abstentions and withholding votes for important proxy issues as a way to influence Board and Management decisions. The purpose of shareholder activism is to provide the company with an insight into the manner in which the shareholders may influence the companys behavior. Shareholder activism is also basis for the shareholders to stipulate the options that are available with the shareholders wishing to pursue an activist agenda. In UK, Shareholder activism was exercised through proxy battles, publicity campaigns, shareholder resolutions, litigation and negotiations with management. Shareholder activism may be defined as a mode of establishing a dialogue with the management on issues that concern the shareholders. It aims at improving the corporate culture. Shareholder activism aims at utilizing the corporate democracy provided by law. The effectiveness of large shareholders in corporate governance is reflected generally is a few countries such as UK, US, Germany and Japan.113 The role of large shareholdings in influencing the corporate governance of enterprises is a significant issue. 114 The emergence of shareholder activism is a new facet of corporate governance in India. The key drivers which facilitate shareholder activism are the regulatory reforms which give scope for shareholder participation and market forces which create an activist stance in the investors. Shareholder activism in India is consistent with the international trend. Although the impact of shareholder activism on corporate governance may not be unambiguous in companies which have large shareholding pattern, the influence that shareholder activism has on corporate governance cannot be disregarded.115
113
Jayati Sarkar and Subrata Sarkar, Large Shareholder Activism in Corporate Governance in Developing Countries: Evidence from India, available at http://www1.fee.uva.nl/fm/Conference/cifra2000/Sarkar.pdf 114 Rafael La Porta, Florencio Lopez-de Silanes, Andrei Shleifer and Robert Vishny Investor protection and corporate governance, Journal of Financial Economics ( 000) http://leedsfaculty.colorado.edu/bhagat/InvestorProtectionCorporateGovernance.pdf 115 Varottil Umakant, EMERGENCE OF SHAREHOLDER ACTIVISM IN INDIA, NSE Quarterly Briefing, April 2013, available at http://www.nse-india.com/research/content/res_QB1.pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM In the wake of corporate frauds in India, the corporate governance reforms reflect empowerment the investors. In India, the corporate sector is dominated b y the promoters and controlling shareholders, in such a scenario, the need for empowerment of the investors through shareholder activism becomes more significant. The recent regulatory reforms in India empower the shareholders and facilitate their participation through various mechanisms such as e-voting, voting through postal ballots, etc. However, inspite of furtherance of shareholder activism by the regulatory regime in India, the impact of shareholder activism may get dampened on account of the fact that many companies in India are widely controlled by majority shareholders. Also, the mechanism available with remedies available to the shareholders to counter the management is not efficient. In the past two decades, the corporate governance mechanisms have developed in the line of global standards and hence various reforms have taken place in the regulatory framework. These reforms include appointment of the Board of Directors, independence in the audit process, certification of financial statements etc. The Stock Markets have also advocated the role of good governance practices116. However, the efficacy of the set standards remains an unanswered question, more so in the light of the Satyam scandal.117 The influence of controlling shareholders in India is very magnificent and the current scenario is characterized by the lack of shareholder activism in the institutional and retail investors118. The perceived absence of shareholder activism in India has triggered reforms which are directed towards providing a framework wherein the investors are empowered and have a significant role119. In India, the controlled companies are predominant and even in these companies, the minority shareholders are deterred from participating in the corporate decision making, this further works in favor of the large shareholders, who emerge as the sole decision makers in the Company.120 Also, the cost of availing of the remedies against the management acts as a deterrent in enforcement of the rights of the minority shareholders; further leading to the absence of shareholder activism in India.121 Hence on account of the collective action problems, retail and institutional investors were viewed as passive investors. The evolution
116
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 http://ssrn.com /abstract=914440 117 Umakanth Varottil, A Cautionary Tale of the Transplant Effect on Indian Corporate Governance , 21(1) NAT. L. SCH. IND. REV.1 (2009). 118 id 119 Varottil, Umakanth, The Advent of Shareholder Activism in India (October 22, 2012). Journal on Governance, Vol. 1 No. 6, 2012 Available at SSRN: http://ssrn.com/abstract=2165162 or http://dx.doi.org/10.2139/ssrn.2165162 120 Mathew, Hostile Takeovers in India: New Prospects, Challenges, and Regulatory Opportunities, 2007(3) COLUM. BUS. L. REV. 800 available in cblr.columbia edu archives 0 00 121 Lee Harris, Missing in Activism: Retail Investor Abstinence in Corporate Elections, 2010 COLUM. BUS. L. REV. 104, 166, available in www.memphis.edu/law/facultystaff/bio/harriscv 0 pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM of shareholder activism in a developed country such as the USA can also be traced back only to the 1990s.122 Shareholder activism may be defined as series of proactive efforts on the part of the shareholders to influence the behavioral patterns of the firm and the governance rules. Hence, it is a mechanism to change the manner of the company's management without an actual change in the control of the company.123 The most important shares of shareholder activism are participative shareholder activism, interactive shareholder activism and shareholder activism whereby a combative strategy is used. In the participative shareholder activism, the shareholders actively participate in corporate franchise by exercising their votes in the meetings. Although, they are be the minority shareholders, on account of the overwhelming participation of the minority shareholders; the course of management undergoes a change124. In the interactive shareholder activism, the shareholders communicate with the management and derive information and also make attempts to convince them about the direction in which the company should proceed.125 In shareholder activism wherein a combative strategy is used, the shareholders make attempts to overthrow the management through mechanisms such as the hostile takeovers.126
122
Stuart Gillan & Laura T. Starks, The Evolution of Shareholder Activism in the United States (2007), available at http://ssrn.com/abstract=959670 123 Bernard Black, Shareholder Activism and Corporate Governance in the United States, in PETER NEWMAN (ED.), available at http://ssrn.com/abstract=45100 124 Financial Reporting Council, The UK Stewardship Code (September 2012), available at http://www.frc.org.uk/Our-Work/Codes-Standards/Corporate -governance/UK-Stewardship-Code.aspx. 125 Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control , 155 U. PA. L. REV. 1021 (2007). 126 Brian R. Cheffins & John Armour, The Past, Present and Future of Shareholder Activism by Hedge Funds, 37 J. CORP. L. 51 (2011) available at blogs.law.uiowa.edu/jcl/wpcontent/uploads/2012/01/Cheffins-web pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM REGULATORY REFORMS ACTIVISM IN INDIA STRENGTHENING THE SHAREHOLDER
The regulatory reforms in India have focused on furthering greater shareholder participation. The approach in terms of the regulatory reforms depicts various facets of shareholder activism. The various angles of shareholder activism may be reflected in terms of manner of participation of shareholders in meetings and the role of shareholders in corporate decision making.
Manner of casting votes

In 2001, the Companies Act was amended and the facility of voting by postal ballot was introduced in 2001.127 The aim of this amendment was to address the issues faced by the retail investors who could not be physically present for casting the votes at the company meetings. The system of postal ballot provides the shareholder the facility of casting their votes through post instead of being physically present in the meeting. The Central Government laid down rules and laid down a list of the resolutions wherein the Companies were required to compulsorily provide a facility of voting by postal ballot.128 In those resolutions which did not feature in the list, the Companies had the discretion of not providing the facility of postal ballot. Although the mechanism of voting through postal ballot provided the retail shareholders an avenue to participate in the corporate franchise, the efficacy of this mechanism remained an issue. The shareholders could participate in the corporate decision making through postal ballot, but they could not be a part of the deliberations that take place in course of the decision being taken by the management. In a recent report, it was observed that the shareholder participation through postal ballot remained as low as 3% on an average.129 Hence, introduction of voting by postal ballot failed to have an impact. After the system of voting by postal ballot failed to have a positive impact, technological advancements were utilized in the regulatory reforms for enhancing shareholder participation. Companies (Passing of the Resolution by Postal Ballot) Rules, 2011 were passed which specifically recognized voting through the electronic means. SEBI amended the Listing agreement in 2012 for providing a mechanism whereby the companies were required to provide e-voting facilities130. Also, the top 500 listed companies on the Bombay Stock Exchange were
127 128
Section 192A of the Companies Act, 1956 Companies (Passing of the Resolution by Postal Ballot) Rules, 2001 129 Welcome to the World of E-Voting, THE FIRM: CORPORATE LAW IN INDIA, July 2, 2012, referred in Varottil, Umakanth, The Advent of Shareholder Activism in India (October 22, 2012). Journal on Governance, Vol. 1 No. 6, 2012 Available at SSRN: http://ssrn.com/abstract=2165162 or http://dx.doi.org/10.2139/ssrn.2165162 130 Securities and Exchange Board of India, Amendment to the Equity Listing Agreement Platform for EVoting by Shareholders of Listed Companies, Circular CIR/CFD/DIL/6/2012 (Jul. 13, 2012).
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM required to provide an e-voting facility. It may be expected that the introduction of the e voting facility would enable greater participation by the shareholders because the penetration of technology had increased. Also, the e-voting facility is a much cheaper mode and made encourage the shareholders to participate in decision making.131
Participation of Shareholders in Meetings

It is important that the shareholder shall exercise their voting rights in an informed manner and the same is possible only when the shareholders are present in the meetings and get an opportunity to engage in deliberations for exercise of corporate franchise. The government of India recognized that the shareholders may have some limitations in being physically present in the meetings. Hence, the Government of India introduced the concept of eparticipation. The companies were required to provide the shareholders an option to attend the meeting through audio visual means in such a manner that all the participants can communicate and participate effectively132. The Chairman of the Company has the responsibility to ensure that the integrity of such meeting is maintained. The Government had the intention to provide that such a facility shall be mandatorily provided. However, on account of the fact that an issue raised that the meetings held through audio-visual means may not have legal validity under the Companies Act, 1956; provision of such facilities was optional even by the Listed Companies. 133 Since the holding of meetings through audio-visual means is not compulsory, the efficacy of the rules becomes an issue.
Voting in the Meetings as a Responsibility

Shareholding in a Company can be considered as a bundle of rights. 134 The right to cast vote and participate in the corporate franchise is the most significant right of a shareholder. Shareholders however, have the discretion to vote or refrain from voting. The regulatory authorities had recognized the passivity among the retail and institutional investors in terms of exercising their voting as a responsibility. Mutual Funds are one category of institutional
131
Tania Kishore, E-voting will make life easier for investors, BUSINESS STANDARD, July 4, 2012, available at www.business-standard.com/search?type=news&q=E-voting 132 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) 133 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). 134 Cambridge Gas Transportation Corporation v. Official Committee of Unsecured Creditors of Navigator Holdings [2006] UKPC 26, [2007]
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM investor. SEBI specified that the mutual funds were required to exercise their voting rights in the investee company in a responsible manner.135 A circular was issued by the SEBI in 2010 whereby the Institutional Investors were required play an active role in ensuring better corporate governance of listed companies. The SEBI adopted a comply or explain approach.136 As per this approach the institutional investor was required to participate in the meetings of the company and was answerable for not attending the meeting. The Asset Management companies were also required to disclose the participation in the meetings in the annual report of the company and the firm's website. Disclosure also needs to be made with regard to the area in respect of which the voting rights were exercised such as corporate governance, merger and takeovers etc. This regulatory reform of the SEBI facilitates participation of the mutual funds being institutional investors in the process of exercising their voting rights.
The Companies Act, 2013 as a Furtherance of Shareholder Activism

The Companies Act, 2013 can be considered as a furtherance of the protection of investors and facilitation of greater participation by the shareholders. Section 110 of the Companies Act, 2013 provides for voting by postal ballot. This provision was contained even in the Companies Act, 1956. Voting by postal ballot can be regarded as a mechanism to facilitate greater participation of the shareholders. The SEBI has also taken steps in the direction of propagation of class action suits. The SEBI (Investor Protection and Education Fund) Guidelines, 2009, provide that the SEBI can aid investors in undertaking legal proceedings that are in the interest of investors at large in the company that is listed or proposed to be listed137. Section 245 of the Companies Act, 2013 provides for class action suit. This can also be regarded as a facet of shareholder activism because shareholder activism includes proceedings against the management of the Company for alleged mismanagement. The provision for a class action suit would enable the aggrieved shareholders to proceed against the management and enforce their rights. The aspect of class action suits has been very successful in the US to promote shareholder activism. The provision of class action suit may be observed as a basis of which the minority shareholders can become active watchdogs of the Company instead of helpless spectators.138 Thus, a mechanism whereby the shareholders have an avenue to enforce their rights can also be regarded as a furtherance of shareholder activism.
135 136
Circular for Mutual Funds, SEBI/IMD/CIR No 18 / 198647/2010 (Mar. 15, 2010) Anita Indira Anand, An Analysis of Enabling vs. Mandatory Corporate Governance: Structures PostSarbanes Oxley, 31 DEL. J. CORP. L. 229, 229-30 (2006). 137 http://indiacorplaw.blogspot.in/2009/06/shareholder-activism-and-class-action.html Section 245 138 http://www.openthemagazine.com/article/business/thumbs-up-for-shareholder-activism
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM The Companies Bill, 2012 provided for the rights of the shareholders to approve certain related party transactions139, the Companies Act, 2013 provides for a similar provision that the Boards Report shall disclose the related party transactions and the reasons for entering into the related party transactions. As per the provision, in case a Board of Director enters into a related party transaction and does not take the approval of the Board or the shareholders within three months from the date of entering into such transaction, the same may be held as avoidable at the option of the Board. Hence, although the aspect of disclosure of the related party transactions to the shareholder would not have a direct relation to shareholder activism, it would nevertheless facilitate transparency and promote informedness of the shareholders and the fact that the shareholders approval may be required for the ratification of a related party transaction may be treated as a provision in furtherance of Shareholder Activism. Another important provision in the Companies Act, 2013 is that the minority shareholders shall be permitted to select an independent director. This, in effect would empower the minority shareholders.140 Thus, the Companies Act, 2013 also furthers the aspect of shareholder activism. Significant changes were made to the Listing agreement in 2013 by the SEBI whereby the aim was to protect the minority shareholders interests in mergers and other forms of corporate restructuring involving listed companies.141
Assessment of the Reforms

An assessment of the regulatory reforms undertaken in India reflects that the shareholder participation is sought to be increased, it cannot be denied that shareholder activism shall be self generated. Another issue that demands scrutiny is that of lack of information available with the shareholders with regard to the meetings and the Companies Act, 1956 also does not provide an elaborative framework of dissemination of information regarding the meetings. SHAREHOLDER ACTIVISM: A RECENT EXAMPLE IN INDIA Although the Companies Act, 2013 facilitated a few reforms in furtherance of shareholder activism142, there was a recent instance which reflects shareholder activism in action. The Children's Investment Fund is a hedge fund in the United Kingdom. TCI holds 1% shares in Coal India which is a government company wherein the government holds 90%
139
Umakanth Varottil, EMERGENCE OF SHAREHOLDER ACTIVISM IN INDIA, NSE Quarterly Briefing, April 2013, available at http://www.nse-india.com/research/content/res_QB1.pdf 140 Section 150 of the Companies Act, 2013 141 ibid 142 Jayanta Mallick, Shareholder Activism gains foothold in 2012 , Business Line, http://www.thehindubusinessline.com/markets/shareholders-activism-gains-foothold-in2012/article4210248.ece
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM stake. TCI raised the concern that Coal India has huge government influence and thus was refusing to sell its products at market prices. TCI also raised issues about the governance of Coal India as a public listed company. According to the Articles of Association 0f Coal India, the President of India has the power to direct the affairs of the company and the same was received as a satisfactory answer by TCI. TCI went on to initiate a legal action against Coal India before the Kolkata court. It has also proceeded to initiate arbitration with Coal India as the opposite party under certain bilateral investment treaties143. TCI is a hedge fund that has a track record of being successful in terms of shareholder activism in many other countries. The main allegations of the TCI in the law suit were that the Ministry of Coal did not permit Coal Indi as an independent company. Also, the international market pricing norms are not followed by Coal India. Also, TCI pointed out that the Directors of Coal India were not performing their duties in a reasonably efficient manner and fail to exercise care and skill; which is the main reason for the Company running into losses144. The Government denies to be bound to follow the international pricing norms and did not accept the allegations of TCI145. While the suit remains to be decided, regardless of whether or not TCI succeeds in the case; what needs to be observed is that shareholder activism can be utilized as a weapon in the hands of the minority shareholders to enforce their rights. It can thus be inferred that shareholder activism is a proactive action of the shareholders and many not require complex reforms for initiation. For instance, class action suit as a provision in the Companies Act, 2013 did not exist when TCI initiated the suit and set an example of shareholder activism in India. Thus, it may be further be purported that on account of the recent regulatory reforms in India, shareholder activism may be seen as a manner of enforcement of rights of the shareholders against their companies. CORPORATE GOVERNANCE INTERMEDIARIES Corporate Governance intermediaries play a significant role in influencing the function of corporate decision making. Proxy Advisory firms advise the institutional investors regarding the manner of exercising their votes.146
143
Coal India faces a surprising case of shareholder activism in India, available at http://www.policymic.com/articles/6356/coal-india-faces-a-surprising-case-of-shareholder-activism-inindia 144 Umakanth Varottil, EMERGENCE OF SHAREHOLDER ACTIVISM IN INDIA, NSE Quarterly Briefing, April 2013, available at http://www.nse-india.com/research/content/res_QB1.pdf 145 TCI plea to raise prices has no legal basis: Coal India, The Economic Times http://articles.economictimes.indiatimes.com/2013-01-28/news/36596302_1_cil-directors-coal-prices-coalindia 146 Paul Rose, On the Role and Regulation of Proxy Advisors, MICHIGAN LAW REVIEW: FIRST IMPRESSIONS, available at http://www.michiganlawreview.org/articles/on-the-role-and-regulation-ofproxy-advisors
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM It may not be economical for the retail investors to consult the proxy advisors; hence the proxy investors also make public recommendations regarding exercise of voting rights by shareholders. The proxy advisors are well established in the international arena in the form of corporate governance intermediaries and their recommendations have the potential to influence corporate decision making. In India, the industry of proxy advisors came up in 2010. The major proxy advisors in India include InGovern, Institutional Investor Advisory Services and Stakeholders Empowerment Services. These proxy advisors have published various recommendations pertaining to the corporate proposals in listed Companies in India. The proxy advisors give recommendations with regard to major corporate decisions such as appointment of auditors, independent directors and transactions such as mergers and takeovers.147 In cases where the proposals of the managements are against the corporate governance norms, the proxy advisors recommend the shareholders to vote against the proposal of the management. The proxy advisors have also recommended against the proposal of the management with regard to corporate restructuring where the value of the public shareholders may deteriorate after the corporate restructuring decision is taken. The proxy advisors have also recommended against the appointment of independent directors and auditors wherein the corporate governance norms are not followed and the same is not in the interest of the shareholders.148 Hence, on account of proxy advisors in India, the Companies in India cannot disregard the impact of the minority shareholders and institutional investors. The objective of the proxy advisors is to act as corporate governance intermediaries and to ensure that the decisions of the management of the company are not against the corporate governance norms established in India, by keeping the investors aware of the proposal of the management of companies with respect to the aspect of corporate governance. Also, the fact that the proxy advisors make their recommendations public, can be viewed as a mechanism of imposing checks and balances on the functioning of the proxy advisors. The listed companies in India are under a mandatory legal obligation to follow the corporate governance standards. However, the close monitoring of the companies by the proxy advisors would trigger the listed companies to follow higher corporate governance norms and may also act as a basis for the companies to follow international best practices in terms of corporate governance.149
147
Bhuma Srivastava, Proxy advisory firms give a boost to shareholder activism, THE MINT, June 29, 2012, available at http://www.livemint.com/Companies/HeuG8SPSw3zXE4sUYhecqN/Proxy-advisoryfirms-give-a-boost-to-shareholder-activism.html 148 Sucheta Dalal, Proxy advice: Check on Misgovernance, MONEYLIFE, August 11, 2011 available at http://suchetadalal.com/?id=22ef29a5-277b-916c-4e548f747d82&base=sections&f 149 Varottil, Umakanth, The Advent of Shareholder Activism in India (October 22, 2012). Journal on Governance, Vol. 1 No. 6, 2012 Available at SSRN: http://ssrn.com/abstract=2165162 or http://dx.doi.org/10.2139/ssrn.2165162
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM Another benefit of the institutional investors is that the cost of carrying out research and analyzing the corporate governance norms in terms of the proposals of the management can be outsourced to the proxy advisors. The advent of the proxy advisors in India can be termed as a new facet of emergence of corporate governance in India, the efficacy of the mechanism cannot be determined owing to the fact that the proxy advisors industry has boomed in India in the recent past.150 Although the mechanism of proxy advisors in India has many advantages, the concerns raised with regard to the proxy advisors in other jurisdictions needs to be scrutinized. One of the drawbacks of the system could be that in case a proxy advisor runs for profit and provides consultancy service to the company with regard to corporate governance and also gives recommendations to the shareholders, a situation of conflict of interest may arise and the same needs to be addressed. Also, the policies followed in evaluating the corporate governance norms in the companies are standardized; they are not evaluated in terms of the nature of the company. Also, the aspect of responsibility and legal liability of the proxy advisor is not dealt with under any legislation; hence close monitoring of the mechanism may be required. Also, the proxy advisors are not amenable to any government intervention; thus the issue of accountability and transparency in functioning of the proxy advisors may arise. The SEBI could play an important role in monitoring the proxy advisors and ensuring their liability.151 INTERNATIONAL TRENDS OF SHAREHOLDER ACTIVISM After the global financial crisis, the phenomenon of shareholder activism has been gradually increasing. The institutional investors are making an attempt to engage with the management of the portfolio companies and hedge fund activism also has a chilling effect on the board rooms in Indian Companies. Retail Investors participation in critical corporate decision has been recognized by the regulatory reforms world over. In US, the concept of say-on-pay reforms was introduced whereby the shareholders could participate in decision making with regard to the compensation payable to executive directors. Access to decision making is another crucial reform that has taken place. In India and Turkey, the system of e-voting in listed companies was introduced.152 Efforts are also being taken in the direction of promoting participation of the institutional investors. The UK Stewardship Code provides for participation of the investors in order to enhance the overall governance standards.
150 151
ibid Sucheta Dalal, Proxy advice: Check on misgovernance, MONEYLIFE, August 11, 2011. 152 Melsa Ararat & Muzaffer Eroglu, Istanbul Stock Exchange Moves First on Mandatory Electronic Voting, The Harvard Law School Forum on Corporate Governance and Financial Regulation (Nov. 6, 2012) available at blogs.law.harvard.edu/corpgov/tag/muzaffer-eroglu
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM The role of proxy advisors in shareholder activism has not been denied by the countries. However, the Countries estimate a possibility of conflict of interest of the proxy advisors with the firm on one hand and the investor on another hand. Hence, in Europe 153 and United States, attempts are being made to define the role of proxy advisors without ambiguity. AN OVERALL PERSPECTIVE OF SHAREHOLDER EVALUATING THE NEED OF SHAREHOLDER ACTIVISM ACTIVISM:
In the United States of America, the aspect of shareholder activism is exercised through filing of class action suit. The shareholders in us exert pressure on the management of the company to follow the good corporate governance practices. The shareholders also closely monitor the corporate affairs and effectively participate in the meetings to exercise their voting power. The aspect of shareholder activism in India may be termed as almost nonexistent. In order to promote shareholder activism, the ministry of corporate affairs and Securities and Exchange Board of India in order to promote protection of investors and raise awareness amongst the shareholders. Clause 49 of the listing agreement provides for various disclosures and maintenance of transparency154. In the Satyam scam, the when the management of Satyam Computers Limited decided to takeover the Maytas Infrastructure Limited, the Institutional Investors pressurized the management to withdraw its decision henceforth, the decision was withdrawn only in account of the pressure faced from the shareholders. After this, the value of the American Depository Receipts, which were listed in the New York Stock Exchange, fell down. Consequent to this, the shareholders in the US filed various class action suits against director of Satyam Computers Limited alleging its directors have committed violations of the US Securities Exchange Act, 1934, by issuing materially false and misleading statements. Hence, in terms of occurrence of corporate frauds such as the Satyam Fiasco, it becomes exceedingly necessary for the shareholders to exercise diligence and ensure that their rights are protected. In case of lack of shareholder activism, major corporate frauds would become rampant. Thus, the Satyam scam can be viewed as a result of failure of corporate governance on the part of the Company and lack of shareholder activism. Shareholder activism in India is at a nascent stage and comes to the fore only in instances where institutional investors holding a significant stake are in a position to question the quality of corporate governance.155 The minority shareholders are generally not aware of the
153
European Commission, Green Paper: The EU corporate governance framework (2011), available at http://ec.europa.eu/internal_market/ company/docs/modern/com2011-164_en.pdf 154 Shareholder Activism-Healthy trend for Corporate Governance http://www.lawyersclubindia.com/articles/print_this_page.asp?article_id=1517 155 Enhancing Transparency and Accountability in Indian Corporates, available at http://www.kpmg.de/docs/Enhancing_Transparency.pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM means through which they can exercise their rights and in order to enhance good corporate governance practices, increased activism on the part of the shareholders is extremely critical.156 The exercise of rights by the minority shareholders in terms of shareholder activism can be regarded as a step to ensure furtherance of promotion of corporate governance. The landmark Companies Act, 2013 has put in an impressive framework for making firms more accountable to shareholders, but the provisions on corporate governance will have teeth only if shareholders start exerting their rights157. The TCI case was the first instance in India wherein a listed company was threatened by an institutional investor with regard to corporate governance practices. The role of institutional investors in furtherance of corporate governance is extremely significant. Also, recently, the Vedanta Restructuring instance, Vedanta announced the merger of Sesa Goa and Sterlite Industries. The institutional investors had protested against the merger.158 The need for shareholder activism can be brought out by analyzing the issues that are a setback in enforcement of the rights by the shareholders. For instance, the shareholders do not exercise their rights and abstain from voting; this is the most crucial reason for the lack of shareholder activism in India, The regulatory system in India is not considered effective enough and the extent of time taken in resolving a grievance of a shareholder act as a major drawback159
156 157
ibid Indias missing shareholder activists, http://www.livemint.com/Opinion/NvhadreiRdsM4bJbMSTAxK/The-lack-of-shareholder-activism-inIndia.html 158 INSTITUTIONAL SHAREHOLDER ACTIVISM IN INDIA, http://www.ingovern.com/wpcontent/uploads/2012/03/Institutional-Shareholder-Activism-in-India.pdf 159 Shareholder Activism: Greenmail to Governance , http://www.advantageindia.in/GreenmailtoGovernance.pdf
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CHAPTER IV: CONCLUSIONS AND SUGGESTIONS

In light of the discussion on Investor Protection and Corporate Governance, it may be reflected that the Indian legal and regulatory framework of corporate governance is elaborative enough to encompass the aspect of investor protection in listed companies. The Listing Agreement provides an extensive set of disclosures that shall be mandatorily be made to the shareholders of the Company. The Companies Act, 1956, Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009; SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and SEBI (Prohibition of Insider Trading Regulations) 1992 which was amended in 2002 also provide for various aspects that shall be disclosed to the shareholders by the companies. The mandatory requirement of the Shareholders Grievance Committee has an extremely significant role in safeguarding the shareholders and redressing their grievances on a timely basis. Although the efficacy of the Shareholders Grievance Committee depends on the members of the Committee and the perspective of the company with regard to corporate governance, the mandatory provision of setting up of a Shareholder Grievance Committee has far reaching implications in terms of safeguarding the interests of the investors. The corporate governance framework in India is very extensive and makes every attempt to protect the investors interests. In fact investor protection can be termed as a manifestation of good corporate governance practices in India. Tracing out the history and evolution of corporate governance in India reflects that the role of maintenance of transparency in the Company shall be considered as extremely significant in ensuring that good corporate governance practices are followed. Thus, the amendment to the Listing Agreement requires an elaborative set of disclosure norms that shall be followed by the Company. The reason for the amendment to the Listing Agreement was that maintenance of transparency in the company shall be extremely significant to ensure the protection of investors in India. An analysis of the Satyam Fiasco and the Reebok Fraud Case reflects that good corporate governance practices are the bedrock of investor protection. Such corporate frauds and unfair trade practices occur owing to the lack of good corporate governance in India. Hence, the need of corporate governance arises in order to facilitate protection of the investors. These corporate frauds occurred on account of loopholes in the corporate governance of the companies. Hence, the role of corporate governance in furtherance of investor protections shall be recognized. It can also be inferred that the institutional shareholders have an important role to play influencing the corporate to follow good corporate governance practices. The institutional investors can establish a dialogue with the management of the company and ensure that they review the strategies, disclosure norms and many other aspects. This would create
INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM accountability on the management to follow good corporate governance practices as this would create a level of answerability. The aspect of shareholder activism has also been discussed in light of the corporate governance framework in India. It can be concluded that the regulatory reforms in India provide a much larger scope of enhancement of shareholder activism. However, it cannot be denied that the reforms would be meaningless if the shareholders do not be aware of their rights and make an attempt to enforce these rights. Thus, in effect, shareholder activism bottles down to proactive action on the part of the shareholders. In case the shareholders make an attempt to participate in the management of the company, the corporate governance practices of the company would be enhanced to a great extent. Also, the shareholder activism can be used as a tool in the hands of the shareholders to enforce their rights and influence decisions of the management. The corporate governance mechanism in the company may be enhanced on account of the shareholder activism. However, it cannot be denied that the shareholder activism is in the nascent stage in the current Indian scenario. The need of shareholder activism arises because the companies indulge in unfair trade practices and corporate fraud and evade the corporate governance norms. Hence, the shareholders shall act proactively and ensure that the company maintains transparency and does not take any decision that goes against the interest of the investors. The Companies Act, 2013 has provided for the aspect of class action suits. This can be viewed as a step toward promotion of shareholder activism in India because in case a class of investors is dissatisfied with the management, they can proceed against the company and enforce their rights. Thus, the Companies Act, 2013 can be termed as a furtherance of investor protection India. The aspect of Corporate Governance in unlisted Companies also requires a scrutiny. The corporate governance framework in India does not mandate corporate governance practices in Unlisted Companies. The Corporate Governance Voluntary Guidelines, 2009 provide for various disclosures that shall be made by the companies. It can be inferred that the Guidelines encompass the aspect of investor protection in terms of corporate governance. However, these guidelines are not mandatory in nature although they provide for a complyor-explain basis of enforcement. These guidelines do address the need of investor protection impliedly by laying down a series of disclosures that shall be made to the shareholders by the company. However, these guidelines are not adequate enough because it is easy to evade the guidelines and the enforcement of these guidelines poses another issue. A perusal of the Companies Act, 1956 provides that the shareholders have various rights in terms of proceeding against the company for winding up, oppression or mismanagement and the Act as such does not provide for the rights of the shareholders in terms of enforcing disclosures in terms of corporate governance which are necessary for the protection of the investors. The protection of the minority shareholders in the company is also another issue that needs to be addressed since the framework of the Companies Act, 1956 and the Corporate
INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM Governance Voluntary Guidelines, 2009 are not adequate enough to protect the rights of the minority shareholder. It is thus suggested that legal and regulatory framework shall be developed in India in terms of Corporate Governance encompassing the need for investor protection. In effect the hypothesis stands proved. The reason is that the disclosure norms required by the Listed Companies is adequate enough to address the issue of protection of investors. Various clauses of the Listing agreement provide for a series of disclosures that need to be made by the company to the shareholders. These disclosures entail maintenance of transparency in the Company and the same shall be construed as the basis of the protection of investors. However, one aspect that cannot be disregarded is that regardless of the efficacy of the company in terms of corporate governance, the need of shareholder activism cannot be ruled out because shareholder activism has an extremely important role in ensuring that the company continues to follow good corporate governance practices and does not indulge in such activities that would defy the interest of the investors. Hence, inspite of the adequacy of the legal and regulatory framework of Corporate Governance in India in listed companies, the adequacy would hold no meaning if the shareholders do not act proactively, ensure that their rights are protected and that the concerned organization does not indulge in any practices that would defy the interests of the investors. Finally, owing to the fact that in unlisted companies, there is no such mandatory requirement to follow corporate governance practices; legal and regulatory framework shall be developed in India with regard to the protection of the investors since the protection of the investors in unlisted companies is an equally critical issue.
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REFERENCES
BOOKS REFERRED 1. Renu Jatana and David Crowther, Corporate Social Responsibility-Theory and Practice with Case Studies, Deep and Deep Publications Private Limited, New Delhi, 2007 2. AC Fernando, Corporate Governance: Principles, Policies and Practices, available at http://books.google.co.in/books?id=al6zP7foCSEC&pg=PT172&lpg=PT172&dq= fernando+ac+investor+protection&source=bl&ots=6AHt2RJZkP&sig=vCRHNZp 8CqhXvfpJ5FbkgFJB4c8&hl=en&sa=X&ei=O8zUqbvG4uzrgeu0YH4Aw&ved=0CFIQ6AEwCQ#v=onepage&q=fernando%2 0ac%20investor%20protection&f=false 3. Sharma, J.P, Corporate Governance, Business Ethics and Corporate Social Responsibility, Ane Books, New Delhi, India, 2011 ARTICLES REFERRED 1. Rafael La Porta, Florencio Lopez-de Silanes, Andrei Shleifer and Robert Vishny, Investor protection and corporate governance, Journal of Financial Economics 58 (2000) http://leedsfaculty.colorado.edu/bhagat/InvestorProtectionCorporateGovernance.p df 2. Pratip Kar, Corporate Governance and the Empowerment of the Investors ADB/OECD/WORLD BANK 2nd ASIAN CORPORATE GOVERNANCE ROUND TABLE, http://www.oecd.org/daf/ca/corporategovernanceprinciples/1930766.pdf 3. Prabhash Dalei, Paridhi Tulsyan and Shikhar Maravi, Corporate Governance in India: A Legal Analysis, International Conference on Humanities, Economics and Geography (ICHEG'2012) March 17-18, 2012 Bangkok, available at http://psrcentre.org/images/extraimages/312018.pdf 4. Santosh Pande and Kshama V Kaushik, Study on the State of Corporate Governance in India, http://www.iica.in/images/Evolution_of_Corporate_Governance_in_India.pdf 5. Shareholder Activism-Healthy trend for Corporate Governance http://www.lawyersclubindia.com/articles/print_this_page.asp?article_id=1517 6. Enhancing Transparency and Accountability in Indian Corporates, available at http://www.kpmg.de/docs/Enhancing_Transparency.pdf 7. Indias missing shareholder activists, http://www.livemint.com/Opinion/NvhadreiRdsM4bJbMSTAxK/The-lack-ofshareholder-activism-in-India.html 8. INSTITUTIONAL SHAREHOLDER ACTIVISM IN INDIA, http://www.ingovern.com/wp-content/uploads/2012/03/InstitutionalShareholder-Activism-in-India.pdf 9. Shareholder Activism: Greenmail to Governance , http://www.advantageindia.in/GreenmailtoGovernance.pdf
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM 10. Recommendations on Capital Markets Governance & Investor Protection, available at http://www.icsi.edu/WebModules/LinksOfWeeks/CAPITAL%20MARKETS%20 WEEK%20SUGGESTIONS.pdf 11. Colin Mayer, Corporate Governance, Competition, and Performance, Journal of Law and Society Volume 24, Issue 1, March 1997 available at http://onlinelibrary.wiley.com/doi/10.1111/1467-6478.00041 12. Kshama Kaushik and Rewa Kamboj, Study on the State of Corporate Governnace in IndiaGatekeepers of Coprorate Governance, http://www.iica.in/images/Prologue_Gatekeepers.pdf 13. C. Udaya Kumar Raju; M. Subramanyam; Himachalam Dasaraju, Emergence of Corporate Governance in India, International Journal of Multidisciplinary Management Studies Vol. 2 Issue 5, May 2012, ISSN 2249 8834 available at http://zenithresearch.org.in/images/stories/pdf/2012/May/EIJMMS/7_EIJMMS_ MAY12_VOL2_ISSUE5.. Pdf 14. Corporate Governance Voluntary Guidelines: A New Beginning, February 3, 2011 available at http://www.business-standard.com/article/companies/corporate-governancevoluntary-guidelines-a-new-beginning-111020300106_1.html 15. N K Jain, New Corporate Governance Norms: An Analysis of Revised Clause 49 of The Listing Agreement, available at: http://www.icsi.edu/docs/webmodules/Programmes/31NC/NEWCORPORATE GOVERNANCENORMS-NKJAIN.doc. 16. Bhanumurthy, I. and Sawant Dessai, Dr. Sanjay, Corporate Governance in India Clause 49 of Listing Agreement (August 17, 2010). Available at SSRN: http://ssrn.com/abstract=1660285 or http://dx.doi.org/10.2139/ssrn.1660285 17. Varottil, Umakant., A Cautionary Tale of the Transplant Effect on Indian Corporate Governance, National Law School of India Review, Vol. 21, No. 1, 2010 available at papers.ssrn.com/sol3/papers.cfm?abstract_id=1331581 18. Kumar Naveen and Singh JP, Corporate Governance in India: Case for Safeguarding Minority Shareholders Rights, International Journal of Management & Business Studies Vol. 2, Issue, June 2012, available at http://www.ijmbs.com/22/naveen.pdf 19. SEBIs Tough Stand Against IPO Cheats Sends Out Right Signals, Economic Times (2012), January 2, Available: http://articles.economictimes.indiatimes.com/2012-0102/news/30587433_1_ipo-market-ipoprocess-merchant-bankers 20. ICSI welcomes passage of Companies Bill, 2012 by Parliament, Aug 9, http://www.aninews.in/newsdetail3/story124934/icsi-welcomes-passage-ofcompanies-bill-2012-by-parliament.html 21. Highlights of the Companies Bill (as passed by the Lok Sabha on 18.12.12 and by the Rajya Sabha on 08.08.13), available at http://www.icsi.edu/WebModules/Linksofweeks/Cos%20bill%20highlights.pdf 22. Sahil Arora and Utkarsh Soni Investor Protection In The Aftermath of The Reebok Fraud Case: An Appraisal of the need for corporate governance in Non-Listed Companies, XI Capital Markets Conference (December 21 - 22, 2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263081 23. An Update of Adidas India Euro 125 Million Fraud Story, 28 May, 2012, http://soniajaspal.wordpress.com/2012/05/28/an-update-of-adidas-india-euro-125million-fraud-story/
INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM 24. Reebok India case: Corporate mismanagement led to Scam, September 23, 2012, The Economic Times, http://articles.economictimes.indiatimes.com/2012-0923/news/34040662_1_conspiracy-and-fraudulent-practises-reebok-india-gurgaonpolice 25. SFIO report finds Reebok guilty of fudging A/Cs: Sources, June 10, 2013 http://www.moneycontrol.com/news/cnbc-tv18-comments/sfio-report-findsreebok-guiltyfudging-acs-sources_895198.html?utm_source=ref_article 26. Shleifer, Andrei; Vishny, Robert W, A survey on corporate governance, 52 JOURNAL OF FINANCE 737-783 (1997) available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1997.tb04820.x/full 27. India Seeks to Overhaul a Corporate World Rife With Fraud, http://dealbook.nytimes.com/2013/08/15/india-seeks-to-overhaul-a-corporateworld-rife-with-fraud/?_r=0 28. Shivanna, Manoj, The Satyam Fiasco - A Corporate Governance Disaster! (May 2010). Available at SSRN: http://ssrn.com/abstract=1616097 or http://dx.doi.org/10.2139/ssrn.1616097 29. Lessons from Satyam fiasco that can help improve corporate governance in India, Jan 02 2009, http://www.livemint.com/Companies/OqLofvAsyiwHkEBlLJaoOL/Lessonsfrom-Satyam-fiasco-that-can-help-improve-corporate-g.html 30. Deemed to be Insiders: Major players of Insider Trading, available at http://nmims.edu/wpcontent/uploads/2012/p3/MPSTME/Insider%20%20TradingAbhay%20Kumar.pdf 31. S. Vaidya Nathan, The Samir Arora case: A setback for SEBI, Business Line, http://www.thehindubusinessline.in/bline/iw/2004/10/17/stories/2004101700530 600.htm 32. Jayati Sarkar and Subrata Sarkar, Large Shareholder Activism in Corporate Governance in Developing Countries: Evidence from India, available at http://www1.fee.uva.nl/fm/Conference/cifra2000/Sarkar.pdf 33. Varottil Umakant, EMERGENCE OF SHAREHOLDER ACTIVISM IN INDIA, NSE Quarterly Briefing, April 2013, available at http://www.nseindia.com/research/content/res_QB1.pdf 34. 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 http://ssrn.com /abstract=914440 35. Varottil, Umakanth, The Advent of Shareholder Activism in India (October 22, 2012). Journal on Governance, Vol. 1 No. 6, 2012 Available at SSRN: http://ssrn.com/abstract=2165162 or http://dx.doi.org/10.2139/ssrn.2165162 36. Mathew, Hostile Takeovers in India: New Prospects, Challenges, and Regulatory Opportunities, 2007(3) COLUM. BUS. L. REV. 800 available in cblr.columbia.edu/archives/10900 37. Stuart Gillan & Laura T. Starks, The Evolution of Shareholder Activism in the United States (2007), available at http://ssrn.com/abstract=959670 38. Financial Reporting Council, The UK Stewardship Code (September 2012), available at http://www.frc.org.uk/Our-Work/Codes-Standards/Corporate -governance/UKStewardship-Code.aspx. 39. Brian R. Cheffins & John Armour, The Past, Present and Future of Shareholder Activism by Hedge Funds, 37 J. CORP. L. 51 (2011) available at blogs.law.uiowa.edu/jcl/wpcontent/uploads/2012/01/Cheffins-web.pdf
INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM 40. Tania Kishore, E-voting will make life easier for investors, BUSINESS STANDARD, July 4, 2012, available at www.business-standard.com/search?type=news&q=E-voting 41. Jayanta Mallick, Shareholder Activism gains foothold in 2012, Business Line, http://www.thehindubusinessline.com/markets/shareholders-activism-gainsfoothold-in-2012/article4210248.ece 42. Coal India faces a surprising case of shareholder activism in India, available at http://www.policymic.com/articles/6356/coal-india-faces-a-surprising-case-ofshareholder-activism-in-india 43. TCI plea to raise prices has no legal basis: Coal India, The Economic Times http://articles.economictimes.indiatimes.com/2013-01-28/news/36596302_1_cildirectors-coal-prices-coal-india 44. Paul Rose, On the Role and Regulation of Proxy Advisors, MICHIGAN LAW REVIEW: FIRST IMPRESSIONS, available at http://www.michiganlawreview.org/articles/on-the-role-and-regulation-of-proxyadvisors 45. Bhuma Srivastava, Proxy advisory firms give a boost to shareholder activism, THE MINT, June 29, 2012, available at http://www.livemint.com/Companies/HeuG8SPSw3zXE4sUYhecqN/Proxyadvisory-firms-give-a-boost-to-shareholder-activism.html 46. Sucheta Dalal, Proxy advice: Check on Misgovernance, MONEYLIFE, August 11, 2011 available at http://suchetadalal.com/?id=22ef29a5-277b-916c4e548f747d82&base=sections&f REPORTS REFERRED 1. Consultative Paper on Review of Corporate Governance Norms in India, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf 2. World Bank, Managing Development - The Governance Dimension, 1991, Washington available at http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2 006/03/07/000090341_20060307104630/Rendered/PDF/34899.pdf 3. Report of the Kumar Mangalam Birla Committee on Corporate Governance,avaialbe at http://www.sebi.gov.in/commreport/corpgov.html 4. ICSI Recommendations to Strengthen Corporate Governance Framework, http://www.icsi.edu/docs/webmodules/LinksOfWeeks/Recommendations%20Bo ok-MCA.pdf 5. European Commission, Green Paper: The EU corporate governance framework (2011), available at http://ec.europa.eu/internal_market/ company/docs/modern/com2011164_en.pdf 6. Report on Corporate Excellence on A Sustained Basis to Sharpen Indias Global Competitive Edge and to Further Develop Corporate Culture in the Country, available at http://www.acga-asia.org/public/files/IndiaReddyreport2000.doc 7. Investor Education and Protection, Report of the Expert Committee on Company Law, 2005, available at http://www.mca.gov.in/Ministry/chapter7.html
INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM 8. India: An Overview of Corporate Governance of Non-Listed Companies, Corporate Governance of Non Listed Companies (OECD 2005), available at http://www.oecd.org/corporate/corporateaffairs/corporategovernanceprinciples/3 7190767.pdf WEBSITES REFERRED 1. http://finmin.nic.in/reports/chandra.pdf 2. http://www.sebi.gov.in/cms/sebi_data/pdffiles/21168_t.pdf 3. http://www.takeovercode.com/uploads/regulations/New%20Takeovercode_23092 011.pdf 4. http://www.sebi.gov.in/acts/insideregu.pdf 5. http://www.indianexpress.com/news/companies-bill-2013-receives-presidentsassent/1162742/ 6. http://articles.economictimes.indiatimes.com/2013-0201/news/36684552_1_independent-directors-corporate-governance-shareholders 7. http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24d ec2009.pdf 8. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf 9. http://www.nseindia.com/getting_listed/content/clause_49.pdf 10. www.cbr.cam.ac.uk/pdf/wp277.pdf 11. www.sebi.gov.in/acts/insideregu.pdf 12. http://www.sebi.gov.in/acts/futpfinal.html 13. http://www.watchoutinvestors.in/Press_Release/sebi/1998050.asp 14. http://corporateinsiderstrading.wordpress.com/2012/02/02/case-of-insidertrading-hindustan-lever-limited-hll-brooke-bond-lipton-india-limitedbblil/ 15. http://indiacorplaw.blogspot.in/2009/06/shareholder-activism-and-classaction.html Section 245 16. http://www.openthemagazine.com/article/business/thumbs-up-for-shareholderactivism
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INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM

Corporate Governance Dissertation

CHAPTER II LEGAL AND REGULATORY FRAMEWORK OF CORPORATE GOVERNANCE IN INDIA

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ibid http://finmin.nic.in/reports/chandra.pdf 16 ibid

Corporate Governance Dissertation

Consultative Paper on Review of Corporate Governance Norms in India, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf

Corporate Governance Dissertation

Corporate Governance Dissertation

http://www.takeovercode.com/uploads/regulations/New%20Takeovercode_23092011.pdf Regulations 28-31 of the SEBI Takeover Code 22 http://www.sebi.gov.in/acts/insideregu.pdf 23 http://www.indianexpress.com/news/companies-bill-2013-receives-presidents-assent/1162742/

Corporate Governance Dissertation

Section 149 of the Companies Act, 2013 http://articles.economictimes.indiatimes.com/2013-02-01/news/36684552_1_independent-directorscorporate-governance-shareholders

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CHAPTER III ROLE OF CORPORATE GOVERNANCE IN PROTECTION OF INVESTORS

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CHAPTER V: SHAREHOLDER ACTIVISM AND CORPORATE GOVERNANCE

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Manner of casting votes

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Participation of Shareholders in Meetings

Voting in the Meetings as a Responsibility

Corporate Governance Dissertation

The Companies Act, 2013 as a Furtherance of Shareholder Activism

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Assessment of the Reforms

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CHAPTER IV: CONCLUSIONS AND SUGGESTIONS

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