Public shareholders of Indian listed companies have begun to exert an unprecedented level of influence on companies in which they hold shares. Over the last few months, they have succeeded in pushing back on resolutions proposed by the management on matters ranging from the reappointment of directors to managerial remuneration and related party transactions in companies such as Eicher Motors and Balaji Telefilms.
The phenomenon is attributable to both market and regulatory factors. Uncertainty in the financial markets has prodded investors to be more participative in corporate democracy to protect their interests. An enabling regulatory regime that is epitomised by virtual shareholder meetings and electronic voting has removed disincentives to greater shareholder engagement in a company’s decision-making process.
Institutional shareholders too have been foisted with greater responsibility through stewardship codes issued by the insurance, pension fund and securities regulators. This requires insurance companies, pension funds, mutual funds, and alternative investment funds to have a clear policy on engagement with companies in which they invest, and to cast their corporate franchise transparently. Further, an array of proxy advisory firms has been minimising any informational asymmetry in the markets by putting out recommendations on how shareholders ought to vote on specific resolutions.
A burgeoning but more noteworthy trend is a combative form of shareholder activism. In September, a US-based fund, Invesco, fired a salvo to the board of directors of Zee Entertainment, requisitioning it to convene an extraordinary general meeting of the company. Holding a 17.88 per cent equity, Invesco is Zee’s largest shareholder. The purpose of the EGM is the appointment of six independent directors named by Invesco and the removal of the managing director and CEO as a director of the company. A somewhat similar requisition was made to the board of Dish TV by Yes Bank, the company’s largest shareholder with 24.78 per cent of the equity.
These developments signal the importation of US-style proxy wars into the Indian corporate ecosphere, whereby activist investors seek to bring about changes in corporate governance practices in companies and to improve their financial performance. Recalcitrant managements would face the threat of being overthrown by the shareholders. These moves have been made possible in some Indian companies because of gradually changing shareholding patterns. Promoter-owned entities have witnessed a significant dilution of promoter stake in recent years, with the waning influence of the incumbents. It is, therefore, natural that activist investors are likely to be emboldened in such companies with dispersed shareholding.
Nevertheless, activist investors are bound to confront numerous obstacles to success in the Indian context. Listed companies without promoters are still few and far between, and activism in controlled entities is a non-starter given the well-entrenched status of promoters. To that extent, there is considerable ambivalence regarding the effectiveness of shareholder activism in India.
Moreover, legal strategies adopted by activist investors may suffer roadblocks, thereby stymying their efforts. Take the Zee-Invesco episode. Unsurprisingly, the board of Zee declined to convene the EGM to consider the proposals put forth by Invesco, and instead approached the Bombay High Court claiming that Invesco’s requisition was illegal. Specifically, Invesco asserted that if the resolutions proposed were to successfully pass at the shareholders’ meeting, there could be a lack of compliance with several legal and regulatory requirements. For instance, being in the media business, any change in the composition of Zee’s board would require the prior approval of the Ministry of Information and Broadcasting (MIB), which had not yet been obtained in that case. On October 26, a single judge of the Bombay High Court found these pleas compelling and restrained Invesco from proceeding with its call for an EGM.
Arguably, the situation commands a more nuanced approach. At the outset, it is unclear whether the non-compliance with various provisions of law, such as the requirement of obtaining MIB approval, would amount to illegality or whether they are merely conditions that need to be satisfied before director appointments take effect. This would be a common scenario with changes in board composition in regulated companies that are subject to several compliance requirements. While Invesco has already preferred an appeal against the High Court’s ruling, it deals a body blow to shareholder activism in India, and seriously undermines the right of a substantial shareholder available under company law to call for a meeting to assuage shareholder concerns.
While activist shareholders can exert the necessary pressure on managements to ensure optimal governance of companies, concerns abound as well. Activism is desirable only if its gains can be shared among all shareholders. However, in some cases, activism could constitute a subterfuge for certain investors to pursue private battles with managements and promoters, leaving other shareholders caught in the crossfire. As proxy advisory firm Institutional Investor Advisory Services noted in the context of the Zee-Invesco fracas, such protracted legal confrontations are sometimes nothing more than a “distraction”.
Going forward, the Indian markets are likely to witness an escalation in the participation of public shareholders, and gone are the days when managements and promoters could afford to take shareholder decision-making for granted. However, the more aggressive form of shareholder activism displayed in the Zee-Invesco case is likely to become widespread only when shareholdings in Indian companies become more dispersed, and when activists taste legal victory in at least a few initial test cases.
This column first appeared in the print edition on November 1, 2021 under the title ‘Activists in the boardroom’. The writer is an associate professor of law at the National University of Singapore
Institutional shareholders too have been foisted with greater responsibility through stewardship codes issued by the insurance, pension fund and securities regulators. This requires insurance companies, pension funds, mutual funds, and alternative investment funds to have a clear policy on engagement with companies in which they invest, and to cast their corporate franchise transparently. (Representational Photo) 
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