Gaurav G. Arora
JSA, Gurgaon
gaurav.arora@jsalaw.com

Aditi Richa Tiwary
DNLU, Jabalpur
aditiricha9999@gmail.com

Introduction

Shareholder engagement and participation are deep rooted in corporate legal systems around the globe. While the degree of shareholder participation in corporate governance might vary across jurisdictions, the larger principles of shareholder engagement remain the same.

As India’s corporate governance trajectory has its underpinnings in globally accepted principles of corporate law, shareholder engagement and participation are not novel to India. The Indian corporate governance regime, over the course of its evolution, has accommodated effective principles aimed at securing shareholders’ rights and ensuring appropriate consideration of their voices in decisions of significance. However, frequent challenges reflecting the inadequate involvement of shareholders continue to surface in India, calling for appropriate regulatory recalibrations.

To empower shareholders by bolstering their contribution to active corporate governance, the Securities and Exchange Board of India (SEBI) released on 21 February 2023 a consultation paper (the ‘Consultation Paper’) proposing material amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (the ‘Listing Regulations’). The proposed amendments aim to impose stringent requirements on listed entities to ensure appreciable shareholder participation in key corporate decisions.

Legal background: regulating shareholder engagement and participation in India

The contemporary corporate legal system in India ensures the protection of shareholders’ rights through apt shareholder representation and the availability of avenues for their participation in key corporate decisions.

To facilitate the appropriate representation of shareholders within companies, the Companies Act 2013 (the ‘Act’), inter alia, provides for the appointment of nominee directors representing the interests of institutional investors, the appointment of directors elected by small shareholders in listed entities and the calling of extraordinary general meetings at the behest of shareholders. Further, the Act mandates that companies obtain shareholders’ approval in matters of corporate importance, including in relation to the appointment and removal of directors, any increments in managerial remuneration beyond specified thresholds, undertaking transactions with related parties beyond specified limits, the variation of rights of specific classes of shareholders and the amendment of the articles of association of the companies, thereby enabling shareholders’ participation in key decisions concerning the company. 

While the Act considerably enables shareholders’ representation and participation in corporate affairs, SEBI, through its enacted laws, provides additional forums facilitating shareholders’ engagement and participation concerning listed entities. The Listing Regulations mandate that listed entities obtain specific shareholder approval concerning certain decisions, including material transactions involving related parties, the determination of the overall remuneration of the directors and the reclassification of promoters. Such approvals are required to be undertaken by listed entities, in addition to complying with mandates under the Act, which makes shareholder participation more onerous for listed entities in India.

Challenges in India’s contemporary corporate regulatory design vis-à-vis shareholder engagement and participation

As reflected in the contemporary contours of the Act and Listing Regulations, the Indian corporate legal regime fosters the effective involvement of shareholders in corporate decisions. However, it has its own challenges, which surface as corporate misrepresentations, manipulations and concealment. Such malpractices stem from the insufficient regulatory grip on the promoter group, board and external dealings undertaken on behalf of listed entities, leading to relative opacity in the interface separating the shareholders from the board and the promoters.

Board permanency of selected directors and the consequent corporate malpractices exist as imperative challenges and can create serious corporate governance fiascos. The existence of such practices is evident from the most recent and notable corporate legal disputes, including Tata Consultancy Services Limited v Cyrus Investments Private Limited (the ‘Tata–Cyrus dispute’) and Invesco Developing Markets Fund v Zee Entertainment Enterprises Limited (the ‘Invesco–Zee dispute’). In both disputes, shareholders sought to remove directors due to apparent frictions and a trust deficit within the companies. The judiciary ruled against the directors, thereby upholding the values of corporate democracy.

While the Supreme Court of India (the ‘Supreme Court’) ruled in the Tata–Cyrus dispute against the reinstatement of a director post, his directorship being discontinued through a shareholders’ resolution, the Bombay High Court, in the Invesco–Zee dispute allowed the shareholders to conduct an extraordinary general meeting to remove a director from office. Episodes of friction between management and shareholders are not novel to India and call for necessary amendments to safeguard the rights of shareholders.

Another challenge is the lack of safeguards against the frequently observed practices of misappropriation of funds by directors or promoters through unwarranted dealings with third parties. The Supreme Court’s directions concerning SEBI’s ongoing investigation against a corporate giant for alleged large-scale misappropriation of investors’ funds through external dealings are most relevant in this context, as the Supreme Court, while issuing directions for investigation, directed SEBI to form an expert committee to suggest measures to strengthen the existing regulatory framework and to secure compliance with the current framework. Consequently, material amendments to the Listing Regulations and other laws concerning listed entities are expected. The Consultation Paper is in alignment with the Supreme Court’s objectives concerning the expected reform of the law and will provide essential input on such amendments.

SEBI’s proposed amendments to the Listing Regulations: contrast with contemporary laws, significance and impact

SEBI, through its Consultation Paper, aims to ensure shareholders’ participation in the most nuanced corporate governance matters, including binding agreements on listed entities, special rights availed by listed entities to specific shareholders, the transfer of assets of listed entities beyond specified frameworks and the existence of board permanency in listed entities. The specifics of SEBI’s proposed amendments are explained below.

Agreements binding on listed entities

Contemporarily, the Listing Regulations recognise the necessity to disclose material information to shareholders and mandate that listed entities disclose all binding agreements, excluding agreements undertaken in the normal course of business.

The Consultation Paper recognises the possibility of agreements concluded by promoters, directors, related parties, employees, shareholders or any other officers of listed entities or their holding, subsidiary or associate companies (the ‘parties to agreements’) in the normal course of business but having substantial bearing on the listed entities in terms of control, management, liabilities or restrictions. Consequently, it proposes that listed entities disclose information about such agreements to stock exchanges. If listed entities are not privy to such agreements, the Consultation Paper proposes that the parties to agreements inform listed entities about the existence of such agreements within two working days from the date of their conclusion and, consequently, proposes that listed entities disclose such information to stock exchanges as per the timelines for disclosure specified in the Listing Regulations. Additionally, it proposes mandating that listed entities include all the information on such agreements in their annual reports.

For agreements imposing liabilities or restrictions on listed entities, the Consultation Paper proposes that the board express its opinion on the matter. Further, it aims to subject such agreements to shareholders’ approval through a special resolution, including the mandatory requirement to obtain approval from the majority of minority shareholders, thereby overhauling the requirements concerning the disclosure and approval of binding agreements on listed entities to ensure transparency in their corporate dealings.

Special rights to certain shareholders

Currently, any special rights with respect to anti-dilution, veto, nomination, the right of first refusal and so on, available to specific categories of shareholders of listed entities are to be approved by all the shareholders in a general meeting post-completion of the listing procedure. However, SEBI, through the Consultation Paper, observes that such special rights continue to exist despite substantial dilution in the shareholding corresponding to such rights, as there are no regulations aimed at the reassessment of such special rights.

As a remedy to this situation, the Consultation Paper proposes subjecting such rights to the approval of shareholders once every five years and the renewal of existing rights within a period of five years from the date of notification of the amendments proposed in the Consultation Paper. The proposal aims to give material effect to the principle of equality among shareholders enshrined in the Listing Regulations, thereby putting an end to covert trends concerning the retention of special rights of shareholders.

Lease, sale or disposal of assets of listed entities outside the ‘scheme of arrangement’ framework

Currently, the Act provides for the lease, sale or disposal of the whole or a substantial part of the whole of the undertakings of the companies to be approved by shareholders through a special resolution. Such transactions concerning the lease, sale or disposal are undertaken either through the ‘scheme of arrangement’ framework, or through business transfer agreements. Regulating the scheme of arrangement framework, the Act and Listing Regulations provide additional safeguards in terms of mandates concerning disclosures to SEBI and approval by a majority of public shareholders. However, the transactions undertaken through the route of business transfer agreements remain unregulated by the Listing Regulations.

Identifying the relative void in the regulation of business transfer agreements, SEBI, through the Consultation Paper, proposes to amend the Listing Regulations, mandating the approval of such agreements by the majority of public shareholders, thereby expanding the ambit of shareholder participation to approve transfers beyond the scheme of arrangement framework.

Board permanency in listed entities

Currently, the Act subjects the retirement of two-thirds of the total number of directors of a company to the process of ‘retirement by rotation’, out of which at least one-third of the total number of directors must retire according to such a process. The reappointment of retiring directors is subject to the approval of shareholders. Evidently, the office of non-rotational directors is immune to shareholder scrutiny. Further, while the extension of tenures of executive directors, managers and independent directors beyond five years is subject to approval by the shareholders, there are no restrictions on the tenure of non-executive directors other than independent directors, giving companies a wider scope to perpetuate board permanency.

The Consultation Paper recognises the probability of board permanency and its detriments to shareholders’ interest under the present regulatory system and, consequently, proposes the mandatory reappointment of all categories of directors via shareholders’ approval at least once in every five years, thereby resolving unwarranted board permanency through appropriate shareholder scrutiny.

The way forward

The Consultation Paper is presented against an interesting backdrop of recent episodes reflecting the subversion of corporate governance by promoters’ dominance, parallel to the appreciable investment trends in India, despite the global economic stagnancy. It targets a shareholder-centric approach towards corporate governance, in alignment with the recent judicial pronouncements.

It is remarkable that the Consultation Paper aims to recalibrate the most conventional practices, particularly the ones concerning board permanency and the unregulated retention of special rights available to certain categories of shareholders post-listing. Considering the contemporary judicial trends and the directions of the Supreme Court towards strengthening the contemporary regulatory framework, it is expected that SEBI’s proposals enunciated in the Consultation Paper will soon materialise as functional laws, paving the way for a robust corporate legal regime that sufficiently accommodates shareholders’ participation in key corporate decisions.

The views expressed in the article are the personal views of the authors.