This Article is written by Abhinay Dubey of ISDC (University of Allahabad), Prayagraj, an intern under Legal Vidhiya
ABSTRACT
Shareholder activism has been steadily increasing as investors have begun to take a more active role in safeguarding both the company’s future and their own financial interests. Stakeholders are no longer content with remaining silent owners; instead, they now pay close attention to how the company functions on a daily basis. Corporate governance is built on principles such as accountability, transparency, fairness, responsibility, and proper risk control. In the same manner, shareholder activism also seeks to promote these values by encouraging companies to act in a more open and responsible way.
Whether shareholder activism actually results in better corporate governance remains a matter of discussion. Many experts believe that it helps in strengthening governance practices, while others doubt its practical effectiveness. The growing trend of shareholder activism in India can be clearly seen through important cases involving Invesco, Nestlé, and the Tata Group, which stand out as strong examples of shareholders asserting their rights and influencing corporate decision-making.
KEYWORDS
Corporate Governance, SEBI, Tata Mistry, Raymond, Shareholder’s Activism.
INTRODUCTION
Shareholders may resort to shareholder activism when they feel the need to safeguard their interests. This concept refers to the steps taken by shareholders to bring about changes in the working of a company or to influence the way in which the management controls and governs it. Activism, in simple terms, means being conscious of unfair practices and actively taking part in efforts aimed at preventing such wrongdoing. In many cases, minority shareholders either choose not to vote or end up supporting the management or controlling shareholders because it is costly and difficult for them to coordinate among themselves. In India, shareholder activism gained recognition mainly due to repeated instances of violation of shareholders’ rights, particularly those of minority shareholders.
The principal law regulating shareholder activism in India is the Companies Act, 2013. Along with this, the regulations framed by the Securities and Exchange Board of India (SEBI) also provide various rights and remedies to shareholders of listed companies. Over time, amendments to company law have made it easier for shareholders to assert their rights and participate in corporate decision-making.
Under the Companies Act, 2013, certain important corporate transactions cannot be carried out without the approval of shareholders. The Act also allows shareholders to file class action suits against the company, its directors, and even professional advisors where necessary. Shareholders are further empowered to approach the authorities in cases of oppression and mismanagement and are also given exit options in specific situations.
SEBI regulations have introduced several additional rights and remedies for shareholders of listed companies, enabling them to voice their concerns and actively protect their interests. Listed companies are required to constitute a Stakeholders’ Relationship Committee to deal with investor grievances and to provide facilities such as electronic voting for shareholder participation.
Recent legal developments in India have strengthened corporate governance norms, created new remedies for shareholders, and expanded the scope of their rights. Because shareholders can now exercise and enforce these rights more easily, they are more confident in expressing their views, which has led to a noticeable rise in shareholder activism in the country.
GROWING TRENDS OF SHAREHOLDER ACTIVISM
he term “activist” is often linked with disruption or unrest. However, activism does not necessarily have a negative impact. In many cases, it serves as a method through which meaningful and lasting change is achieved. Shareholders can act as important drivers of reform by using tools such as private meetings, public voting, and engagement through the media to push for better standards of corporate governance. Companies that choose to overlook matters that provoke shareholder concern are likely to face consequences. Some of the major areas that commonly attract activist attention include executive pay, succession planning, diversity on the board, and the independence of directors.
Investors expect that any increase in a CEO’s salary should be clearly connected to the company’s performance. They are also interested in understanding the principles and benchmarks used by boards while deciding compensation packages for top executives. At the same time, shareholders want to be confident that the board of directors possesses the right mix of skills, experience, and diversity to safeguard their investments and guide the company toward steady, long-term growth. In the present environment, shareholders closely examine every new appointment to the board and evaluate candidates based on their qualifications and competence. Board members must also remain alert to other issues that may trigger shareholder action, such as scrutiny of the company’s capital allocation and overall strategy. Another major area of interest for shareholders is how companies factor social responsibility, ethical conduct, and environmental concerns into their policies and business decisions.
MODES OF SHAREHOLDER’S ACTIVISM
1. PARTICIPATION OF SHAREHOLDERS: Even though this task may appear challenging, shareholders can understand what is really happening by being vigilant and reviewing documents such as the audit report and the balance sheet. If there is any suspicion that company funds have been misused for personal benefit, shareholders can alert others and take collective action to stop such practices in the future and hold those responsible accountable.
2. PRIVILEGE OF RIGHT TO VOTE: This mechanism has proved to be an effective way to prevent shareholders from being influenced by the arbitrary decisions or misconduct of directors. The Companies Act, 2013 recognises and regulates the right of shareholders to vote electronically. Under Section 108, the Central Government is empowered to prescribe the manner in which electronic voting may be carried out. In practice, shareholders who live far from the company’s registered office find it more convenient to participate in decision-making when voting is done through email or other electronic platforms.
3. SEBI’S RECOGNITION OF ELECTRONIC VOTING RIGHTS: SEBI, through its circular dated 21 May 2013, clarified that resolutions approving a scheme of merger may be passed by way of postal ballot, including electronic voting, instead of convening a physical meeting, provided a majority of equity shareholders consent. This raised the issue of whether the Companies Act, 2013, read along with the relevant circulars and notifications, effectively removes the necessity of holding a meeting altogether. This question came before the Bombay High Court in a case involving Godrej Industries Ltd. and its shareholders.
Section 110 of the Companies Act, 2013 permits a company to transact certain matters through postal ballot in two situations: first, where the Central Government specifies by notification that such matters must be dealt with only by postal ballot; and second, in respect of matters other than ordinary business and those matters where directors or auditors are entitled to be heard at a meeting. Where the prescribed number of shareholders cast their votes in favour of a resolution through postal ballot, the resolution is treated as validly passed.
4. DISCLOSURE OF FINANCIAL STATEMENTS: Shareholder awareness and activism go hand in hand. When management knows that shareholders are informed about the company’s financial position, it creates both direct and indirect pressure on them and discourages arbitrary or self-serving conduct.
In this regard, the Securities and Exchange Board of India issued a circular directing companies engaged in asset management services and mutual fund operations to publish their financial statements and general administrative policies on their official websites. This measure allows shareholders and other stakeholders to remain informed about the financial health and functioning of the company.
Further, recommendations concerning the Board of Directors emphasise the importance of accountability in audit matters. It has been suggested that the Chairperson of the Audit Committee should be present at the company’s Annual General Meeting to respond to queries relating to the audit. In situations where attendance is not possible due to unavoidable reasons, another member of the Audit Committee may represent the Chairperson. Additionally, if the Board chooses not to follow the recommendations of the Audit Committee, such a decision must be clearly stated in the Directors’ Report along with the reasons for rejecting those recommendations.
5. APPOINTMENT OF DIRECTORS BY SMALL SHAREHOLDERS: The importance of protecting the interests of small shareholders was clearly highlighted in the Tata–Mistry dispute. In Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. & Ors. (2021), the Supreme Court addressed not only the major issue of oppression and mismanagement but also examined, in a timely yet often overlooked manner, the rights of small shareholders under Section 151 of the Companies Act, 2013.
Section 151 of the Companies Act, 2013 provides for the appointment of a director to safeguard the interests of small shareholders. Such a director is required to be elected by the small shareholders themselves, in accordance with the procedure and rules prescribed by the Central Government. In the case of listed companies, the appointment of this director is mandatory.
6. PROXY ADVISORY FIRMS: Regulation 2(1)(p) of the SEBI (Research Analysts) Regulations, 2014 defines a proxy advisor as any person or entity that prepares voting recommendations and provides guidance to institutional investors or shareholders to assist them in exercising their voting rights on policy matters or public offers. While directors manage the day-to-day affairs of the company, shareholders also play an important role in corporate decision-making. Since most shareholders do not possess detailed knowledge of complex corporate issues, proxy advisory firms support them by enabling well-informed choices. These firms offer opinions on matters such as profits, dividend policies, governance practices, and other key business concerns. In this way, they function as an independent mechanism to protect and promote shareholder interests.
SEBI formally recognised the role of proxy advisory firms through the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Notable examples of such firms include Institutional Investor Advisory Services (IIAS) and Stakeholders Empowerment Services (SES). Their growing influence has encouraged greater shareholder participation, including from foreign investors, by helping them make reasoned and informed decisions. Proxy advisory firms also contribute by presenting a critical assessment of the company’s management and overall functioning.
7. SUIT FOR UNWARRANTED INTERVENTION: An example of judicial protection against excessive interference can be seen in the case where minority shareholders approached the Bombay High Court against Cadbury India Ltd. The Court directed the company to buy back the shares of minority shareholders at a price of ₹2,014.50 per share, which was about fifty per cent higher than the company’s original offer of ₹1,340 made in 2009.
Similarly, in Children’s Investment Fund v. Coal India Ltd., the issue of government interference in the functioning of the company was examined. In this case, the Central Government held a majority stake, while the hedge fund owned only about one per cent of the shares. The investment fund argued that it had invested with full knowledge of the risks involved but suffered due to excessive supervision and intervention by the Government of India. It claimed that such statutory interference resulted in a loss of nearly 1.5 billion dollars. These developments have contributed to growing concern among foreign investors regarding undue state intervention in corporate affairs.
CONSEQUENCES OF SHAREHOLDER ACTIVISM
Shareholder activism has become an important force in modern corporate governance. Activist investors use their ownership rights to demand changes in company policies, management practices, and organisational structures in order to improve governance standards and create long-term shareholder value. A key objective of such activism is to promote accountability, transparency, and greater shareholder participation in corporate decision-making. This often includes calls for reforms in executive compensation, separation of the roles of the CEO and the Board Chairperson, and adoption of recognised governance practices.
The influence of shareholder activism on corporate governance has been mixed, but largely positive. Studies show that companies targeted by activist investors are more likely to adopt governance reforms, which can enhance both financial performance and shareholder value. For instance, in 2016, Nestlé agreed to sell its stake in L’Oréal and refocus on its core food business after pressure from an activist investor. Similarly, Yahoo! sold its core internet business to Verizon following demands from Starboard Value. These examples demonstrate the growing ability of shareholders to shape major corporate decisions.
Another important aim of shareholder activism is to improve a company’s financial performance. Activist investors often demand changes in business strategies, higher dividends, and share buybacks in order to increase shareholder value. The impact of such activism on financial results has been mixed. While some studies show short-term increases in share prices for companies targeted by activists, others find little or no long-term effect on overall financial performance. Beyond governance and profits, shareholder activism is also used to promote corporate social responsibility. Activists increasingly push for reforms that support social justice, human rights, and environmental protection. This includes encouraging companies to adopt stronger Corporate Social Responsibility (CSR) policies and Environmental, Social and Governance (ESG) standards, as well as measures to address climate change.
The case of Invesco Developing Markets Fund v. Zee Entertainment Enterprises Ltd. (2021) illustrates the growing role of shareholder activism, which involves efforts by investors to influence the management and affairs of a company in which they hold shares. In this matter, Invesco, a significant shareholder in Zee Entertainment, approached the Bombay High Court raising concerns about corporate governance failures and alleged financial misconduct within the company. Shareholder activism is increasingly gaining prominence as investors attempt to ensure that companies act responsibly and that their investments are managed in a manner that protects the interests of all stakeholders. Such activism may take several forms, including initiating legal proceedings, proposing resolutions at shareholders’ meetings, and participating in proxy contests to appoint directors who support their objectives.
In 2020, Invesco Pvt. Ltd., a significant shareholder in Zee Entertainment Enterprises Ltd., approached the Bombay High Court alleging lapses in corporate governance and financial misconduct within the company. It accused the promoters, headed by Subhash Chandra, of mismanaging the company’s affairs and acting in a manner detrimental to shareholder interests. Zee Entertainment rejected these allegations and asserted that it consistently followed high standards of corporate governance. To address the concerns raised, the company also engaged an independent auditor to examine the claims made by Invesco.
The case of Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd. (2019) is a well-known corporate dispute that arose in 2016 between two leading Indian business groups, namely the Tata Group and the Shapoorji Pallonji Group. The controversy mainly concerns the removal of Cyrus Mistry from the position of Chairman of Tata Sons in 2016 and the subsequent allegations of oppression and mismanagement made against the Tata Group. Cyrus Mistry, who had been appointed Chairman of Tata Sons in 2012, was unexpectedly removed from office in October 2016. His dismissal was said to have resulted from disagreements over management approach and corporate strategy between him and the Board of Directors of Tata Sons. Following his removal, the companies controlled by the Mistry family, namely Cyrus Investments Pvt. Ltd. and Sterling Investments Corporation, approached the National Company Law Tribunal (NCLT) by filing a petition alleging oppression and mismanagement by the Tata Group.
Shareholder activism may be expressed in different ways, such as engaging directly with company management, initiating legal proceedings, or proposing resolutions at shareholders’ meetings. In Cyrus Investments v. Tata Sons, activism took the form of a legal challenge against the decision taken by the Board of Directors of the Tata Group. Such actions can play an important role in strengthening corporate governance by ensuring that companies function in the best interests of their shareholders. Activism also serves as a safeguard against oppression and mismanagement by those in control of corporate affairs. The Cyrus Investments v. Tata Sons case therefore underlines the significance of shareholder activism in promoting accountability and good governance within companies. It demonstrates that minority shareholders can meaningfully challenge decisions of management and the board, and protect their interests through lawful and institutional mechanisms.
In Brookefield Technologies Pvt. Ltd., it was observed that a company is a legal entity created by law. The members of a company are entitled to seek relief against acts of oppression and mismanagement. In such cases, the primary factors examined by the Corporate Law Tribunal are fairness and integrity rather than strict legality. Section 241 of the Companies Act, 2013 indicates that the nature of oppression, discrimination, or unfair conduct is determined by the extent of harm suffered by the affected party in a given situation. The burden lies on the petitioner to establish the existence of oppression and mismanagement. Further, a shareholder approaching the tribunal must do so with bona fide intentions and without any mala fide conduct.
In the well-known case of Vikram Bakshi v. McDonald’s India Private Limited (2016), Mr. Bakshi entered into a partnership with McDonald’s India Private Limited (MIPL), with each party holding an equal 50 per cent share in CPRPL, a principal franchisee of MIPL. The management structure consisted of four directors, with each side having the right to nominate two directors. As per the agreement between Mr. Bakshi and MIPL, the company was entitled to purchase Mr. Bakshi’s shares at fair market value if he ceased to hold the position of Managing Director. The dispute was first brought before the National Company Law Tribunal and later appealed to the National Company Law Appellate Tribunal. The tribunals held that allegations of oppression and mismanagement were not established. On the contrary, it was noted that under Mr. Bakshi’s leadership, the number of outlets had grown from zero to 154. The claims made by MIPL were therefore rejected, and Mr. Bakshi was not directed to vacate his office.
NOTABLE INSTANCES OF SHAREHOLDER ACTIVISM
There have been many occasions where shareholders have successfully stopped transactions that were likely to harm their interests. Under company law, a shareholder is disqualified from voting on a matter in which he or she has a personal or related-party interest. In such situations, the protection of minority shareholders assumes particular importance. The following are some examples where shareholder activism has led to the blocking of proposed transactions.
In 2018, shareholders of Fortis Healthcare succeeded in removing a director from office. Under company law, a director may be removed before the expiry of his term by passing a resolution with a simple majority at a general meeting. Where the Articles of Association do not prescribe any special procedure for such removal, no additional approval of the Board or the Chairperson is required. This position was also reflected in the Tata Sons case, where the removal of Cyrus Mistry did not require prior consent of the Chairperson or the Board. In the Fortis Healthcare matter, a hostile takeover situation arose when the promoters lost effective control over their shareholding after pledging their shares to lenders, which were later impacted by market conditions. Investment funds regularly published analytical reports on the company’s performance, and one such report played a key role in prompting the removal of the director.
Similarly, in 2017, the shareholders of Raymond opposed a related party transaction with a third party. They argued that the company’s assets were being transferred at an undervalued price, which would result in financial loss. This resistance reflects shareholder activism aimed at protecting the financial interests of the business. Since the proposed transaction did not offer any real economic benefit, it was strongly opposed by the shareholders.
Shareholder activism can also result in the renegotiation of contractual terms already agreed upon by a company. A notable example is the case of Maruti Suzuki, one of India’s largest automobile manufacturers, where minority shareholders raised objections to a proposed transaction relating to its Gujarat plant, arguing that the arrangement was commercially disadvantageous to the company. In response to these concerns, Maruti Suzuki revised the terms of the contract. This incident reflects the growing influence of minority shareholders and highlights the increasing prevalence of shareholder activism in corporate decision-making.
CONCLUSION
Over time, shareholder activism has developed into an effective means for investors to influence the management of the companies in which they hold shares. Activist shareholders have played a key role in bringing about change, ensuring accountability, and advocating reforms that serve both the company and its stakeholders. As a result, corporate practices have become more transparent and responsible, which is essential for a company’s long-term growth and stability. In recent years, shareholders have shown greater awareness of issues related to environmental, social, and governance (ESG) concerns. Investors are no longer focused solely on financial returns but are also assessing companies based on their environmental impact, social responsibility, and governance standards. This shift toward sustainable investing is expected to strengthen further as more investors acknowledge the value of responsible and ethical business practices.
Corporate governance in India has seen notable improvement following the introduction of SEBI regulations and the Companies Act, 2013. Large shareholders and private equity firms, apart from providing financial support, also play an important role in promoting sound governance practices and encouraging shareholder activism. In contrast, lenders generally have limited influence over a company’s internal governance matters. A study conducted by the Asian Corporate Governance Association in 2014 ranked India ninth out of eleven Asian markets, indicating that the country was still behind several of its regional counterparts in adopting and implementing effective governance standards. Singapore and Hong Kong jointly secured the top position in the survey. Although India’s corporate governance framework has improved considerably since 2012—mainly due to stricter legal requirements and increased shareholder awareness—the overall condition remains unsatisfactory and requires further strengthening.
The growing trend of shareholder activism and awareness has placed increased pressure on companies to maintain transparency, ensure accountability, and actively communicate with their investors. Firms that ignore these expectations risk losing the confidence and support of their shareholders, which may lead to serious financial repercussions. Therefore, it has become essential for companies to adopt a proactive approach in engaging with shareholders and responding to their concerns. In conclusion, shareholder activism and awareness are not temporary developments but enduring features of the modern corporate environment. They will continue to influence corporate practices in the future. Companies that give priority to openness, responsible governance, and meaningful shareholder engagement are likely to achieve financial success while also fostering a sustainable and ethical corporate culture. It is thus vital for companies to take constructive steps to understand shareholder expectations and build enduring relationships founded on trust and mutual advantage.
REFERENCES
- Gelter, M., Shareholder Activism and Institutional Investor Stewardship: Theoretical Perspectives and Empirical Evidence, Journal of Corporate Law Studies, Vol. 19(1), 2019.
- Mergers and Acquisitions Transactions: Impact of Shareholder Activism on Corporate Governance, (2021) 4.1 JCLG 153
- Report of the Expert Committee on Company Law, Management And Board Governance, Ministry of Corporate Affairs, https://www.mca.gov.in/content/mca/global/en/data-and-reports/otherreports/report-company-law/management-and-board-governance.html.
- McDonald’s India Private Limited v. Vikram Bakshi & Ors [2016] NCLAT 134.
- Cyrus Investments Pvt. Ltd. & Anr. v. Tata Sons Ltd. & Ors. [2019] SCC OnLine Bom 2076.
- Invesco (India) Private Ltd. v Zee Entertainment Enterprises Ltd. [2021] SCC OnLine Bom 1021.
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