" RIGHTS OF SHAREHOLDERS: REPORT OF THE

COMMITTEE ON CORPORATE GOVERNANCE"

SUBMITTED BY: SUBMITTED TO:

NAME: ADITI BHAWSAR MS. HIRAL MEHTA
ROLL NO.: 728
SEMESTER: VII
SECTION: A

NATIONAL UNIVERSITY OF STUDY AND RESEARCH IN LAW, RANCHI

 Report of the Committee on Corporate Governance | December 2020

RIGHTS OF SHAREHOLDER

Corporate governance is the system of rules and responsibilities delegated to several groups
within a corporation as well as procedures on handling corporate matters. One of the groups,
shareholders, is given certain rights as owners of corporations. These rights are protected by
law, and honoring them is one of the objectives in corporate governance.

Shareholders play an important role in a company. Shareholders are the owner of the company.
They are the main stakeholders in the company. The Companies Act, 2013 provides various
rights to such shareholders to protect their interest in their companies and address issues of abuse
by the majority of shareholders/ persons in control of their companies. Shareholders play both
direct and indirect roles in a company's operations.

Accordingly, the Committee makes the following recommendations:

1. Equitable Treatment of Shareholders

Current regulatory provisions:

Currently, under the Companies Act, 2013, shareholders are owners of the corporation and
efficacy of a corporate governance mechanism depends upon how the shareholder wealth and
rights are protected. Promoters, the majority shareholders, have ability to control the affairs of
the company by virtue of their controlling rights. The other shareholders of the company form
the fraction of minority shareholder segment. Dominant shareholders can divert firm resources
by selling assets, goods, or services to the company through self-dealing transactions. Minority
shareholders have been given protection under the Companies Act, 1956. Under Section 397
and 398 of the Act, minority shareholders in case of oppression or mismanagement by
controlling shareholder/ management may seek relief by approaching the Company Law Board
(CLB).
Recommendation and rationale:

As stated above, the rights of minority shareholders are protected under section 397 and 398 of
the Companies Act, 2013. It has been observed by OECD Principles of Corporate Governance
 Report of the Committee on Corporate Governance | December 2020

and World Bank Report on the Observance of Standards and Codes1, that India's status on with
OECD principles has not rated India very well in the treatment of minority shareholder and the
protection of their rights. Minority shareholder can seek remedy from the Company Law
Board(CLB) in case of any Oppression and Mismanagement by the Company. However,
minority shareholders may seek redressal from CLB only under condition of at least 100
shareholders or hold at least 10% of shares under section 399 of the Act. Minority shareholders if
not satisfied may file a petition in the High Court or Supreme Court of India.

Minority shareholders are required to satisfy certain prerequisites from substantive point of view
before can espouse their cause2. It has also been suggested that the provisions of the Companies
Act, 2013 for safeguarding minority shareholder are effective only under extreme cases of mis-
governance and winding up of the Company. World Bank report points that shareholders may
file derivative and class actions suits to dominant shareholder/ management only under certain
cases.
Moreover, the delay in court proceedings and judgment hinders safeguarding shareholder rights.
Courts in India have a massive number of pending cases, with case adjudication extending from
5 to 20 years and even beyond 20 years in some stances. Clause 49 of the Listing Agreement
(Section VI (C)), mandates listed companies to have a ''Shareholder Grievance Committee''.
Non-executive director should be the Chairman of this committee to redress the grievance of
shareholders and investors. However, the efficacy of such committees is still questionable due to
possible allegiance of non-executive director with management. Such committee has not proven
very successful. SEBI has also been very to slow take actions on companies for shareholder
grievance redressal.

Proposed Amendment:

Controlling shareholders owe a fiduciary duty of fair dealing to the corporation and minority
shareholders when the controlling shareholder enters into a transaction with the corporation. The
Committee suggests that laws on protection of minority are inadequate and there exists a
significant gap in Indian corporate governance regulatory framework that warrants utmost

1
World Bank, Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country
Assessment: India, World Bank-IMF, Washington, DC, USA, 2004.
2
Varottil, U.,“A Cautionary Tale of the Transplant Effect on Indian Corporate Governance”, National Law School
of India Review, Vol. 21, No. 1, 2010, pp. 1–49.
 Report of the Committee on Corporate Governance | December 2020

safeguards to minority shareholder rights. A controlling shareholder who is found to have

violated a duty to minority shareholders upon the sale of control may be liable for the entire
amount of damages suffered, instead of only the purchase price paid or for the amount of the
control premium. Minority shareholders can bring claims against a controlling shareholder for
breach of fiduciary duty on either a derivative or direct basis, depending on the nature of the
harm suffered.

2. Duties and obligations of the controlling shareholders

Current regulatory provisions:

There is no specific provision regarding the duties and obligations of the controlling
shareholders. In India, although a very large number of companies have controlling shareholders
(known as promoters), they are not subject to any duties under law in their capacity as
shareholders, thereby exposing minority shareholders to some level of vulnerability.

Recommendation and rationale:

Under the U.S.A. System of Corporate Governance, controlling shareholders are accountable to
shareholders. It has been held in a number of decisions of various American courts that the
controlling shareholders are liable to account to the other shareholders3.

A ninety per cent majority of the shareholders is in a position compel the 10% per cent
dissentient shareholders to sell out their shares. The majority of shareholders who control the
board of directors can also compel the minority shareholders to sell their shareholdings by not
declaring dividends in spite of good profits in the company. It is therefore necessary to consider
how the controlling shareholders may be made to act in the bona fide interest of the company as
well as the other minority shareholders. The controlling shareholders unlike the directors do not
stand in any fiduciary relationship and are therefore not required to act in good faith in the
interest of others. The controlling shareholders, it appears, are not liable to account to the other
shareholders for the larger price obtained by them on sale of the block of their shares than that

3
Nikhil Narayanan, The legal and regulatory framework surrounding shareholder activism in India, Lexology.
 Report of the Committee on Corporate Governance | December 2020

which the other shareholders have obtained in a take-over bid, although there are provisions in
the Companies Act for making the directors responsible for it.

Proposed Amendment:

Duties and obligations of the controlling shareholders should be specifically laid down, so as to
avoid any irregularities or confusion in the future.

3. Directors Remuneration

Current regulatory provisions:

Currently, under the Companies Act, 2013, remuneration shall be paid to all of the directors in
accordance with provisions of section 197 of the companies act, 2013. Section 196(4) of the
Companies Act, 2013 provides that subject to the provisions of section 197 and Schedule V, a
managing director, whole-time director or manager shall be appointed and the terms and
conditions of such appointment and remuneration payable be approved by the Board of Directors
at a meeting which shall be subject to approval by a resolution at the next general meeting of the
company and by the Central Government in case such appointment is at variance to the
conditions specified in Schedule V.

Recommendation and rationale:

Under the U.K. System of Corporate Governance4, shareholders have a binding vote on any
increases to the total pool of non executive director fees. Generally this pool is equally divided
among directors, with additional fees for committee members, chairman of committees and
board. With effect from 2011, two strike rule has emerged, i.e. if at two consecutive meetings
over 25% of shareholders vote against the directors' remuneration package, the directors have to
stand for re-election in 90 days; also it is mandatory that non executive directors are to be
remunerated on fixed basis, but executive directors are to be remunerated on fixed plus
performance based evaluation.

There is no such similar concept in India. However, Kumar Mangalam Birla Committee's
mandatory recommendations included shareholders' approval of compensation to non executive

4
UK Corporate Governance Code, Finance Reporting Council, July 2018.
 Report of the Committee on Corporate Governance | December 2020

directors and Companies Act' 2013 requires approval of the company in general meeting for
remuneration to directors for higher than 11% of net profits.

Also, under the Australian System of Corporate Governance, with regard to remuneration of
directors, two strike rule, i.e. if at two consecutive meetings over 25% of shareholders vote
against the directors’ remuneration package, the directors have to stand for reelection in 90
days5.

Proposed Amendments:

Shareholders consent must be mandatory regarding the remuneration of the Directors.

Shareholders must have a binding vote on any increases to the total pool of director
remuneration. There should be proportional representation of shareholders on the company
Board linked to their shareholding and without their approval, no changes should be made
regarding the directors remuneration.

4. Removal of Directors by Shareholders

Current regulatory provisions:

Currently, under the Companies Act, 2013, Removal of Directors shall take place in accordance
with Section 169 of the Act. Section 169 of the Companies Act, 2013 states that the shareholders
can remove the director by passing an ordinary resolution in a general meeting.

Recommendation and rationale:

As per current rules of Companies Act, seven days notice will be given to all the Directors
informing about the removal of Directors. In the Board meeting, a resolution for the holding of
an (EGM) extraordinary general meeting will be held along with the resolution for the removal
of the director subject to the approval of the shareholders. The Board members of the company
will hold a Board meeting by providing seven days of clear notice. This notice has to be issued
within 21 days by the company which excludes the day on which the notice was sent and
received. In the board meeting, the Board members will discuss and then decide whether to

5
Mark Rix, The New Australian System of Corporate Governance: Board Governance and Company Performance
in Corporate Governance Environment, Corporate Law & Governance Review/ Volume 1, Issue 2, 2019.
 Report of the Committee on Corporate Governance | December 2020

remove the director. Before passing the final resolution, a choice is given to the director to
present anything in favor of himself. In the end, the name of the concerned director has to be
removed and finally withdrawn from the master data of the company of the MCA (Ministry of
Corporate Affairs) website.

However, under the Australian System of Corporate Governance, directors can be removed by
the shareholders by passing ordinary resolution; in case of public companies, 2 months’ notice
before the meeting is required; in case of private companies, procedure is more simpler. In a
country like India, where people can come up with various reasons and excuses to make them
free from the guilt and where the system is already corrupted. Directors can get a lot of time to
free themselves from the allegations. Directors can be removed by shareholders by passing
ordinary resolution, but here, 14 days special notice is required6.

The power of shareholders to remove directors is possibly the most patent instance of the
principle of ‘corporate democracy’, exemplifying the idea that the management of a company,
ultimately, is under the control of the shareholders of the company. Therefore, under the law,
while the directors have the right to make a representation and be heard, the final decision rests
with the shareholders. The majority shareholders, if they so desire, thus have an ability to remove
any director including independent directors. For example, in the United States, the Delaware
Model Law provides that shareholders may remove directors, with or without cause, subject to
specific statutory exceptions. It should be ensured that the director concerned should not have
been appointed by the Tribunal under section 242 which relates to powers of the Tribunal for
prevention of oppression and mismanagement.

Proposed Amendment:

Without any doubt this provision under section 169 of the Companies Act 2013 for removal of
directors is one of critical importance in any corporate administration and functioning. This
power needs to be exercised by the Board and the shareholders with utmost restraint and good
faith. The Committee suggests that, the process of removal of directors should be made simpler,
and a proper procedure should be made, without giving directors' excess time to clean

6
Squire Patton Boggs, Corporate Governance in Australia, Lexology.
 Report of the Committee on Corporate Governance | December 2020

themselves up. Being a developing country, India should learn new practices from Australia,
America and other countries and amend laws, governing the removal of directors.

5. Right of Inspection to Shareholders

Current regulatory provisions:

There is no specific provision the Right of Inspection of Books of Account by Shareholders in

the current Companies Act, 2013. As per Section 128 of the Companies Act, companies are
required to preserve the statutory registers which contain the records of the Company's accounts.
These registers are required to be produced before the Registrar of Companies (ROC) within a
limited period of time and a auditor may inspect the books of accounts of the company.

Recommendation and rationale:

The right of inspection of books of account is available in various countries including U.S.A.7
and Japan to a specified number of shareholders. There appears to be no sound reason why in
India also a respectable minority of ten per cent or so should not be provided the right of
inspection of books of account. A person holding ten per cent of the equity paid up capital has
got a reasonable stake and will not like to harm the interests of the company. The competitors
have their own way of getting the information by 'commercial spying' and it should not be taken
for grant that the person holding one-tenth of the shareholding can be easily influenced by the
competitors to part with the information.

The right to inspect books of account is an important method of obtaining useful information
about a company by the shareholders so that they may take necessary action against the
management for mismanaging the affairs of the company. Further, one-tenth of the shareholders
can apply to the government for investigation/under section 235 or may move the Court for relief
against oppression or mismanagement under sections 397 and 398 but they cannot approach the
authorities for taking action unless they have the means to obtain information. As a safeguard
against misuse, the right may be granted subject to the approval of the Government who should

7
Gregory Jackson, Understanding Corporate Governance in the United States: An Historical and Theoretical
Reassessment, Arbeitspapier 223, October 2010.
 Report of the Committee on Corporate Governance | December 2020

be empowered to refuse the permission if the. company is able to satisfy that the right is likely to
be misused or that the shareholder is moved by improper motives.

Proposed Amendment:

A right of inspection should be given to the shareholders to inspect the books of account, in the
present phase of development of the country.

6. Representation of Minority Interests on the Board

Current regulatory provisions:

Section 255 of the Companies Act, 2013, allows a company to adopt proportional representation
whereby the minority shareholders may look for a chance of representation on the Board.

Recommendation and rationale:

As stated above, a company has allowed proportional representation to the shareholders on the
Board, under section 255 of the Companies Act, but in actual practice only a microscopic
minority of the companies have adopted it. The proportional representation was not made
compulsory for the companies as it was felt that the Board of Directors may become a contesting
field for warring factions of shareholders and the smooth working of the company may be
rendered virtually impossible. It is now being felt that the option given to the companies to adopt
proportional representation for appointment of directors has no value. Unless a respectable
minority of the shareholders are allowed some right of representation on the Board, they cannot
know about the real state of affairs.

However, compulsory provisions to elect directors by the method of proportional representation

or cumulative voting exist in a number of States in the U.S.A.8 It is to be considered whether the
system of proportional representation should be made compulsory in India. The High Courts
have powers to force cumulative voting upon a company if they find that the minority is

8
William R. Luney, Corporations: Cumulative Voting, Classified Boards and Proportional Representation,
Michigan Law Review, Vol. 55, No. 7 (May, 1957), pp. 997-1005.
 Report of the Committee on Corporate Governance | December 2020

oppressed under a system of straight voting. The Government also has powers under section 4039
to direct the company to amend its articles and to make appointments of directors according to
proportional representation to prevent mismanagement and oppression of members.

Proposed Amendment:
Appointments by the order of a Court or of the Government arc only possible in certain
exceptional cases and cannot be treated as a substitute for the right to seek representation on the
board by the minority shareholders. In fact, the Government has used these powers very
sparingly and has preferred to appoint non-members instead of shareholders as directors under
sub-section (I) of section 40810.

9
Any document, required to be submitted, filed, registered or recorded, or any fact or information required or
authorised to be registered under this Act, shall be submitted, filed, registered or recorded within the time specified
in the relevant provision on payment of such fee as may be prescribed.
10
Notwithstanding anything contained in this Act, the Central Government, may appoint such number of persons as
the Company Law Board may, by order in writing, specify as being necessary to effectively safeguard the interests
of the company, or its shareholders or the public interests to hold office as directors thereof for such period, not
exceeding three years on any one occasion, as it may think fit, if the Company Law Board, on a reference made to it
by the Central Government or on an application of not less than one hundred members of the company or of the
members of the company holding not less than one- tenth of the total voting power therein, is satisfied, after such
inquiry as it deems fit to make, that it is necessary to make the appointment or appointments in order to prevent the
affairs of the company being conducted either in a manner which is oppressive to any members of the company or in
a manner which is prejudicial to the interests of the company or to public interest: Provided that in lieu of passing an
order as aforesaid, the Company Law Board may, if the company has not availed itself of the option given to it
under section 265, direct the company to amend its articles in the manner provided in that section and make fresh
appointments of directors in pursuance of the articles as so amended, within such time as may be specified in that
behalf by the Company Law Board.