Corporate Governance in Protection of Shareholders’ Rights

by SEBI

AMITY UNIVERSITY, DUBAI

Batch: 2019-2024

Submitted by:
Submitted to:
Ms. Hassana Quadri
Fayeza Farhana
Investment Law Assignment AUD 10721

BA. LLB [ SEMESTER 8 ]

 Bonafide Certificate

Certified that this project titled “Corporate Governance in Protection of

Shareholders’ Rights by SEBI” is the bonafide work of “Fayeza Farhana &
Anju Krishna” who carried out the project work under my supervision.

Professor In-charge: ………………………………………………

Internal Examiner:………………………………………….
 Acknowledgement

Firstly, we thank the Almighty for His love and blessings.

The success and outcome of this project required a lot of guidance.

and assistance from many people and We are extremely privileged to

have received this all along the completion of my project. All that we

have done is only due to such supervision and assistance and we would not forget
to thank them.

We owe our deep gratitude to our program leader as well as our professor who

took keen interest on our project.

work and guided us all along, till the completion of our project work by providing.

all the necessary information for developing a good work.

We also thank our parents and friends who have helped and cooperated to

complete this project successfully on time.

We take this opportunity to extend our hearty thanks to Amity University Dubai

for providing an opportunity for letting us work in this project and develop our

researching skills.
 Abstract

This paper evaluates how the Securities and Exchange Board of India (SEBI) uses
corporate governance to safeguard shareholders' interests. Analysis of the
effectiveness of SEBI policies and activities in defending shareholder interests and
boosting investor trust in the Indian capital market is the objective.

The paper begins by providing an overview of the basic principles of corporate

governance. It then delves into shareholders’ rights in India and the various
judgements delivered with respect to this. It also deals in detail with the voting
rights of shareholders in India and its various kinds. The paper evaluates the
impact of SEBI regulations on shareholders' rights protection and corporate
governance practices. Additionally, the paper explores recent developments in
shareholders' rights.

The research employs a mixed-method approach, combining empirical data, case

studies, and qualitative insights of shareholders, institutional investors, and
industry experts taken from other researches which were conducted. The study's
findings help explain how corporate governance and SEBI's protection of
shareholders' rights are related to one another. The research highlights the benefits
and drawbacks of the existing regulatory system and identifies opportunities for
future development through suggestions and recommendations.
 Table of Contents

S.No Topics Pg No

1. Introduction 7

2. Principles of Corporate Governance 8

3. Literature Review 9

4. Research Methodology 9

5. Research Questions 9

6. Research Objectives 10

7. Hypothesis 10

8. Historical Background 10

9. Shareholder’s Rights 13

10. Voting Rights of Shareholders 14

11. 18
Recent Developments in Shareholders’ Rights

12. Shareholder Democracy 20

13. Protection of Minority Shareholders 21

14. Related Party Transactions and Corporate Governance in India 22

15. Concerns regarding abusive RPTs in India 23

16. Suggestions and Recommendations 25

17. Conclusion 26

18. References 27
Corporate Governance in Protection of Shareholders’ Rights
by SEBI

1. Introduction

Corporate governance, which includes the laws, regulations, policies, and standards for
accountability, transparency, and general corporate integrity, describes how businesses or market
systems function. Corporate governance has also been defined more specifically as a system of
rules and ethical principles that govern how corporations are run and managed, with an emphasis
on internal and external corporate structures in order to keep an eye on management and director
behavior and, as a result, reduce agency risks that may result from the wrongdoing of corporate
officers.1

Due to corporate failures, unethical business activities, inadequate disclosure, etc., corporate
governance has become increasingly popular around the world. There are two components that
make up effective corporate governance. The second is the legal and regulatory framework
established by the government, which promotes transparency in company operations. Between
corporate governance theory and practice, there is a gap. Since the 1980s, when the Cadbury
committee released its code of corporate governance, the subject of corporate governance has
become more popular.

Every country's corporate governance structure has unique features that set it apart from those in
other nations. Three corporate governance models for established capital markets have been
recognized by researchers. The first is the Anglo-US model, followed by the Japanese and
German models. Each model identifies the following component parts: the share ownership
distribution in the relevant nation, the board of directors' makeup, significant players in the
business environment, regulatory framework, corporate actions requiring shareholder approval,

1
Rani AR, ‘Role of SEBI in Promoting Corporate Governance: A Conceptual Paper’ (IJETSR, February 2018)
accessed 1 May 2023
disclosure, etc. Attempts to bring a certain stakeholder's interests into alignment with corporate
governance standards have an impact. Corporate governance principles were only given the
attention they deserved in India after several huge firms, the majority of which collapsed in the
public eye between 2001 and 2002.

Corporate governance standards in India were not given the attention they deserved until after
the high-profile failures of several significant firms in 2001–2002, the majority of which
included accounting fraud or corrupt activities; and again, following the most recent financial
crisis in 2008–2009.2

2. Principles of Corporate Governance

a. Recognition to each shareholder: Because small shareholders in a company have little

effect on the stock price, their interests are typically ignored in favor of those of the majority
shareholders and the executive on the board. However, the corporate governance principle
states that organizations must respect each shareholder's rights and ensure that all
shareholders are given the opportunity to participate.

b. Duties toward other stakeholders: Every business should be aware of the obligations it has
to non-shareholder stakeholders, such as employees, creditors, suppliers, and customers,
under the law, in society, and in the marketplace. Upholding these obligations is essential to
successful corporate governance.

c. Effective role of the Board: The board must have the right amount of independence and be
the right size. It also requires the necessary expertise to evaluate and question management
performance. The board's members must all agree on the company's direction and have a
similar outlook.

d. Ethical behavior: Every organization should have a code of conduct that encourages moral
and responsible decision-making for its directors, executives, and other members.
2
Robin, ‘[ Volume 6 I Issue 1 I Jan.. March 2019] e ISSN 2348 1269, Print ISSN ...’ (Corporate Governance in
India: Issues and Importance, 27 February 2019) accessed 2 May 2023
e. Transparency: To ensure that stakeholders are held to a standard of accountability,
organizations should make clear the roles and duties of the board and management. The
organization's relevant information should be timely made available to interested parties.
3. Literature Review

Rujitha (2012) investigated the regulatory aspects of corporate governance and discovered that
the loopholes in rules and regulations needed to be closed. Companies shouldn't be allowed to
use the challenges of clause 49 of the listing agreement in order to get away with it. To foster
adherence to the principles of good corporate governance, the audit committee's role has been
broadened to cover oversight of risk management control systems.

Aggarwal (2013) used several statistical tests to assess the effect of corporate governance on
monetary performance of a corporation in an Indian setting and concluded that a company's
governance rating has a significantly beneficial impact on its overall success.

According to Unadkat (2017), India has seen a number of enactments that have greatly
strengthened governance standards and raised accountability through disclosures. It's noteworthy
that the Anglo-US style of corporate governance served as the inspiration for these
modifications. However, it is crucial that regulatory measures are implemented according to
Indian practices and the commercial environment in order to achieve the intended outcomes in
India.

4. Research Methodology

This paper is primarily descriptive in style. The study was conducted using secondary data that
was gathered from a variety of sources, including research papers by various organizations and
individuals, conference papers, books, articles issued in journals and newspapers, and website
blogs.

5. Research Questions
a. To what extent have SEBI's corporate governance regulations contributed to increased
transparency, accountability, and shareholder engagement in Indian companies, and how do
these practices compare to international standards and best practices?
b. What role does SEBI play in protecting the rights of minority shareholders with respect to
corporate governance?

6. Research Objectives

a. To examine the role of SEBI in promoting transparency, accountability, and fairness in

corporate decision-making processes to protect shareholders' rights.
b. To explore the relationship between corporate governance practices and shareholders' rights
protection in the Indian context and evaluate the role of SEBI in shaping this relationship.
c. To investigate the role of shareholders' democracy in influencing corporate decision-making
and its relationship with the protection of shareholders' rights.

7. Hypothesis

“The extent of the protection of shareholders' rights, made possible by SEBI's corporate
governance standards, positively correlates with greater firm value and financial
performance, in addition to improved corporate transparency and disclosure methods.”

8. Historical Background

Following India's declaration of independence in 1947, there were stock markets, a reasonably
developed banking industry, and some corporate practices that had been imported from the UK.
The nationalization of 19 banks and the government's subsequent role as the primary source of
both equity and loan capital for specific businesses led to the adoption of socialist policies by the
Indian government up until 1991. Instead of focusing on returns on investment, the government
agencies that gave capital to private businesses looked at the total amount invested.
Foreign rivalries were suppressed. Due to protracted delays in legal proceedings, lenders of loan
and equity money encountered numerous challenges. Public equity offerings were only permitted
at the pricing specified by the government. The businesses Act of 1956, the Listing Agreement,
and the accounting guidelines provided by the Institute of Chartered Accountants of India (ICAI)
were the only legal documents that public businesses in India were obligated to abide by in terms
of governance and transparency requirements. In order to keep up with the Liberalization,
Privatization, and Globalization process, the Indian government implemented a number of
reforms beginning in 1991.

The Security and Exchange Board of India was established after the Controller of Capital Issues
post was abolished. Although it was initially founded in 1988, it didn't receive statutory authority
until the SEBI Act was passed in January 1992. To control how the capital market's participants
operated and to encourage more responsible corporate governance, SEBI developed a number of
rules and regulations. Since the mid-1990s, a number of significant corporate governance
initiatives have been launched in India as a result of the need for capital. The majority of these
initiatives aimed to improve the governance climate in Indian corporations.

Since 1998, when the Confederation of Indian Industry (CII) created the CII of Desirable
Corporate Governance, a voluntary code of corporate governance for listed firms, the history of
corporate governance in India has really taken off. As a result, SEBI launched the second
significant corporate governance effort in the nation. It established a committee early in 1999,
headed by Kumar Mangalam Birla, to advance and raise the bar for excellent corporate
governance. Birla committee recommended-
a. To improve the validity of financial reports and to encourage transparency, the board should
establish a qualified and independent audit committee.
b. Greater involvement and interest from shareholders in the selection of directors, auditors, etc.
The government modified the firms Act in 2000 to speed up the process of bringing about
improvements in how firms work.

The Amendment Act of 2000 significantly expanded the responsibilities and duties of directors
in corporations in order to enhance corporate governance. Immediately following the effective
date of the Companies (Amendment) Act 2000, SEBI resolved at its meeting on January 25,
2000, to change the Listing Agreement by adding a new Clause 49.

The new Clause 49 dealt with corporate governance and included the aspects:
a. Appointment of optimum number of executive, non-executive/independent.
b. Appointment of audit committee
c. Remuneration of directors and its disclosure
d. Board procedure and meeting
e. Report on corporate governance
f. Management report

As a result, the Naresh Committee was swiftly constituted by the Government of India in 2002 to
review the rules regarding auditor-client relationships and the function of independent directors
and recommend significant changes. The proposals of the Narayana Murthy Committee represent
the fourth corporate governance initiative in India. N.R. Narayana Murthy, the chairman and
mentor of Infosys, is the chairman of the Committee that SEBI established to study Clause 49
and recommend actions to enhance corporate governance standards.

The committee offered recommendations regarding independent directors, audit committees,

audit reports, directorship and director compensation, codes of conduct, financial disclosures,
related party transactions, and risk management. The audit committees, corporate boards, and
shareholder disclosure were only a few of the issues that the Murthy Committee examined.
Clause 49, named "Corporate Governance," as it stands now, is divided into eight sections, each
of which deals with a different aspect of corporate governance: the boards of directors, the audit
committee, the compensation of directors, board procedures, management, shareholders, reports
on corporate governance, and compliance. Companies who violate Clause 49 run the danger of
being delisted and facing financial penalties. India's efforts to strengthen corporate governance
persisted after Clause 49 was passed.

The government established an Expert Committee on Company Law on December 2, 2004, and
Dr. J.J. Irani served as its chairman. According to the Irani Committee's recommendation, the
Company Bill 2008 should be submitted in the Indian Parliament. This bill aimed to establish the
necessary regulatory framework for the Indian corporate sector to operate. The government
chose to resubmit this Bill as the Companies Bill, 2009 without making any other changes
besides the Bill year due to the Companies Bill, 2008's applicability for matters relevant to
corporate governance.3

At the end of 2008, Satyam Computer Services (Satyam), one of the largest information
technology companies in India, became the subject of a significant corporate governance
controversy. The Indian government responded to this matter right away. This necessitated
reassessing the nation's accomplishments in corporate governance.

As a result, the CII began examining corporate governance issues. The National Association of
Software and Services Companies (NASSCOM) also formed a Corporate Governance and Ethics
Committee chaired by N.R. Narayana Murthy. Additionally, the Institute of Company
Secretaries of India (ICSI) has also put forth a series of corporate governance recommendations. 4

9. Shareholders’ Rights

Shareholders have a number of rights, the most important of which are the rights to transfer and
register their shares, as well as the rights to vote at shareholder meetings and access to important
company information. The investor has the right to choose the chiefs and inspectors of the
organization and circulation of the excess benefit of the organization. The committee is of the
opinion that shareholders' rights are protected and that, in the event of any changes, they are
informed of them.

Changes like the sale of assets, seizure, company separation, and shifts in financial institutions
can lead to a change in control or even lead to some shareholders gaining control over a different
percentage of the equity ownership. Later, the committee decides that the company should post
quarterly documents on the corporation's website or send them to the stock exchange where the
corporation's securities are listed.
3
Agarwal S, ‘Corporate Governance in India - World Wide Journals’ (Corporate Governance in India, May 2014)
accessed 15 May 2023
4
Verma B and Singh H, ‘Evolution of Corporate Governance in India’ (SCC Blog, 7 April 2021) accessed 5 May
2023
These all are compulsory proposals, further, the panel is of the view that the semi-yearly
monetary data should be shipped off every family investor and this is a non-obligatory
suggestion. The committee makes the observation that the board's composition could hear
shareholder complaints about things like the sale of assets and a change in capital structure under
the chairmanship of a non-executive director.

These are the mandatory recommendations. According to the committee, in order to transfer
shares, the power to do so must be given to any committee, officer, or transfer agent of the
corporation. This is also a recommendation that must be made.

In the event of Derry v. Look, it was held that, chiefs, specialists and different people who are
associated with the making of the outline are similarly responsible on the off chance that there is
any explanation that isn't correct and they have marked and have given assent for the issuance of
the plan and they have little to no faith in it to be exact.

If there should arise an occurrence of R.T. Perumal v. H. John Deavin and Anr., in this the
Madras High court held that, no part is the proprietor of the organization during its presence or at
the hour of twisting up. It implies the property of the partnership isn't anything simply the
inclusion of the individuals or investors or financial backers. Significantly, the legal
arrangements and custom-based regulation standards connecting with outlining and giving of
plan they are sufficient to protect the financial backers. In light of the issues, the existing laws
and regulations are insufficient to safeguard investors or protect them. There are so many issues
with the statutory provisions that company members can misuse and exploit them.5

10. Voting Rights of Shareholders

Shareholders have economic rights such as the right to receive dividends from the company's
profits and the right to sell their interest in the company. Control rights, on the other hand,
consist primarily of the shareholder's right to vote on a variety of corporate resolutions. The
course and control of the organization is in the joint hands of the administration, for example the
top managerial staff on one hand and the proprietors of the organization, for example the
investors on the other. Through their right to vote, shareholders have the ability to exercise
5
Singh D, ‘Corporate Governance: Protection of Shareholders Rights in India - IJARIIE’ (IJARIIE, 2021) accessed
10 May 2023
 control over the company's major operations and the selection of directors. As a result, the core
of the corporate governance system is the shareholder vote right.

A. Voting rights associated with various kinds of Shares

Section 43 of the Companies Act of 2013 stipulates that whenever a company limited by shares
issues shares to raise capital, its share capital must be divided into two categories: equity share
capital and preference share capital. The voting rights that come with these two types of share
capital set them apart in major ways.

i. Preference Share Capital

In Act Section 47, the voting rights of shareholders in a company are outlined. As per subsection
2 of this part an individual from an organization holding inclination share capital will in regard
of such capital reserve a privilege to cast a ballot in three conditions to be specific, when goals
are set before the organization, which straightforwardly influence the freedoms joined to his
inclination shares; when the resolution calls for the company to be wound up; also, when the
goal manages reimbursement or decrease of the value or inclination share capital of the
organization.

In any case, the stipulation to segment 47(2) refers to an exemption for the above expressed rule
as it gives, "Given further that where the profit in regard of a class of inclination shares has not
been paid for a time of two years or more, such class of inclination investors will reserve a
privilege to decide on every one of the goals set before the organization."

Therefore, the holder of a class of preference shares has the right to vote on all resolutions only if
the company fails to distribute dividends to them for at least two years. It is important to note
that the current section of The Companies Act, 1956, which corresponds to this one, explains that
a period of two years or more must be consecutive. The ongoing area needs clearness with
regards to whether the time of at least two years must be continuous or not. In addition, it lacks
an explanation regarding whether, in the case of cumulative preference shares, the payment of
dividends from previous years in subsequent years will be considered a remedial measure,
thereby terminating shareholders' voting rights due to dividend default.
ii. Equity Share Capital

Segment 47(1) of the demonstration gives that each holder of value shares conveying casting a
ballot rights will reserve a privilege to decide on each goal put before the organization. The
equity shareholder can vote at any time without having to hold on to the shares for a certain
amount of time. An equity shareholder has almost no voting rights, with the exception of three
scenarios:

a. when the company has exercised its right to levy on his shares;
b. when the member has not paid calls; and
c. when the member has not paid other amounts due against him.
B. Shares with differential voting rights

In accordance with the principle of "one share, one vote," Section 43 of the Act permits the
issuance of equity shares with different voting rights. This means that the shares that are issued
may not carry equal voting rights. These are thought of as shares, which could have higher
voting rights or be offered at a lower price or with lower voting rights but higher dividends. The
upsides of the issue of such offers to the organizations are that it permits them to raise capital
without changing its proprietorship structure and furthermore to keep away from a threatening
takeover. On the other hand, it proves to be advantageous to passive investors who seek higher
dividends and discounts but do not intend to participate in the company's management. The act
and the rules that govern the issue of shares with different voting rights say that shares with
different voting rights can't be more than 26% of the total paid-up equity share capital after the
issue. The Companies (share capital and debenture) Rules, 2014 regulate the issuance of shares
with differential voting rights. Among the requirements for companies to be eligible for issuing
shares with differential voting rights are the following:

a. the company must have had distributable profits for the three financial years preceding the
year in which it decides to issue such shares;
b. there shouldn't have been any default on installment of profit to inclination investors or
reimbursement of a term credit to a public monetary establishment among others;
c. During the three years immediately preceding the year in which it decides to issue such
shares, there should be no penalization of the company by Securities and Exchange Board of
 India (hereinafter referred to as "SEBI") or any Indian court, tribunal, reserve bank, or other
authority.

Since 2000, companies like Tata Motors and Pantaloons Retail have been allowed to issue shares
with different voting rights. In the case of Anand Pershad Jaiswal and Ors. v. Jagatjit Industries
Ltd. and Ors., which took place in 2009, the validity of these shares that were issued was
questioned. As a result, there was a lot of discussion about shares that had different voting rights.
For this situation the advertisers of Jagatjit Businesses Ltd had given imparts to 20 democratic
rights for each offer. As a result, even though the promoters owned shares representing only 32%
of the company's economic stake, they had voting power of almost 60%. The minority
shareholders objected to this by filing a petition with the company law board. The issue, on the
other hand, was deemed valid by the company law board because it met all of the necessary
regulatory requirements.

After this case, the general public was against the issue of shares with superior voting rights
because it could result in a small number of people owning the company. As a result, there was a
public outcry. The idea behind a shareholder's right to vote in a company is that the shareholder
will ensure that his or her vote is based on sound reasoning because the company's decisions will
have an impact on its profits, which in turn will have an impact on the dividend that the
shareholder receives. The holder of shares with superior voting rights has a limited number of
shares that not only provide him with a limited dividend but also provide him with superior
voting power. Under such conditions, the activity of the unrivaled democratic power by the
investors may be impeding to steady dynamic cycle, as it would prompt,

a. blunder of the organization as the directorate can be designated and taken out effectively by a
select number of investors;
b. exercise of the democratic power not in light of sound thinking as it won't meaningfully
affect the profits acquired by the investor;
c. poor corporate governance because a small number of people make decisions.

Due to these factors, the SEBI sent a July 21, 2009 letter to all stock exchanges prohibiting the
issuance of shares with superior voting rights. As a result, the terms "difference in voting rights"
and "superior voting rights" were distinguished, with the former being used more broadly and the
latter specifically referring to more than one vote per share. Therefore, the SEBI prohibited the
issuance of shares with voting rights greater than one vote, but it did allow shares with voting
rights less than one vote per share. The SEBI's law change may also be viewed as a means of
ensuring that minority shareholders are not marginalized.

In any case, it tends to be seen from the ongoing situation that very few organizations are keen
on giving offers with differential democratic freedoms even thought the organization regulation
permits them to do as such. This could be because of absence of mindfulness about the upsides
of issue of such offers as well as because of absence of investment by the overall population,
which is again because of being uninformed. This must change, and necessary reforms should be
implemented in light of the DVR models in France and the United States.

11. Recent Developments in Shareholders’ Rights

Although shareholder activism and engagement are not entirely uncommon in India, they are
uncommon. While institutional investors in India have begun exercising their voting rights, they
have not yet reached the level of engagement that large investors in other markets have achieved.
The stock manipulation scandals of the early 1990s were the initial catalyst for the limited
shareowner activism that now exists in India. For instance, shareholders only submitted 460
resolutions in 2012, 458 of which were merely for the appointment or re-appointment of
directors.

Pension funds have traditionally not had a significant impact on corporate governance; however,
the nomination of board members by large institutions can have an impact. The most well-known
component through which shareowners express dismay with organizations, generally, in a
consolidation circumstance, is to undermine a huge dumping of offers. In spite of the fact that
India has various shareowner bunches that are perceived by the Protections and Trade Leading
body of India (SEBI), those gatherings assume a restricted part and are not dynamic.

In India, institutional investors and pension funds exhibit little interest in companies' corporate
governance and rarely attend the annual general meeting (AGM) of shareowners. Shareowners
usually address problems in analyst meetings or by contacting the company directly, but rarely in
a corporate governance context.
A company must hold an annual general meeting (AGM) every year in India, regardless of where
its registered offices are (quite a few businesses have their headquarters in remote, frequently
inaccessible locations). The majority of the time, shareowners elect board members at the AGM
after being nominated by the board. Despite the fact that shareowners might select a competitor
no less than 14 days before the AGM, they only occasionally practice this right.

In Indian businesses, board members are typically elected for three years; By rotation, one third
of those board members are required to retire annually (boards have rotational directors). At least
two-thirds of the board in India is made up of rotational directors, and up to one-third of the
board can be made up of nonrotational directors. These nonrotational directors are typically
promoters, executive directors, or nominee directors who are not subject to shareowner election.

Under SEBI's posting arrangements, no less than 33% of board individuals should be
autonomous in the event that the seat and Chief jobs are discrete and one-half should be free
assuming these jobs are joined. Despite the fact that it is exceptional in India for the places of
seat and President to be held by a similar individual, this training is more pervasive in family-
controlled organizations. Overworked board members are a major concern in India. At the
moment, board members in India are permitted to sit on the boards of up to 20 publicly traded
companies, and many board members sit on at least ten boards. It is difficult for an individual to
effectively contribute to a particular board and ensure good governance under these conditions.
A contributor to the issue is the absence of experienced board individuals, especially given the
new flood in postings, the quick development of numerous Indian organizations, and the pattern
toward a more global concentration.

In India, there are ownership restrictions for foreign investors. Foreign funds could not own more
than 49% of any Indian company up until September 2001. Around then, the Hold Bank of India,
the country's national bank, raised the unfamiliar possession roof above half in many areas, in
this manner permitting unfamiliar financial backers to have larger part control of Indian
organizations in specific cases. Currently, the ownership restriction ranges from 26% to 100%
(0% indicating no restrictions on foreign ownership). The restriction fluctuates based on
area/industry, and mining, arms, ammo, and nuclear energy are the areas where unfamiliar
proprietorship is generally restricted. After the company has received approval from the
shareowners at an AGM, more flexibility can be granted. Despite the fact that these resolutions
have begun to appear on meeting agendas, the majority of businesses have maintained some limit
(typically 74%, which is just below the threshold for amending the articles of association and
approving mergers); Few publicly traded businesses have completely relaxed restrictions on
foreign ownership.

Securing of offers or control of an openly recorded Indian organization is represented by SEBI

under the Significant Procurement of Offers and Takeovers Guidelines, otherwise called the
Takeover Code. Any individual or corporate body whose share ownership exceeds the 5%
threshold must disclose this information to the stock exchange and SEBI, according to the code.
Assuming that an acquirer passes the 15% boundary, the acquirer should make a proposal for
basically an extra 20% of the offers and store 10% (25% on account of little organizations) of the
worth of its offered in an escrow account. Either cash or an exchange of shares must be offered.
India's takeovers have historically relied heavily on government-owned financial institutions
because of their substantial shareholdings; they likewise regularly represent government
perspectives and strategies, which favor the norm.6

12. Shareholder Democracy

Enabling shareholders, a voice and a say in a company's decision-making processes is referred to

as "shareholder democracy." It highlights the notion that shareholders, who are the company's
owners, need to be able to participate in important corporate decisions, like the selection of
directors, the approval of significant business transactions, and the design of corporate policies.

In many ways, the phrase "shareholder democracy" itself serves as an inaccurate comparison
between political and corporate governance. Corporate governance is fundamentally about
upholding the spirit of this contractual arrangement, in contrast to political governance, which is
largely contractual in character.

The relationship between the corporation and its shareholders as well as the relationship among
the shareholders is essentially of a contractual nature. The heart of this contract is set down in the

6
CFA, ‘Shareowner Rights across the Markets - CFA Institute’ (CFA INSTITUTE, 2012) accessed 17 May 2023
company's memorandum and articles of association, and corporate law establishes the framework
for its operation. The core of this contractual arrangement is that each shareholder has a right to a
piece of the company's assets and income in proportion to his shareholding. This leads to the
conclusion that the Board and management of the corporation have a fiduciary duty to all
shareholders, not only to the majority or dominant shareholder.

The essence of the corporate model of business is not at all shareholder democracy. Shares are
primarily ownership rights, including rights to profits and property. That is all there is to it in
some circumstances (non-voting shares, for instance). In some circumstances, shares can come
with some secondary rights, such as the control rights—the authority to elect the Board and
consent to specific significant actions. The phrase "shareholder democracy" emphasizes the less
significant and ancillary aspect of shareholder rights. Ownership rights are a topic that corporate
governance should be more concerned with. Saying that a shareholder's control rights have been
completely upheld if his ownership rights have been violated is untrue.

13. Protection of Minority Shareholders

According to company law, a corporation may be dissolved if the Court determines that doing so
is just and equitable. Of course, this is the last choice for a shareholder to protect his ownership
interests. He asks the court to have the company dissolved and to receive his part of the
company's assets rather than allowing the value of his stock to be frittered away by the
enrichment of the dominant shareholder. This is rarely a useful remedy in most instances because
a company's value as a "going concern" is far lower than its break-up value when it is wound up.

If the minority shareholders can prove that the company's affairs are being run in a way that is so
detrimental to the interests of the company or its shareholders that it would be just and equitable
to wind it up, company law also offers another remedy. They can go to the Company Law Board
(currently being dubbed as the Company Law Tribunal), as opposed to the Court.

If the business Law Tribunal, a quasi-judicial authority, determines that dissolving the business
on these grounds would unfairly harm the members even though doing so is just and equitable, it
may issue the necessary instructions. The Tribunal may, among other things, set aside or change
certain contracts made by the company, direct the future management of the company's
operations, order the buyout of minority owners by the majority shareholders or by the company
itself, and appoint a receiver. The Tribunal may additionally stipulate that some of the company's
directors be chosen through proportional representation or by the Central Government. The
Tribunal typically only considers these complaints from a group of shareholders that numbers at
least 100 or represents 10% of the shareholders by number or value.

Although one can question whether these powers are overly broad, the Company Law Tribunal
has been given some remedies that may be more effective than the courts' authority of winding
up. However, they only apply in the most egregious instances of bad governance where closing a
business would be fair and just.

14. Related Party Transactions and Corporate Governance in India

According to the Indian Accounting Standards (AS-18), parties are deemed to be related if, at
any point during the reporting period, one party has the capacity to control the other party or
exert significant influence over the other party in making financial and/or operational decisions.
"Related-party transactions" (RPTs) are any business dealings, whether they include a single or
numerous parties.

This connection extends to family ties and encompasses more than just parent-subsidiary
relationships. It also covers the workforce of the business, which includes both employees and
management, as well as the majority of stakeholders. Abusive RPTs are a serious issue for many
countries, including India. Deals of this sort are risky for both the governing authorities and the
investors because of the influence/control that one side can exert, whether directly or indirectly.
In the equities market, such companies' economic growth is constrained as public confidence
erodes.

The Companies Act of 2013, AS-18, and Clause 49 all put various regulatory mechanisms, such
as disclosures, approvals, and bans, into effect to control self-dealings. The Organisation for
Economic Cooperation and Development (OECD) has also offered legislative and regulatory
guidelines for the oversight and avoidance of abusive RPTs.

The Companies Act also included the notion of connected parties, which includes
(i) the company's directors,
(ii) key managerial personnel,
(iii) the above individuals' immediate families, and
(iv) linked businesses.

The RPTs are governed by Section 188 of the Act through disclosures that must be approved by
both the Board Members and the other shareholders. These disclosures in the Board Report need
to be supported by strong arguments. The attached threshold limit of the RPTs is outlined in Rule
15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014, which were later
changed in 2019. If this transaction amount exceeds this cap, the shareholders' approval is
necessary.

This punishment takes the form of a special resolution that is adopted by the Company's General
Meeting and is only used when material information, such as the parties' identities, the nature of
their relationship, and the specifics of the contract, are made public.

15. Concerns regarding abusive RPTs in India

Despite the various laws and regulations India has put in place to stop abusive RPTs, the nation
has been unable to find a balance between the need for necessary compliances to protect the
interests of small investors and the promotion of "ease of doing business" by lightening the
burden of compliance on businesses. Unhappy with the situation as it was, SEBI created the
Working Group (WG) Committee to review the RPT regulations and subsequently make
workable recommendations.

The WG found that businesses had begun entering into RPTs through their subsidiaries in order
to get around the strict relevant restrictions. For instance, Assam Co. India Ltd. (ACIL) failed to
produce the necessary certificates and its correct accounts when investing more than 24 crores
INR in Mexia Resources Ltd. Only Duncan Macneill Power India Ltd., an ACIL subsidiary,
disclosed investments in the compulsorily convertible preference shares. As a result, the
company's falsified financial standing was used to deceive investors.7

Utilizing shareholder funds to make investments in promoter groups is another way RPTs have
been acting maliciously. Instead of using it for relatively safer and morally sound investment
goals, these Groups typically use this money to support new projects, sometimes through quasi-
debt. A large loan of 6100 crore INR was obtained by an infrastructure company during the
Financial Year (FY) 2017–2018, but it was fully repaid before the year's conclusion. Because of
this, this RPT was not mentioned in the final balance statement.

The RPTs are typically grouped under ambiguous and nonspecific headings like "Associates" or
"Joint Ventures" and "Key Managerial Personnel's Controlled Entities" despite the requirement
to disclose significant details of the RPTs. Additionally, the lack of justifications for these
questionable transactions undermines the faith and confidence of the smaller shareholders. These
investors are still in the dark about the company's investments since not enough information is
revealed to them in the annual report.

It is challenging to decide whether to authorize such RPTs because there aren't any similar
alternatives. This avoidance of compliance is also facilitated by the Audit Committees.
Typically, the RPTs' hazards are not disclosed, largely as a result of poorly worded remarks,
which deceives voters. The primary reason for this is still the lack of a standard structure for
reporting such transactions.

A. Case Studies

7
‘Corporate Governance Principles - Oecd.Org - OECD’ (OECD, September 2009) accessed 18 May 2023
(i) Apollo Tires: Two cases of abusive RPTs were made public in 2018. First, the special
resolution for Neeraj Kanwar's (MD) reappointment for a further five years and the setting of his
remuneration was shot down by the tiny investors (56% institutional and 49% retail
shareholders). His pay is estimated to increase by 25% from his existing compensation of 68.4
crores INR. The Board was then forced to cap the promoter's salary at 7.5% of profit before
taxes. In addition, each received 30% lower pay; their combined compensation amounted to 13%
of the business's net profits.

(ii) Eveready Industries: In the fiscal year 2020, Price Waterhouse & Co., Eveready Industries'
statutory auditor, resigned on the grounds of "Basis of Disclaimer of Opinion". The auditor
revealed that the company had given another company a credit of 62 crore INR, along with inter-
corporate deposits worth 230.8 crore INR and corporate guarantees estimated at 283.1 crore INR,
without disclosing the specifics of the deed or making any requests for the refund of the
advanced amount.

The audit committee was not provided with sufficient information to make a determination, and
as a result, they were unable to determine the true financial situation of the company and its
implications for the future. The "notes to accounts" of the audited reports revealed that the
promoter directors had guaranteed the default in repayment of a number of loans, which was
additional proof of RPTs.8

16. Suggestions and Recommendations

The guidelines for the upkeep of good governance must be strictly followed in order to
strengthen corporate governance procedures. Some suggestions about the same are:

The RPTs must be chosen by and approved by the Board. But occasionally, the Board will
approve something quickly and without doing its due research. Additionally, "ordinary
transactions" that are conducted on an "arm's length basis" are exempt from approval
requirements. It becomes quite challenging to tell these transactions apart from related ones. All
8
Chaturvedi L and Dixit P, ‘Related Party Transactions and Corporate Governance in India’ (SCC Blog, 2
November 2021) accessed 15 May 2023
transactions must have checks and permissions established by the Audit Committee. Due to its
independence, the Audit Committee is likely to protect investors' interests.

Only RPTs that surpass 10% of the yearly consolidated turnover, as per the most recent financial
statement of the listed businesses, are considered "material" RPTs under Regulation 23 of the
Listing Regulations. Similar to this, the MCA's four categorize thresholds are likewise quite
high. Reduce this threshold limit to maintain a tougher check because numerous RPTs are
excluded from the Board's approval range.

The Whistleblower Policy was implemented in 2003, which was one of the most significant
changes to Clause 49. Its goal is to inform the Audit Committee of any improper behavior on the
part of the Personnel. However, there is no statutory protection for a whistleblower who is a
separate third party. Additionally, the Act forbids complete anonymity; a "competent authority"
guarantees identity confidentiality, but whistleblowers are unconvinced of this and choose not to
report.

17. Conclusion

In order to improve accountability, openness, and fairness in corporate decision-making

processes, SEBI has established a number of rules and initiatives all through the years. These
initiatives have considerably boosted investor trust in the Indian capital market and strengthened
shareholders' rights. It is clear from the evaluation of SEBI's rules and regulations that they have
been essential in protecting shareholders' interests. Key elements including disclosure standards,
board structure, independent directors, related-party transactions, and shareholder activism have
been the focus of the rules. SEBI has given shareholders a venue to exercise their rights and
express their concerns by enforcing these procedures.

Recent advancements in shareholder rights, including proxy access, say-on-pay, and shareholder
activism, have increased shareholder power and pushed for a more democratic method of
corporate governance. The facilitation of electronic voting and remote participation in
shareholder meetings by SEBI has also improved shareholder democracy and increased their
involvement in corporate decision-making.

The application and enforcement of corporate governance principles still face difficulties,
nevertheless. Despite SEBI's efforts, there are times when non-compliance or a lack of efficient
enforcement measures endanger shareholders' interests. To solve these issues and provide greater
protection of shareholders' interests, SEBI must keep evaluating and improving its regulatory
framework. In addition, as the corporate environment and emerging technology change, so do the
opportunities and problems for protecting shareholders' interests.

18. References

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