India: Shareholder Activism

Disclaimer: The information provided in these Frequently Asked Questions (FAQs) is for general informational purposes only and does not constitute legal advice. While every effort has been made to ensure the accuracy of the information as of the date of publication, readers are advised to consult a qualified legal professional for advice specific to their individual circumstances. Reliance on any information contained herein is solely at the reader’s own risk.

What are the principal sources of laws and regulations relating to shareholder rights and activism? Do insider trading and/or market abuse rules apply to activist activity?

In India, shareholder rights are governed by the Companies Act, 2013 (Companies Act), Securities and Exchange Board of India Act, 1992 (SEBI Act), and the rules and regulations framed thereunder.

While in respect of private companies, shareholders can approach the National Company Law Tribunal (NCLT) for grievances including oppression and/or mismanagement (O&M), the SEBI actively looks into allegations of insider trading, corporate governance and market manipulation in listed companies. Insider trading and market abuse rules apply to activists and are primarily governed by SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

How is shareholder activism viewed in your jurisdiction by regulators, shareholders (both institutional and retail) and the media?

While institutional investors have always emphasised on transparency and corporate governance, retail shareholders have become more sensitized on governance issues. The NCLT has wide powers in O&M cases alleged by minority shareholders, in order to bring an end to the matters complained of. These include regulation of conduct of affairs of the company, purchase of shares of any members of the company by other members, restriction on transfer or allotment of shares, termination or modification of agreements, removal of directors, recovery of undue gains etc. SEBI, which deals with listed companies, has wide powers to protect interests of investors, to promote the development of and to regulate the securities market including corporate governance and financial wrongdoing.

While disputes involving family companies have always received significant media attention, there has been an increase in reporting of cases involving misconduct of promoters and founders and loss of shareholder confidence.

How common are activist campaigns and what forms do they take? Is activism more prevalent in certain industries? If so why?

Shareholder activism is common and is prevalent in shareholder meetings and litigation in the form of O&M petitions under the Companies Act. Shareholder activism is not dominant in any one specific industry, though is often found in listed companies and family controlled businesses comprising complex shareholding and succession battles.

How common is it for shareholders to bring litigation against a company and/or its directors and what form does this take?

It is not unusual for shareholders to litigate against the company/ its management, when the shareholder concerns remain unresolved. Shareholders typically file a petition under Sections 241 and 242 of the Companies Act, alleging O&M and/or use media pressure.

Further, certain shareholders agreements provide for resolution of disputes amongst shareholders through alternative dispute resolution, including arbitration, which may be domestic or foreign seated. However, only contractual disputes are arbitrable and O&M  disputes are not arbitrable under Indian law.

What rights do shareholders/activists have to access the register of members?

Shareholders have the right to inspect the register of members (maintained at the company’s registered office) during business hours without payment of any fee, under Section 94 of the Companies Act, except where such a register is closed under the provisions of the Companies Act. Shareholders and members including debenture holders, other security holders or beneficial owners are entitled to extract of the register without any fee and to a copy of the register, on payment of the prescribed nominal fees. Refusal of such rights to shareholders can lead to imposition of penalties on the company.

What rights do shareholders have to requisition a shareholder meeting and to table a resolution at the meeting?

The Companies Act entitles shareholders to requisition shareholders meetings. Section 100(2) entitles shareholders (holding atleast 1/10^th of the paid up share capital of the company; or holding atleast 1/10^th of the total voting power of all members in case of a company not having a share capital) to requisition an extraordinary general meeting (EGM) of the shareholders of the company. Such EGM should be called by the directors within the timeline prescribed under Section 100(4), failing which the requisitioning shareholders are entitled to call for a meeting themselves within a period of 3 (three) months from the date of the requisition.

Where a shareholder requisitions a meeting, who is responsible for the costs of calling and holding the meeting?

As per Section 100(6) of the Companies Act, all reasonable expenses incurred by the requisitioning shareholders in calling a meeting are required to be reimbursed by the company and the said expenses are required to be deducted from any fee or other remuneration payable to the directors who were in default in calling the meeting.

Are there any rights to circulate statements to shareholders?

Notice calling for a shareholders meeting (whether annual general meeting or EGM) is required to be circulated to all shareholders, along with a statement of material facts and documents regarding each item of business. Such notice is required to be given 21 (twenty one) days prior to the meeting (unless called on shorter notice with shareholder consent).

1. If a meeting is requisitioned by shareholders, the company is required to give notice to its shareholders of any resolution which is intended to be moved at the meeting, and circulate any statement pertaining to the matters referred to in a proposed resolution or business to be dealt with.
2. Further, under Section 134(7) of the Companies Act, a signed copy of every financial statement, including consolidated financial statement, if any, is required to be issued, circulated or published along with a copy each of: (a) any notes annexed to or forming part of such financial statement; (b) the Auditor’s report; and (c) the Board’s report.

Who is entitled to attend and speak at a shareholders’ meeting?

Shareholders have the right to attend, speak, and vote on resolutions at a shareholders meeting. Further, the Chairman, other invitees such as statutory auditors, secretarial auditors, etc., may answer queries raised by the shareholders.

What percentage of share capital is needed to appoint or remove a director? What is the process?

Usually, directors are appointed, re-appointed and removed by obtaining approvals of shareholders of a company in general meetings by an ordinary resolution (except removal of director appointed by NCLT). However, special resolutions are required for re-appointment of independent directors and removal during their second term. Directors are also liable to retire by rotation, as set out under the Companies Act.

The Companies Act provides detailed and different processes for appointment, re-appointment, retirement and removal of a director. Further, the SEBI regulations also prescribe the manner of appointment, re-appointment, retirement and removal of independent and non-independent directors of public listed companies. Such provisions are to be adhered to in addition to those specified under Companies Act.

What percentage of share capital is needed to block a shareholder resolution?

An ordinary resolution can be blocked by a simple majority, i.e., the number of votes against exceed the number of votes cast in favour of the resolution. A special resolution can be blocked by at least 26% shareholding, since a special resolution requires 75% of the valid votes in its favour.

Do holders of other instruments (e.g. options, warrants, contracts for difference, swaps, cash-settled derivatives) have any of the above rights?

No

Is stamp duty payable on share acquisitions? Can this be avoided/mitigated (e.g. through use of derivatives)?

Yes, stamp duty is payable on share acquisitions. While derivatives could attract lower stamp duty, they don’t confer the same rights as that of a shareholder. Investment in derivates should be done keeping in view the investment objectives and other implications including tax. An expert opinion should be sought prior to making investments in derivatives.

To what level can you acquire shares without having to publicly (or privately) disclose your position?

Under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST Regulations), if an acquirer, along with Persons-Acting-in-Concert (PACs) proposes to acquire 25% or more shares or voting rights in a target company, or control over the company, it triggers an obligation to make an open offer to the public shareholders for acquiring shares of the target company in accordance with the SAST Regulations.

Further, if an acquirer (either singly or with PAC) already holds 25% or more but less than 75%, any further acquisition of more than 5% of shares or voting rights in a single financial year also triggers an open offer obligation. However, no such acquisitions can exceed 75% of shareholding.

Certain acquisitions such as acquisition pursuant to inter se transfer of shares amongst immediate relatives, promoters etc. as more particularly specified in Regulations 10 and 11 of the SAST Regulations, are exempt from the open offer obligations.

Further, the SAST Regulations prescribes the following thresholds for making disclosures in the manner specified in the SAST Regulations: (i) an acquirer together with PACs, acquiring shares or voting rights in a target company, which taken together aggregates to 5% of more shares of such target company, are required to disclose their aggregate shareholding and voting rights in such target company; (ii) any person together with PACs holding shares or voting rights entitling them to 5% or more of the shares or voting rights in a target company, are required to disclose the number of shares or voting rights held and change in shareholding or voting rights, even if such change results in the shareholding falling below 5%, if there has been a change in such holdings from the last disclosure made, and such change exceeds 2% of the total shareholding or voting rights in the target company.

Under Regulation 31 of the SAST Regulations, there are also disclosure obligations on a promoter of a target company to disclose details of encumbered shares and any invocation or release of such encumbrance, subject to exceptions.

Further, the PIT Regulations inter alia prescribe initial disclosures of securities of the company by key managerial personnel (KMP) or a director of the company or upon becoming a promoter or member of the promoter group, as on the date of appointment or becoming a promoter, to the company within 7 (seven) days of such appointment or becoming a promoter. Thereafter, continual disclosures are required to be made by every promoter, member of the promoter group, designated person (as identified by the listed company in accordance with the PIT Regulations) and directors stating the number of such securities acquired or disposed of within two trading days of such transaction, if the value of the securities traded whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of INR 10,00,000 (Indian Rupees Ten Lakhs only) or such other value as may be specified. Even the listed company is required to notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information. The disclosure of the incremental transactions after any disclosure are to be made when the transactions effected after the prior disclosure cross the specified thresholds. The SEBI PIT Regulations also prescribe codes of conduct to be formulated by listed companies to regulate, monitor and report trading by its designated persons (and their immediate relatives), intermediaries and fiduciaries, towards achieving compliance with the said regulations.

There are also certain obligations on a listed company under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, to make disclosures of its shares being subscribed, issued, acquired or held, increase in share capital, as well as quarterly disclosure of its shareholding pattern, restructuring etc. regardless of the percentage of shareholding, on its website as well as the stock exchanges.

Block or bulk deals that exceed the thresholds prescribed by SEBI from time to time, are also required to be disclosed on the same day to the exchange.

Further, a Significant Beneficial Owner (defined under the Companies Act) (SBO) is required to disclose his beneficial interest in any entity in accordance with the Companies (SBO) Rules, 2018.

Is the disclosure threshold different if the issuer is subject to a takeover offer?

Please see our response to 14 above, for disclosure thresholds in case of a takeover offer.

Are there any rules which restrict the speed at which you can build a position?

Yes. As aforesaid, under Regulation 3 of SAST Regulations, any proposed acquisition beyond the 25% threshold triggers an open offer obligation. If an acquirer (along with PACs) already holds 25% or more but less than 75% of the shares or voting rights in a target listed company, they are generally allowed to acquire up to an additional 5% of the shares or voting rights during any financial year without triggering a mandatory open offer.

Are there circumstances in which a mandatory takeover is required?

Yes, please see our response to 14 above

Does collective shareholder action or ‘acting in concert’ have any consequences in your jurisdiction (e.g for disclosure purposes or the rules on mandatory offers)?

The open offer and disclosure obligations as set out in the SAST Regulations, are joint and several amongst the acquirer and PACs, as stated above. If activist shareholders coordinate campaigns (e.g., to oust directors or block a resolution), they may be considered PACs if their objective also includes acquiring control or influencing management, even without share acquisition. Various authorities have passed rulings emphasizing that mere similarity of action does not automatically make parties PACs unless there’s evidence of cooperation or agreement.

Do the same rules and thresholds apply to other instruments (e.g. options, warrants, short positions, contracts for difference, swaps, cash-settled derivatives)?

The SAST rules generally do not directly apply to purely cash-settled derivatives (like CFDs, swaps, or cash-settled options) as they do not entail the acquisition of actual shares or control. SEBI could take a substantive approach, focusing on whether an instrument or a combination of instruments ultimately confers, or has the potential to confer control, shares or voting rights that cross the prescribed thresholds. SEBI is increasingly scrutinizing indirect routes and complex structures to prevent circumvention of its regulations related to substantial acquisition and control.

If an activist makes a takeover offer, what impact might any prior share purchases have on the minimum offer price or the form of consideration that must be offered?

Regulation 8 of the SAST Regulations prescribe a detailed method for calculating the minimum offer price for acquiring shares under the SAST Regulations which includes volume-weighted average price paid or payable for acquisitions whether by the acquirer or PAC during 52 (fifty two) weeks immediately preceding the open offer public announcement; the highest price paid or payable for any acquisition whether by the acquirer or PAC during 26 (twenty six) weeks immediately preceding the public announcement; the volume-weighted average market price of such shares for 60 (sixty) trading days immediately preceding the public announcement, as traded on the stock exchange, where the maximum volume of trading in the shares are recorded during such period, provided such shares are frequently traded. A separate formula is provided for indirect acquisitions etc.

What measures are available to companies to protect against an activist campaign?

By fostering good corporate governance, adhering to disclosure requirements in accordance with law, and appointing reputed and domain experienced directors and independent directors who act towards the business objectives of the company while protecting shareholder interests, companies can build trust with their shareholders. Further, the Board of Directors of the company should provide a platform to shareholders to voice their concerns at shareholder meetings, address shareholder grievances in accordance with law, and avoid conflict of interests. These measures may enable companies to strike a balance between shareholder interests and commercial objectives.

What duties do directors owe to a company and its shareholders? Highlight any that are particularly relevant in the context of an activist campaign.

Directors of a company owe a fiduciary duty to its shareholders and are required to act in good faith, in the best interests of the company, and in conformity with law and the company’s articles of association. The Companies Act sets out the key duties of  directors who are involved in the day to day affairs of a company and are required to uphold corporate governance, avoid conflict of interest and protect interests of the company, its employees, the shareholders, the community and the protection of environment.

Insofar as independent directors as concerned, they act as trustees of shareholders and are entrusted to ensure compliance of applicable laws, uphold corporate governance and solve conflict of interest, act in the overall interest of the company and stakeholders, as more particularly enumerated in Sections 149, 166, read with Schedule IV of the Companies Act. Schedule IV is the code of professional conduct for independent directors and provides guidelines including upholding ethical standards of integrity and probity; assisting the company in implementing the best corporate governance practices; safeguard the interests of all stakeholders, particularly the minority shareholders; balance the conflicting interest of the stakeholders; determining appropriate levels of remuneration of executive directors, KMPs and senior management and appointing and where necessary recommending removal of executive directors, KMP and senior management; moderating and arbitrating in the interest of the company as a whole, in situations of conflict between management and shareholders; and ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use. Further, SEBI regulations cast similar obligations on directors, and additional obligations on listed companies for ensuring compliance with regulations pertaining to disclosure and reporting requirements, implementation of various codes of conduct, and to ensure transparency and accountability towards public shareholders.

These laws also provide stringent provisions for preventing conflict of interests of directors (and their relatives) with that of the company. For e.g., there are strict provisions which require related party transactions to be approved in a specific manner and disclosures by directors in respect of conflict of interests. Such disclosures are to be made annually as well as when any such conflict of interest arises.

Penalties have been prescribed under the Companies Act and the SEBI regulations for non-compliance with these provisions.

What rights does a company have to require parties to disclose details of their interests (direct and indirect) in the company’s share capital?

Under the Companies Act, an SBO is required to make a declaration to the company in form BEN-1 specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof. Further, a company is entitled to issue notice to a person (whether or not a shareholder) seeking information about the ultimate beneficial ownership of shares in the company if the company reasonably believes that such person is a SBO or was during the preceding 3 years, or could have knowledge of another person to be a SBO. Failure to disclose SBO information or providing false or incomplete information could result in penalties. Further, under Section 184, Companies Act, directors are required to disclose their interest in any company / body corporate / firm / association of individuals, including details of shareholding and any change thereof during a financial year, in Form MBP-1. Similarly, directors are required to file Form DIR-8, declaring whether they are disqualified from holding office as a director under Section 164(2) of the Companies Act, and details of any other company where they have been a director in the past 3 (three) years. Independent Directors are also required to provide a declaration that they meet the criteria of independence as provided in Section 149(6), Companies Act.

Initial and continual disclosures required to be made under the PIT Regulations have been set out in the response to question 14.

Disclosures of acquisitions and disposal of shares or voting rights required to be made under the SEBI SAST Regulations have been set out in the response to question at 14.

The above are key disclosures in the context of the present subject matter.

Are there restrictions on companies selectively disclosing inside information to activists?

Yes. PIT Regulations prohibit insiders from communicating UPSI to any person (including other insiders) unless such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations, as more particularly set out in PIT Regulations. An ‘insider’ means a person who is inter alia in possession of or having access to UPSI. If a company or any insider discloses UPSI to an activist in contravention of the said regulations, the company will be in non-compliance. Further, if any UPSI is shared with an activist in compliance with PIT Regulations, such an activist will be deemed to be an insider and the restrictions under PIT Regulations applicable to insiders would extend to the activist.

Are settlement agreements between a company and an activist permitted in your jurisdiction? How common is it for activist campaigns to be resolved in this way?

While there aren’t many instances or jurisprudence regarding such settlement agreements, in our view, such settlements are enforceable, provided they comply with the extant law in India including the Companies Act and SEBI regulations, as applicable. Further, depending on the facts and circumstances of the case, appropriate Board and shareholder approvals and disclosures may be required for such settlements. However, there are several O&M cases where Courts and NCLT have settled disputes between warring shareholder groups when such groups cannot coexist, especially in family owned or controlled companies. In such circumstances, in the interest of the smooth functioning of the company and to protect shareholders’ interests, courts have ordered division of the company (if shareholder groups have more or less equal shareholding) or a buyout arrangement whereby, one group purchases the shares of the other, in order to resolve deadlocks or conflicting interests.