The Advent of Shareholder Activism in India

Abstract

The recent spate of crises afflicting the corporate and financial sectors around the world has triggered a new wave of corporate governance reforms, which call for greater empowerment of institutional and retail shareholders. The need for such reforms cannot be greater than in India where controlling shareholders, or promoters, dominate the corporate landscape. Consistent with reforms in several countries that seek to confer greater power in the hands of shareholders, the recent regulatory developments in India signify a greater opportunity for shareholder participation in the form of postal ballot, e-voting and the like. The rapid proliferation of proxy advisory firms, a hitherto non-existent phenomenon in India, bestows shareholders with the advice necessary to exercise their corporate franchise in an informed manner. The presence of activist institutional shareholders such as private equity funds and hedge funds has already caused an upheaval in some corporate boardrooms in India. While these developments pave the way for a transformation in the tenor of the governance debate, shareholder activism encounters certain structural and institutional weaknesses embedded in the Indian markets. The dominance of controlling shareholders in most Indian companies operates to dampen the effects of shareholder activism. The legal system and institutions in India are not conducive to rendering timely and cost-effective remedies to shareholders who adopt a litigation strategy to counter managements that are perceived to act inimical to shareholder interests. This paper finds that although shareholder activism is becoming palpable in the Indian markets, its impact as a measure of corporate governance enhancement is far from clear.