Adequacy of Legal and Regulatory Framework in India with regard to Corporate Governance in protecting the interest of Investors

I. Introduction

Corporate governance

The Narayana Murthy Committee defined corporate governance as acceptance by the management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of the company². It is a set of principles comprising of transparency, accountability, mandatory disclosures and obeying the existing laws for the protection of the shareholders best vested interests in a company.

The current emphasis on prevention of corporate criminal liability is its effective governance. A corporate governance mechanism set forwards guidelines to regulate the board of directors, to guarantee that the business is following the law and that there are no harmful or mala fide effects on the legitimate expectations of customers and shareholders. Warren Buffet has indicated that “the ability and the fidelity of managers have long needed monitoring” and that “accountability and stewardship withered in the last decade” because “as stock prices went up, the behavioural norms of managers went down” and “too many people in recent years have behaved badly at the office, fudging numbers, and drawing obscene pay for mediocre business achievement”.³

Diligence is a necessity to discover corruption in a corporate structure. The power and the temptations are common in the world of business. It is a matter of concern whether the corporates who perform misconduct are bad apples in the barrel or they are an association of a larger group who run through the corporate world, out of which only some get caught.

II. Materials and Methods

Literature:

1) Rajora, Varsha, Corporate Frauds in the World of Corporate Sector: A Critical Analysis (January 19, 2010). Available at SSRN: http://dx.doi.org/10.2139/ssrn.1539013

The analysis examines the requirement of strict adherence to high standard of ethical behaviour is necessary for the even and honest functioning of the new social, political and economic processes. The inability of all sections of society to appreciate this need in full results in the emergence and growth of white collar and economic crimes renders enforcement of the laws, themselves not sufficiently deterrent, more difficult.

2) M. Bhasin, "Audit Committee Mechanism to Improve Corporate Governance: Evidence from a Developing Country," Modern Economy, Vol. 3 No. 7, 2012, pp. 856-872. Available at Scientific Researcher: http://file.scirp.org/pdf/ME20120700004_79216559.pdf

This article deals with the concept of corporate governance through Security Exchange and Board of India (SEBI’s) Clause 49 of the Listing Agreement, an AC can be of great help to the board in implementing, monitoring and continuing “good” CG practices to the benefit of the corporation and all its stakeholders. The clause 49 provides for appointment of independent directors, AC and several other parameters for disclosure to and for protection of interest of shareholders.

3) Report of the SEBI Committee on Corporate Governance. Available at: http://www.sebi.gov.in/commreport/corpgov.pdf

The Committee report have recommendations to codify certain standards of “good’ governance into specific requirements, since certain corporate responsibilities are too important to be left to loose concepts of fiduciary responsibility. When implemented through SEBI’s regulatory framework, they will strengthen existing governance practices and also provide a strong incentive to avoid corporate failures. The issues discussed by the Committee primarily related to audit committees, audit reports, independent directors, related parties, risk management, directorships and director compensation, codes of conduct and financial disclosures. The Committee’s recommendations in the final report were selected based on parameters including their relative importance, fairness, and accountability, and transparency, ease of implementation, verifiability and enforceability.

Methodology:

This article will be based on doctrinal research methods. Reliance will be placed on resources such as books, cases, electronic media, journals, articles and reports of various authorities. There are several primary and secondary sources of law which can be utilized to understand the existing legal rules and inconspicuous lacunas of current legal regime in order to arrive at a solution for the research problem. Primary sources will include national legislations and statutes. Secondary sources such as books, journals, scholarly articles and reports will be used to determine the efficacy of law in governing corporate frauds.

III. Corporate governance

Companies get immense amounts of capital from investors in India and all over the world. When an investor invests in a company it means that it has a faith in the capability of the company to grow. It is expected that the investor will get a higher return of profit however it may not happen depending on the market behaves. All though it is also expected that there is an adoption of good governance practices which is in the best interest of the investor. Corporate Governance may be defined in terms of brining the interests of the investors and managers into line and ensuring that the corporate entity functions in the best interests of the investors.⁴ It deals with the interrelationship of the internal governance of the corporation and corporate accountability towards the society.⁵

IV. Evolution of Corporate Governance in India

In 2000, Kumar Mangalam Birla along with the Securities and Exchange Board of India (SEBI) setup a committee to increase the quality of corporate governance. The report submitted by the committee was the first attempt to form a code of corporate governance, as the awareness regarding corporate governance was very low among the domestic investors in India. This helped in forming the Clause 49 in the listing agreement and the report had an inclusion of various recommendations to enhance the mechanism of corporate governance in India through obligatory and non obligatory recommendations. The responsibility of implementing the recommendations was given to the Board of Directors of the company.⁶

The report had included that the Companies shall setup and Audit Committee, composition of the committee, quorum, powers and functions of the committee. The primary job of the audit committee was to have an outlook over the financial reporting process and its information. As a result of this, a guarantee that the statements are credible before the information lands in the prospects of any potential investor interested to invest in the company.

Another committee which was the ‘remuneration committee’ was a non-mandatory recommendation where the remuneration which was paid to the directors was to be determined and recorded. Recommendations in relation to disclosures were also made regarding disputes pertaining to disputes in the market in the past 3 years and the liabilities imposed on the companies as a result of those disputes which were ongoing or already dealt with. Important information regarding the necessary awareness which is in the interest of the shareholder was to be disclosed in the annual report.⁷

The author concludes that the recommendation on disclosure is still a valid recommendation in the present time. Considering a situation, where the company has to pay hefty compensation to institutions or other companies as a result of disputes, the investors should be aware about the liabilities of the companies which may affect the decision of the investor to invest in the company. In general terms, if disclosures are not made then it is ultimately be considered as misrepresentation by the company with an intention to defraud investors. It was recommended that the institutional shareholders shall take active interests in composition of the Board; they shall be vigilant and maintain systematic and regualar contact with the management to examine the performance and quality of management and also to ensure that the voting intentions are translated into practice.⁸

A report on corporate excellence came out in November 2000, known as the ‘Task force on Corporate Excellence’ having different recommendations for enhancing the standards of corporate governance throughout India. It had suggestions on accounting standards being transparent and ethical in nature. There was recognition of Corporate Social Responsibility as a part of the report.⁹

In 2002, a committee established by the Government of India known as the Naresh Chandra Committee took into its consideration international scams regulated by the Sarbanes Oxley Act, which is considered as a strict legislation. In that light, certain recommendations were made in respect to transparency of auditing, appointment of qualified auditors and independent directors, liabilities of the auditors and their disclosures.¹⁰ The report also suggested that there should be an Independent Board for quality review of directors and auditors. Besides, training of independent directors, their remuneration and, exemption from certain liabilities was a part of the committee report.

V. Legislative framework of Corporate Governance in India

(A) SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

a. Prior Intimation

Regulation 29:¹¹ The stock exchange should be intimated whenever there is a meeting of the board of directors for proposal for buyback of securities, fundraising by public offers, declaration of dividends, issues of convertible securities, financial results of quarterly, half yearly or annual, proposal for voluntary delisting by the listed entity from stock exchange.

b. Disclosure of events or information

Events such as frauds, defaults, settlement with banks and winding up are essential events which the company has to disclose. However, important information is to be disclosed as well as it may affect shareholders interest or potential investor interest.

Regulation 30:¹² All material information as per Part A Schedule III should be disclosed by the board of directors, which is as follows:

i. Acquisitions, sale of any unit or subsidiary, scheme of arrangement (amalgamation/ merger/ demerger/ restructuring) or any other agreements such as joint venture or shareholder agreements.

ii. Issuance, alteration, buyback, forfeiture or spit of shares and securities.

iii. Disclosure within 30 mins of closure of meetings having outcomes of dividend declaration, cancellation, fund raising, capital alteration etc. is discussed among the board of directors.

iv. Change in directors, auditors and compliance officers or amendments to AoA and MoA.

The provisions for corporate governance as an obligation on the company are mentioned from regulation 17 to regulation 27.¹³ A formation of independent audit committee as per regulation 18 is a key provision for transparency. The purpose of this regulation is justified as the independent auditors should have the capability to interpret financial statements which help them analyse financial condition of the company. The chairperson of this committee will be at the rank of an independent director of the company who shall respect their obligations under regulation 25. Another key provision is regulation 20 which shall form a ‘stakeholders relationship committee’ which shall be concerned with dealing with the problems of the shareholders. The board of directors shall also form a ‘risk management committee’ for monitoring and reviewing a risk management plan formulated by the committee itself as per regulation 21. Another concern is victimization of directors and employees, which is safeguarded by regulation 22. As per the regulation a vigil mechanism considers reports of concerns addressed by victimized directors and employees.

(B) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

In 2011, SEBI introduced the Substantial Acquisition of Shares and Takeover Regulations which is additionally known as the ‘takeover code’.¹⁴ In order to attain transparency¹⁵ for the public interest the shareholders should declare the acquisitions. The declaration becomes obligatory when the threshold limit is crossed as per the terms and conditions. If the acquisition is crossing 25% of the shares of the company then it has to be publicized. Besides, if there is an increase of acquisition of shares which is more than 5% in a financial year, it has to be publicized as well. The shareholders can take voluntary steps to offer or sell their stake to other shareholders as per the procedure mentioned in the takeover code.

(C) The Companies Act, 2013

Under the Companies Act, 1956 certain key provisions necessary for effective corporate governance were not present. In comparison with the Companies Act, 2013 there was no provision such as appointment of independent directors. SEBI in its listing agreement of Clause 49 mentioned the obligatory duties of a listed company which included the appointment of independent directors. The Companies Act, 2013 provides for provisions based on independent director which is in depth. Under Section 2(47), Independent director is defined in the Companies Act, 2013. Under Section 149 of the new act, every listed company has to appoint the 1/3^rd of the total strength of the directors as independent directors.¹⁶ The independent director so appointed needs to posses certain qualities which makes him apt for the responsibilities they bear being in their post. Certain qualities such as no relation with promoters or other directors, not having held the position of key managerial in the company prior to the appointment, having no monetary interest in the company, having integrity in their character and various other qualities mentioned under the Companies Act, 2013. Besides possessing these requirements, the act also provides how these independent directors will be selected. The Board of Directors Report shall consist of a separate section known as ‘Corporate Governance’ which shall be attached to the financial statement. It can be concluded that the new company legislation deals with the concept of Corporate Governance exclusively. In the interest of shareholders and investors the related party transactions shall be commenced only upon the approval given by the board of directors.

If the approval is granted then the reason should be stated for the same in the report. The rights of the shareholders are now protected under this new legislation. Various proposals such as issuances of security, taking and giving loans, acquisition and merger should be made aware to the shareholders. Active participation of the shareholders is also encouraged in the affairs of the company. In respect to granting a loan to the director or associated parties a special resolution has to be passed. Remuneration is another concern in companies and its shareholders because it exhausts the funds of the company. To regulate this concern, a committee known as ‘The Remuneration Committee’ has the duty to monitor the remuneration policy of the company and the same shall be revealed to the shareholders. As per Section 177 of the act, the company shall also establish an audit committee which overlooks the appointment of auditor, examination of financial statements, independence of the auditors and reports submitted by the auditors. To conclude, the new act surely has taken an effective leap towards the enhancement of the corporate governance framework in India.¹⁷

VI. Rebook India Fraud Case: Corporate Governance for unlisted companies?

The SEBI only regulates the listed companies of India. It is safe to conclude that the listed companies of India are under strict corporate governance mechanism. To refrain criminals from committing a crime, the sanctions must be severe. However, the unlisted companies are easily prone to corporate frauds. The investors investing in unlisted companies are easily exploited by cunning corporate with mala fide intentions. The Rebook Fraud case is one such instance of corporate fraud. Rebook India was merged with Adidas India and because of the fraud the parent company Adidas was affected. Investigation was conducted under Section 234 of the Companies Act, and there were irregularities found in the books of accounts of Rebook. The investigation team concluded that there is an approximate scam of Rs 870 crores. As a result of this, the Managing Director Subhinder Singh Prem and the Chief Operating Officer Vishnu Bhagat were arrested. The matter was taken up by the Serious Fraud Investigation Officer thereafter.¹⁸

After the investigation was finished, the allegation was that there has been an inflation of the invoices to the extent of Rs 147 Crores. Besides this, the company had four secret warehouses, where the goods of the company were diverted. Through this, another Rs 98 Crores were raised through fake invoices. After the investigation was finished, a report was made where the authorities observed the case of ‘systematic mismanagement’. The mismanagement was so systematic that the company had falsified receipts, created fake storage facilities and inflated bills were not recorded in the accounting books correctly. ¹⁹ The SFICO played an important role to deal with this corporate fraud. It observed that there is not sufficient corporate governance in unlisted companies and as a result of this the company’s top executives were in a position to conduct such fraudulent activities. For good corporate governance it is necessary that the legislative framework is efficient.²⁰

As we noticed in the chapter of evolution of corporate governance, there have been numerous committees to make recommendations with respect to the improvement of corporate governance as close to international standards. However, none of the committees have specifically dealt with the mechanism of corporate governance for unlisted companies. All the regulations for corporate governance discussed above are regulated by SEBI, a body which is only concerned with listed companies and its regulation. Also certain provisions for corporate governance in Companies Act, 2013 only apply to listed companies. Provisions such as setting up Auditors Committee under 177(1), Nomination and Remuneration Committee under 178(1), Vigil Mechanism under 177(9), Independent Director under 149(4) and several other provisions do not apply to unlisted company. Corporate Governance Voluntary Guidelines, 2009 are applicable for the unlisted company but as it is not mandatory that these guidelines should be enforced. Hence, there is no mechanism for the effective corporate governance of unlisted companies. It is understood that, unlisted companies are private companies and may not have shareholders, however, companies can offer ‘private placement’ to investors. It can be also observed that the company many increase the practice of private placement before it goes for initial public offering or before conversion to public company.

The author is not stressing that corporate governance is only for the protection of investors. Accountability and monitoring functions of the company are very important facets of corporate governance.²¹ The rebook fraud case has reflected that there is no corporate governance mechanism for unlisted companies. The interests of the stakeholders and investors are at stake, shareholders of the parent company can also be affected. The legislatures should make it mandatory for the unlisted companies to adopt strict standards of corporate governance.

VII. The Interrelation Between Corporate Governance And Investor Protection

One of the primary objectives of corporate governance is to protect the interest of the investor. An investor primarily looks into the performance of the company, its potential, its management and its expected capital growth.²² This is the motivating factor for the investor to invest in the company after he is satisfied with the prospectus of the company. When the money is invested the investor expects a good return. The mechanism of corporate governance should ensure this investor protection.²³ Corporate governance mechanism ensures that there are no fraudulent activities in the company which affects the investment. There is a certain amount of trust put on the company by the investor and the company should ensure that there is no abuse of power to fiddle with the trust. Hence, corporate governance is a set of mechanism where there is no expropriation by insiders, in turn protecting the shareholders.²⁴ The management of the company is responsible for the protection of the shareholders rights and investments. Hence, such a mechanism acts an instrument to upheld transparency and accountability.

A certain level of transparency and accountability gives a fair amount of boost to the confidence of the investor. The company should also encourage their management to increase the willingness of effective corporate governance.²⁵ Certain important facets include monitoring, oversight over the management, disclosure and corrective action. An important concern is that majority shareholders dominate the minority shareholders and creditors by expropriation. Besides, insider trading possesses eminent danger to the interests of the shareholders.²⁶

The market goodwill, market efficiency, proactive steps to enhance investor protection, market integrity, transparency are other factors which gives a relief to the confidence of the investor in the company.²⁷ It needs an environment of enforcement by the legal world as well in any jurisdiction concerned, as the legal remedy in case of unfortunate scenarios directly affects the investor confidence as well. A committee formed by the ministry of corporate affairs had an opinion that an exclusive legislation for investor protection is not necessary as the protection of investor interest is ensured by the proper enforcement of corporate governance.²⁸

The Birla Committee recommendations examined the relevance of corporate governance and importance of investor protection. The Committee examined the interrelation in its report and recommended that corporate governance is necessary for vibrant capital markets as it is an instrument which ensures protection of the investors. It observed, “. It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure.”²⁹

It can be understood that the mechanism of corporate governance is indispensible for the protection of investors. Hence, there is a strong interrelationship between efficient corporate governance and investor protection

VIII. Shareholder Activism

The shareholder activism is a concept which emerged in the US, when Henry Ford decided to cancel the payment of dividends to the shareholders and decided to invest the money in the company itself. The shareholders heavily disagreed with this move as the non payment of dividend is essentially a violation of the rights of the shareholders. The court was in favour of the shareholders and decided to award the dividend back to the shareholders from the funds of the company. The objective of shareholder activism is to make the companies understand that the shareholder is an important player in a company and their behaviour should influence the company and not the other way round. In United Kingdom, shareholder activism was exercised through shareholder resolutions, litigation and discussions with the management, protests and campaigns. The management should be a ground for the shareholders to communicate their problems and issues for furtherance of the activism. The corporate culture should be improved by democracy in the management, where the shareholders have an active voice which aims at the benefitting the company as well as the shareholders. The significance of shareholders activism should be reflected in the developing countries as well inspired by other countries such as UK, Germany, US and Japan.³⁰

The concept of shareholder activism is emerging in India, as it is understood as an important part of corporate governance. There are certain key drivers for shareholder activism is enhancing the scope of shareholder participation and create a dominant stance of shareholder in the market force. The shareholder activism impact on corporate governance may be ambiguous where there is a large shareholding pattern, and there is no majority of minority shareholders, regardless the importance of shareholder activism cannot be ignored.³¹

India has witnessed a lot of corporate frauds and it has resulted into large losses of investors. It is absolutely necessary that the corporate governance is improved so that the investors are empowered. Investors play an important role in development of companies and if the trust of investors is lost then it will be horrendous for the development of the country. The scenario is India is that the corporate world is dominated by dominating and controlling shareholders, as a result of this the concept of shareholder activism becomes much more necessary in implementation. India should introduce reforms where the shareholders participate and give their opinions through various mechanisms. The rights of the minority shareholders will be controlled and influenced and get dampened as there is a lot of disparity in shareholding patterns.

The corporate governance has been enhanced as per the international standards with the help of various committees formed for improving the regulatory framework. As per the new Companies Act, there have been a lot of changes in regards to the independence in auditing, appointment of board of directors, certification of financial statements etc. National Stock Exchange and Bombay Stock Exchange has also advocated for the role and importance of good governance practices.³² The scenario of shareholder activism had triggered the need for reforms for the improvement of a framework for tackling the lack of shareholder activism.

In India, the companies with a majority shareholding pattern are predominant in corporate decision and policy making, the minority shareholders are usually not given a voice to participate in the decision making and discussing various affairs of the company affecting shareholders rights and interests.³³ Besides, the expenditure involved to go against the acts of the management makes the shareholders hesitant for protection of their own rights.³⁴ The concept of shareholder activism evolved from USA, which can be originated back to the 1990s.³⁵

Shareholders activism is defined by efforts which are proactive in its approach to improve the corporate governance rules and improve the behavioural patterns. It should be noted that the activism does not change the control of the company but only improves the behavioural patterns in the company which improves the company’s management mechanism.³⁶

A combative strategy should be present for shareholder activism. In cases where such a strategy is used, the shareholders are aggressive in their attitude and attempt to overthrow the management through various methods.³⁷Participative and interactive shareholder activism will help benefiting shareholders. In the practice of participative shareholder activism, the shareholders exercise their votes in meetings held by the company. The course of management can experience a change only when there is overwhelming participation of minority shareholders.³⁸Whereas, in interactive shareholder activism, the shareholders communicated with the management and the organization with an intention to derive information and direct the company to act in a certain manner.³⁹

The enactment of Companies Act, 2013 provides for more active participation of shareholders and protection of investors. As per Section 110 of the act, there is a mentioning of votes given by postal ballot. This provision corresponds to the provision mentioned in the in the Companies Act, 1956. Casting of vote by shareholders through the method of postal ballot can be a convenience for the shareholders, thus increasing their participation. The prospect of taking legal action by class action law suits is also considered by SEBI. As per the SEBI (Investor Protection and Education Fund) Guidelines, 2009, the investors can undertake their aid of commencing legal proceedings against the listed or proposed to be listed company for the protection of their interests. As per Section 245 of the Companies Act, 2013 legal proceedings can be commenced against the company and its management if the shareholders are aggrieved. Their rights are to be protected under shareholder activism when there is fraud or alleged mismanagement. The concept of class action suits has been successful in its implementation in America to encourage shareholder activism. Prior to the initiating of class action law suits the minority shareholders were helpless and now they are active decision makers and watchdogs. Hence, a forum where the rights of the shareholders are enforced can be considered as a significant development of shareholder activism.

As per the Companies Act, 2013 the report submitted by the board shall reveal the related party transactions and the reasons for incoming related party transactions. In circumstances where, any particular director gets into a transaction with related party without the approval from the other directors on the board or the concerned shareholders within a period of three months, the board of directors will have an option to avoid the related party transaction. It is to be understood, that when there is such a circumstance, it has no relativity with shareholder activism, as the ultimate discretion is with the board of directors to avoid the transaction. However, it will encourage transparency and the shareholders will be better informed in the affairs of the company. It may happen, when the board of directors will leave it upto the shareholders for approval of the related party transaction entered by any particular director, if it concerned with the vested interest of the shareholders. The other key section in the Companies Act, 2013 is that in the interest of the shareholders, minority shareholders will be permitted to appoint and elect an independent director.⁴⁰ This provision is inserted for the empowerment of minority shareholders. Hence, it can be concluded that certain provisions of the new companies act focuses on the protection of minority shareholders and enhancing shareholder activism.

IX. Corporate Governance Intermediaries

For smooth functioning of decisions of companies, there is a key role played by the intermediaries regulating corporate governance influencing the function and affairs of the company. Certain advisory firms do the job of making their institutional investors aware and give them advice regarding the method their votes should be exercised.⁴¹

Investors can benefit by paying a visit to proxy advisors however all investors may not find it economical. However, the proxy advisors do come up with recommendations in respect of voting rights of shareholders. It is a general notion that the category of these advisors are considered to be influential for their recommendations based on corporate governance and hence have the ability to persuade corporate affairs and corporate choices. It is established in the international forum and in India its industry usually came around in 2010. Usually their motto is to advice and guide shareholders about their rights and empower them by encouraging their engagements in company affairs and their decision making. The proxy advisors have based their recommendations on appointment of auditors, transactions such as mergers and takeovers and independent directors.⁴²

The minority shareholders do have an impact now in decision making of the affairs of the company affecting their interests. This was possible in one of the way as a result of essential corporate governance intermediaries which connect the shareholders to the company. Proxy advisors promote corporate governance by establishing norms and recommendations for management in a company, which works in the favour of shareholders. Their proposals and their functions is a mechanism to enhance the corporate governance obligations on the company which are mandatory by law. The connecting link between the shareholders and the company indicates a practice of higher standards of corporate governance which are at par with the international mechanisms practised around the world.⁴³

The investors can outsource research to proxy advisors which can benefit them with accurate analysis. The accurate analysis can secure higher probabilities of monetary returns on investments. This emergence of proxy advisors is a new advent in the area of corporate governance. All though the emergence is a face of investor protection, the efficiency of such a mechanism cannot be determined as the emergence is recent.⁴⁴

It can be concluded, that the advent of this mechanism is fruitful for investors. However, one of pitfall of corporate intermediaries is that the service of consultancy is profit oriented and is provided to the investor as well as the company. As a result of this, there will be a possibility of conflict of interest which may hamper corporate governance as a whole. Besides, the proxy advisors cannot be scrutinized by government intervention. The consultation given can be manipulated or tweaked for vested interests. Such problems will give rise to issues such as transparency and accountability. It is suggested that the SEBI should intervene in monitoring their acts and ensure their liability.⁴⁵

X. Conclusion

The analysis of Rebook Fraud Case has reflected the importance of corporate governance the primary requirement for investor protection. It has also reflected the loophole where the investors approaching an unlisted company for investment purposes through private placement are not under the ambit of corporate governance.

Therefore, corporate governance is not present in unlisted companies. The only regulatory framework to govern the unlisted companies is the Corporate Governance Voluntary Guidelines, 2009. The guidelines are not mandatory to follow and hence the purpose and objective itself can be easily defeated. The guidelines include mandatory disclosure in aspect of investor protection however, their enforcement still remains questionable. It is concluded, that these voluntary guidelines are made mandatory guidelines with punishment provisions which act deterrent in nature. Hence, neither the Companies Act, 1956/2013 nor the voluntary guidelines are adequate enough for the protection of investors.

XI. Recommendation

SEBI is only concerned with the regulation of listed companies in India. It is suggested that an independent body is constituted by the government for the regulation of unlisted companies or the same responsibility is given to SEBI. The interference by dominant authorities such as the government in this case or majority shareholders can affect the management decision making ability. This controls the interest of minority shareholders which are during circumstances in the hands of the dominant shareholders.

The interest of the investor in unlisted companies is at stake hence, it should be developed and a regulatory framework should be established. Hence, the corporate governance mechanism and its implementation is only stringent for the listed companies in India. It is concluded that the aspect of shareholder activism cannot be ruled out as the mechanism of corporate governance is adequately stringent and active. The shareholder activism is a furtherance of enhancement of the security and safety provided in the interest of the investors and hence cannot be disregarded. The issue is critical as better practices will attract foreign investments as well. Hence, the regulatory framework should be enacted and enhance for unlisted companies for the purpose of investor protection.

XII. References

[1] Colin Mayer, Corporate Governance, Competition and Performance, Journal of Law and Society, Volume 24, Issue 1, March 1997.

[2] Simon Deakin, Alan Hughes, Comparative Corporate Governance: An Interdisciplinary Agenda, Journal of Law and Society Volume 24, Issue 1, March 1997.

[3] Prabhash Dalei, Paridhi Tulsyan and Shikhar Maravi, Corporate Governance in India: A legal analysis, available at http://psrcentreorg/images/extraimages/312018pdf.

[4] Sahil Arora and Utkarsh Soni, Investor Protection in the Aftermath of The Rebook Fraud Case: An appraisal of the need for corporate governance in Non listed Companies, XI Capital Markets Conference (December 21-22,2012) Available at: http://papers.ssrn.com/sol3/papers.cfm?absract_id=2263081

[5] Rebook India case: Corporate mismanagement led to Scam, September 23,2012, The Economic Times, http://articles.economictimes.indiatimes.com/2012-09-23/news/34040662_1_conspiracy-and-fraudulent-practices-rebook-india-gurgaon-police

[6] Shlefier, Andrei; Vishny, Robert W, A Survery on Corporate Governance, 52 JOURNAL OF FINANCE 737-787 (1997) available at: http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1997.tb04820.x/full

[7] CADBURY, A., REPORT ON THE COMMITTEE OF THE FINANCIAL ASPECTS OF CORPORATE GOVERNANCE (Gee Publishing, London 1992) referred in www.cbr.cam.ac.uk/pdf/wp277/pdf.

[8] AC Fernando, Corporate Governance: Principles, Policies and Practices, available at http://books.google.co.in/books?id=al6zP7foCSEC&pg=PT172&lpg=PT172&dq=fernando+ac+investor+protection&source=bl&ots=6AHt2RJZkP&sig=vCRHNZp8CqhXvfpJ5FbkgFJB4c8&hl=en&sa=X&ei=-O8zUqbvG4uzrgeu0YH4Aw&ved=0CFIQ6AEwCQ#v=onepage&q=fernando%20ac%20investor%20protection&f=false

[9] Rafael La Porta, Florencio Lopez-de Silanes, Andrei Shleifer and Robert Vishny, Investor Protection and Corporate Governance, Journal of Financial Economics 58 (2000)

http://leedsfaculty.colorado.edu/bhagat/InvestorProtectionCorporateGovernance.pdf

[10] Pratip Kar, “Corporate Governance and the Empowerment of the Investors ADB/OECD/WORLD BANK 2nd ASIAN CORPORATE GOVERNANCE ROUND TABLE, http://www.oecd.org/daf/ca/corporategovernanceprinciples/1930766.pdf

[11] Recommendations on Capital Markets Governance & Investor Protection, available athttp://www.icsi.edu/WebModules/LinksOfWeeks/CAPITAL%20MARKETS%20WEEK%20SUGGESTIONS.pdf

[12] Investor Education and Protection, Report of the Expert Committee on Company Law, 2005, available at http://www.mca.gov.in/Ministry/chapter7.html

[13] C. Udaya Kumar Raju; M. Subramanyam; Himachalam Dasaraju, Emergence of Corporate Governance in India, International Journal of Multidisciplinary Management Studies Vol. 2 Issue 5, May 2012, ISSN 2249 8834

http://zenithresearch.org.in/images/stories/pdf/2012/May/EIJMMS/7_EIJMMS_MAY12_VOL2_ISSUE5..pdf

[14] Varottil, Umakanth, The Advent of Shareholder Activism in India (October 22, 2012). Journal on Governance, Vol. 1 No. 6, 2012 Available at SSRN: http://ssrn.com/abstract=2165162 or http://dx.doi.org/10.2139/ssrn.2165162

[15] Sucheta Dalal, Proxy advice: Check on misgovernance, Moneylife (August 11, 2011) Available at:http://suchetadalal.com/?id=22ef29a5-277b-916c-4e548f747d82&base=sections&f&t=Proxy+advice%3A+Check+on+misgovernance

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Footnotes

1. Author is an Advocate at Gujarat High Court, India.

2. Report of the SEBI Committee on Corporate Governance,( February 8, 2003) pg 1, pp 2. ↩

3. Warren Buffett, Berkshire- Hathway, Inc: 2002 Annual Report (Omaha, NB: Berkshire- Hathaway, 2003), p16. ↩

4. Colin Mayer, Corporate Governance, Competition and Performance, Journal of Law and Society, Volume 24, Issue 1, March 1997. ↩

5. Simon Deakin, Alan Hughes, Comparative Corporate Governance: An Interdisciplinary Agenda, Journal of Law and Society Volume 24, Issue 1, March 1997. ↩

6. Prabhash Dalei, Paridhi Tulsyan and Shikhar Maravi, Corporate Governance in India: A legal analysis, available at http://psrcentreorg/images/extraimages/312018pdf. ↩

7. Report of the Kumar Mangalam Birla Committee on Corporate Governance, available at: wwwsebigovin/commreport/corpgovhtml. ↩

8. Ibid. ↩

9. Report on Corporate Excellence on A Sustained Bsis to Sharpen India’s Global Competitive Edge and to Further Develop Corporate Culture in the Country, available at: http://wwwacga-asiaorg/publicfiles/IndiaReddyreport2000doc. ↩

10. Naresh Chandra Committee Report, available at: http://finminnicin/reports/chandrapdf. ↩

11. Securities and Exchange Board of India (Listing Obligation and Disclosure Requirements) Regulations, 2015. ↩

12. Ibid. ↩

13. Ibid. ↩

14. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 Available at: http://www.sebi.gov.in/cms/sebi_data/commondocs/acquistionofshares.pdf ↩

15. Regulations 28-31 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. ↩

16. Section 149 of the Companies Act, 2013 ↩

17. http://articles.economictimes.indiatimes.com/2013-02-01/news/36684552_1_independent-directors-corporate-governance-shareholders ↩

18. Sahil Arora and Utkarsh Soni, Investor Protection in the Aftermath of The Rebook Fraud Case: An appraisal of the need for corporate governance in Non listed Companies, XI Capital Markets Conference (December 21-22,2012) Available at: http://papers.ssrn.com/sol3/papers.cfm?absract_id=2263081 ↩

19. Rebook India case: Corporate mismanagement led to Scam, September 23,2012, The Economic Times, http://articles.economictimes.indiatimes.com/2012-09-23/news/34040662_1_conspiracy-and-fraudulent-practices-rebook-india-gurgaon-police ↩

20. Shlefier, Andrei; Vishny, Robert W, A Survery on Corporate Governance, 52 JOURNAL OF FINANCE 737-787 (1997) available at: http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1997.tb04820.x/full ↩

21. CADBURY, A., REPORT ON THE COMMITTEE OF THE FINANCIAL ASPECTS OF CORPORATE GOVERNANCE (Gee Publishing, London 1992) referred in www.cbr.cam.ac.uk/pdf/wp277/pdf. ↩

22. AC Fernando, Corporate Governance: Principles, Policies and Practices, available at http://books.google.co.in/books?id=al6zP7foCSEC&pg=PT172&lpg=PT172&dq=fernando+ac+investor+protection&source=bl&ots=6AHt2RJZkP&sig=vCRHNZp8CqhXvfpJ5FbkgFJB4c8&hl=en&sa=X&ei=-O8zUqbvG4uzrgeu0YH4Aw&ved=0CFIQ6AEwCQ#v=onepage&q=fernando%20ac%20investor%20protection&f=false ↩

23. Ibid. ↩

24. Rafael La Porta, Florencio Lopez-de Silanes, Andrei Shleifer and Robert Vishny, Investor Protection and Corporate Governance, Journal of Financial Economics 58 (2000) http://leedsfaculty.colorado.edu/bhagat/InvestorProtectionCorporateGovernance.pdf ↩

25. Pratip Kar, “Corporate Governance and the Empowerment of the Investors ADB/OECD/WORLD BANK 2nd ASIAN CORPORATE GOVERNANCE ROUND TABLE, http://www.oecd.org/daf/ca/corporategovernanceprinciples/1930766.pdf ↩

26. Ibid. ↩

27. Recommendations on Capital Markets Governance & Investor Protection, available at http://www.icsi.edu/WebModules/LinksOfWeeks/CAPITAL%20MARKETS%20WEEK%20SUGGESTIONS.pdf ↩

28. Investor Education and Protection, Report of the Expert Committee on Company Law, 2005, available at http://www.mca.gov.in/Ministry/chapter7.html ↩

29. C. Udaya Kumar Raju; M. Subramanyam; Himachalam Dasaraju, Emergence of Corporate Governance in India, International Journal of Multidisciplinary Management Studies Vol. 2 Issue 5, May 2012, ISSN 2249 8834 http://zenithresearch.org.in/images/stories/pdf/2012/May/EIJMMS/7_EIJMMS_MAY12_VOL2_ISSUE5..pdf ↩

30. Jayati Sarkar and Subrata Sarkar, Large Shareholder Activism in Corporate Governance in Developing Countries: Evidence from India, available at http://www1.fee.uva.nl/fm/Conference/cifra2000/Sarkar.pdf ↩

31. Varottil Umakant, EMERGENCE OF SHAREHOLDER ACTIVISM IN INDIA, NSE Quarterly Briefing, April 2013, available at http://www.nse-india.com/research/content/res_QB1.pdf ↩

32. Bernard S. Black & Vikramaditya S. Khanna, Can Corporate Governance Reforms Increase Firms’ Market Values? Evidence from India, JOURNAL OF EMPIRICAL STUDIES, Vol. 4 (2007), available at http://ssrn.com /abstract=914440 ↩

33. Mathew, Hostile Takeovers in India: New Prospects, Challenges, and Regulatory Opportunities, 2007(3) COLUM. BUS. L. REV. 800 available in cblr.columbia.edu/archives/10900‎ ↩

34. Lee Harris, Missing in Activism: Retail Investor Abstinence in Corporate Elections, 2010 COLUM. BUS. L. REV. 104, 166, available in www.memphis.edu/law/facultystaff/bio/harriscv3142012.pdf‎ ↩

35. Stuart Gillan & Laura T. Starks, The Evolution of Shareholder Activism in the United States (2007), available at http://ssrn.com/abstract=959670 ↩

36. Bernard Black, Shareholder Activism and Corporate Governance in the United States, in PETER NEWMAN (ED.), available at http://ssrn.com/abstract=45100 ↩

37. Brian R. Cheffins & John Armour, The Past, Present and Future of Shareholder Activism by Hedge Funds, 37 J. CORP. L. 51 (2011) available at blogs.law.uiowa.edu/jcl/wp-content/uploads/2012/01/Cheffins-web.pdf‎ ↩

38. Financial Reporting Council, The UK Stewardship Code (September 2012), available at http://www.frc.org.uk/Our-Work/Codes-Standards/Corporate -governance/UK-Stewardship-Code.aspx. ↩

39. Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control, 155 U. PA. L. REV. 1021 (2007). ↩

40. Section 150 of the Companies Act, 2013. ↩

41. Paul Rose, On the Role and Regulation of Proxy Advisors, MICHIGAN LAW REVIEW: FIRST IMPRESSIONS, available at http://www.michiganlawreview.org/articles/on-the-role-and-regulation-of-proxy-advisors ↩

42. Bhuma Srivastava, Proxy advisory firms give a boost to shareholder activism, THE MINT, June 29, 2012, available at http://www.livemint.com/Companies/HeuG8SPSw3zXE4sUYhecqN/Proxy-advisory-firms-give-a-boost-to-shareholder-activism.html ↩

43. Varottil, Umakanth, The Advent of Shareholder Activism in India (October 22, 2012). Journal on Governance, Vol. 1 No. 6, 2012 Available at SSRN: http://ssrn.com/abstract=2165162 or http://dx.doi.org/10.2139/ssrn.2165162 ↩

44. Ibid. ↩

45. Sucheta Dalal, Proxy advice: Check on misgovernance, Moneylife (August 11, 2011) Available at:http://suchetadalal.com/?id=22ef29a5-277b-916c-4e548f747d82&base=sections&f&t=Proxy+advice%3A+Check+on+misgovernance ↩