Minority Share Holders Rights: An Analysis of SEBI Guidelines and a Comparison between commonwealth countries

Author: Ananyo Roy (LLM Candidate at National University of Advanced Legal Studies, Kochi) and Dhruv Kalia (5 semester law student at National University of Advanced Legal Studies,Kochi)

Introduction

Ajay Tyagi, chairman of the Securities and Exchange Board of India (Sebi), claimed that despite numerous attempts to guarantee the interests of minority shareholders are protected, the market regulator has failed to ensure that independent directors do not act under the control of strong promoters. It was recently known that SEBI has been considering changing several of its regulations. On June 29, 2023, news about changes to independent directors, accredited creditors, investment managers, and other topics erupted across the markets. Following numerous assessments of the intricate SEBI guidelines, the members chose to modify critical elements, increasing flexibility and control.

Aiming the right way

The 6,800 or so listed firms in India must abide by the Sebi's Listing Obligations and Disclosure Regulations (LODR), ensuring that all stakeholders are treated fairly.

The main reason listed firms must have independent directors is that the millions of tiny retail shareholders who have invested in these companies are not subjected to unjustified risks.

Both the nomination and resignation of independent directors must need dual approval from a firm, one from the board and the other from minority shareholders, according to Sebi.

Currently, most shareholders, including promoters and non-promoters, must agree on appointing an independent director for it to happen.

According to the suggested framework, the current corporate debtor's public equity owners should have the chance to purchase shares of the newly created entity's fully diluted capital structure up to the required minimum public shareholding percentage. (Currently 25 percent). The pricing conditions must be the same as those that the resolution applicant approved.

Through such an offer made to the non-promoter public shareholders, the new organization should try to obtain at least 5% public shareholding. Public equity stockholders should be treated somewhat upon receiving the offer to purchase shares.

Rise in the role of independent directors and proxy firms.

The Proposed Amendment is anticipated to expand shareholder activism/proxy firms, independent directors, and listed security companies in India's market for listed securities (as a result, their participation and reliance on them). In some cases, the agreements on which the board of directors must express its judgment are of a character that benefits some board members directly or indirectly. Without a clear statement in the Proposed Amendment, listed companies will likely adhere to sound governance principles and ensure that the conflicted board members have resigned before reporting on the Agreement's economic impact.

As a result, the shareholders' approval of agreements at general meetings may depend on the independent directors' assessment of the economic impact and potential impact of current and future contracts that fall under the purview of the proposed Clause 5A. It would also be intriguing to investigate whether, over time, top Indian shareholder activist/proxy firms enter this sector of the listed security industry to advise shareholders on potential decisions to be made during their ratification vote.

Last but not least, we will conduct a detailed analysis of the modification and the ultimate consequences of the Consultation Paper on stakeholders once we have seen the final wording of the amendment to the LODR (as authorized by the SEBI on March 29, 2023) in its entirety.

The way forward

The burden on the winning bidder or resolution applicant will be lessened because non-promoter public shareholders can be offered funds for part of the stock in the new business. The resolution applicant must also comply with MPS while having this additional funding source, it stated.

Additionally, the company's current public shareholders under the CIRP become stockholders after the restructuring. They will have the option to purchase capital of the new organization at the same price as the new acquirer is coming, and they will be entitled to participate in proportion to their holdings.

How Minority shareholders ascertain their rights in other countries.

To preserve their interests under company law, which aims to safeguard shareholders, this article has only examined how shareholders can do so. (And not in any other capacity). The business constitutions cannot override these shareholder rights. If there are clauses in the articles of incorporation, the law will not acknowledge them.

But let's say you and the other owners consent to follow an additional set of terms and conditions that you and the other shareholders have individually decided upon. This Agreement shall not be subject to the laws governing corporations and their shareholders. Here, contract law will take precedence. Shareholder agreements are what these contracts are known as. They are solely personal contracts.

In reality, no shareholder would consent to sign a shareholder agreement that would commit them to the legal rights of being a shareholder. However, minority shareholders frequently utilize shareholder agreements to strengthen their influence. For instance, you might have a clause stipulating that all directors must agree to be removed before doing so. In our hypothetical situation, you would violate the shareholder agreement if this were the case. Therefore, the shareholders can bring a private lawsuit against you.

Further Analysis

They can act in an unfair way to one or more minority shareholders if there are no safeguards against a majority of shareholders. Minority shareholders are nonetheless afforded legal protections that allow them to seek assistance if they feel they are not appropriately treated. The displeased shareholder must file a lawsuit for each of the following claims:

• Accusations of unfair and defensible behavior,
• a petition asking for an order to dissolve a firm,
• derivative claims brought on the company's behalf.

The shareholders' right to assert these claims is unaffected by the company's charter. Furthermore, a well-written shareholder agreement can offer further protection, but only by the terms of the contract and not through any inherent rights.

Conclusion

Minority shareholders continue to have the right to participate in and cast votes at shareholder meetings, giving them a voice in crucial decisions involving the firm like the election of directors, the approval of financial reports, and the distribution of dividends. A nation becomes increasingly corporately governed as a result of their input into the company's decision-making process.