minority shareholder protection in india

8/12/2019 Minority Shareholder Protection in India

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MINORITY SHAREHOLDER

PROTECTION IN INDIASUBMITTED BY :

MANIDEEP 1203017,

MANJULA 1203019,

NAVEEN 1203020,

PRASHANTH 1203026,

SAI KIRAN 1203084


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Introduction

A minority shareholder is also a member of the company and he is entitled

to all the rights spelt out in the Companies Act, the Memorandum and the

Articles of Association.

The origin of the rights of minority in Foss Vs Harbottle1 case where the

court held that the minority share holders does not have any right to sue thedirectors.

The administration of the company shall be conducted on the basis of

democratic principle of majority.

There are certain exceptions to this rule for which minority shareholders

can sue successfully as representatives of the corporate interest.


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Minority rights

These basic rights with their constituents are mentioned below:

I. Equitable Treatment

II. The right to seek information

III.The right to voice opinion

IV. Disclosure and Transparency

V. The right to seek redress


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The corporate governance framework should ensure the equitable treatment

of all shareholders, including minority shareholders. All shareholders

should have the opportunity to obtain effective redress for violation of

their rights. The main challenges in ensuring equitable treatment of

minority shareholders include:

1. Ensuring that the Board adopts a shareholders' perspective when making

decisions and ensuring minority shareholders' interests are protected;

2. Improvements to the corporate governance;

3. Concerns of stakeholders at large vs. sharehold ers of the Company;

4. Improving communications and interactions between minority shareholders,Board members and management;

Cotd.


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Legislative Measures

I. Protection of minority shareholders:

Company law provides for remedy if the minority shareholders can show

that the company's affairs are being conducted in a manner prejudicial to

the interests of the company or its shareholders to such an extent as to make

it just and equitable to wind it up. Instead of approaching the Court, theycan approach the Company Law Tribunal under section 433of the

companies act of 1956. The Tribunal could also provide for some directors

of the company to be appointed by the Central Government, or by

proportional representation.

II. Special majority: Another safeguard in the company law is the requirement

that certain major decisions have to be approved by a special majority of

75% or 90% of the shareholders by value.


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III. Information disclosure and audit: Company law provides for regular

accounting information to be supplied to the shareholders along with a

report by the auditors.

IV. Voting Rights: The approval of at least 10% of the shareholders is required

for the requisition of an extraordinary general meeting for an application tothe Company Law Board (CLT) for relief.

V. Qualified Minority According to section 399 of the Act, a qualified

minority consists of at least one hundred shareholders or one tenth of the

total number of shareholders, whichever is less, or any shareholder(s)

holding one-tenth of the issued share capital of the company fully paid-up.

VI. Company Law Tribunal (CLT): The Indian company law shields

minorities' interest by providing an ad equate platform at CLT to raise

grievances in case of oppression or mismanagement by the majority

shareholders of a company.


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VII Minority Representation It is important for Corporations to ensure

that board membership reflects the interest of minority shareholders.

In this regard, the Independent Directors (IDs) have an important

role to play in ensuring minority shareholders' interests are

protected.


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Minority protection

Further Steps1. Disclosure of Holding of Majority Shareholders

2.Disclosure of the Control Structure

3. Good Practices for Compliance

4.Financial Institutions as Gate Keepers

5.Debt Holder Vigilance

6.Well Functioning Capital Market

7.International Accounting Standards


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Minority share holders protection in M&A

To illustrate, a typical M&A deal involving a public listed company

can structured either as a sale of business or slump sale, a scheme

of arrangement or a takeover.

Although it is not possible to use any scientific metric or parameter

that indicates whether one type of structure is optimal to minority

shareholders as opposed to others, some qualitative assessments

can certainly be attempted, as follows:

1. A business sale is perhaps least effective for minority shareholders,

as a simple majority of shareholders can approve the transaction.

Since the voting requirement is a majority of those present and

voting, it is not even necessary that the controlling shareholders

hold more than 50% shares, or sometimes even anywhere close to

that, in the company to exercise effective control.


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2. A scheme of arrangement provides greater protection to minority

shareholders.

3. The most significant right that a takeover provides is the option to minority

shareholders to exit on same terms as controlling shareholders orpromoters. In the Indian context, however, this right may be somewhat

diluted because the acquirer only needs to accept a minimum of 26% shares

from public shareholders. In any event, the takeover regulations are

structured primarily with a view to protecting the interest of minority

shareholder through the exit and other Rights.


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With minority shareholders getting a greater say in the important decisions

taken by companies, it is essential for business leaders to ensure cordial

relations with them. If these shareholders lose faith in the leadership of

companies, it might become very difficult for them to execute importantstrategic plans, which in turn may hamper their firmsgrowth.

Here are the few examples :


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Maruti Suzuki

The recent opposition put forth by the minority shareholders of Maruti

Suzuki India Ltd to the firms plan to become a distributor of cars

manufactured directly by the Japanese joint venture partner Suzuki Motor

Corp. in India.

The developments of the last few weeks at Maruti Suzuki have had an

impact on the firmsstock price and forced the capital market regulator to

look into the matter at the behest of aggrieved shareholders.

The company eventually decided to put the matter to vote, needing majority

approval from the minority shareholders, and it remains to be seen what is

eventually decided.

The key thing to note here is that it was public pressure that compelled

Maruti Suzuki to take this step even before it becomes mandatory under

Indian securities law to do so.


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Essar Energy plc

Essar Energy Plc, the London-listed energy arm of the Essar group.

The Indian conglomerate, promoted by brothers Shashi Ruia and RaviRuia, intends to take Essar Energy private and made an offer of 70 pence

per share to buy out the outstanding shares of the firm in the market.

Though the minority shareholders and independent directors of the firm

feel that the Ruias bid significantly undervalues the company, the latter

have decided to go ahead with the offer.


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Conclusion

Thus the minority share holders have a right to participate in the indoor

management of the company.

The minority shareholders has two relives either to apply for winding up of

a company under section 433 or apply under section 397 and 398 of the

companies act of 1956. Under section 397 and 398 is a preventive remedy.

These are intended to avoid winding up of a company and at the same time

to give the remedies to the minority shareholders.

minority shareholder protection in india

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