INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM

INVESTOR PROTECTION AND CORPORATE GOVERNANCE: THE NEED FOR SHAREHOLDER ACTIVISM

CHAPTER I:INTRODUCTION

Corporate Governance entails conducting the affairs of the companies in such a manner that the corporate entity is accountable and fairness would be assured to all the stakeholders. It may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. The elements of good corporate governance include maintenance of transparency, accountability, disclosures, compliance with the legal framework, shareholders value, etc.The legal and regulatory framework of corporate governance should aim at protection of investors. Since maintenance of transparency in dealings of the company is the most important facet of corporate governance in India, the same shall be ensured in order to provide a mechanism for protection of the investors. The need to protect the investors arises because the companies indulge in unfair trade practices and corporate frauds. When such corporate frauds are committed, the investors are the class of stake holders who are most adversely affected. The companies shall also consider that in case they go beyond the corporate governance norms, the confidence of the shareholders in the company would be instilled; which is indirectly beneficial for the company. Hence, the corporate governance mechanism shall be viewed as a mode by which the companies can gain the confidence of the shareholders. The need for making adequate disclosures rises because only adequate disclosures enable the shareholders in taking an informed decision. Also, the Companies Act, 2013 has for the first time included various aspects relating to corporate governance. This would further ensure that the companies follow good corporate governance practices.Investor Protection is the most significant facet of corporate governance. However, it is neglected. In the wake of various corporate scams and accounting scandals, insider trading, non-disclosure by companies, vanishing companies and other such practices of corporate; the relevance of investor protection has increased. On account of such corporate frauds, the investors are the segment of the stakeholders who are most gravely affected. Hence, the framework of Corporate Governance in India should aim at protection of the investors. Shareholder Activism is a modern trend which triggers the corporates to follow good corporate governance practices and ensure investor protection. The Securities and Exchange Board of India plays a pivotal role in protecting the investors in India. The Kumar Mangalam Birla Committee recommendations led to introduction of Clause 49 in the Listing Agreement which is the bedrock of Corporate Governance in India. A mandatory requirement under Clause 49 of the Listing Agreement is formulation of the Investors Grievance Committee, which shall entertain the complaints of the investors and ensure that such grievances are redressed. Later the Narayana Murthy Committee made recommendations to enhance investor protection by improving the disclosure requirements and widening the roles of the directors in Corporate Governance.However, there seems to be a vacuum in the requirement of the unlisted companies to follow corporate governance practices. The Corporate Governance Voluntary Guidelines, 2009 can be followed by the unlisted companies, while since the guidelines are not mandatory, the purpose remains unserved. Corporate Governance plays a significant role in investor protection. The researcher seeks to analyse whether good corporate practices have the potential of safeguarding the investors.The researcher would trace the evolution of corporate governance in India and the changing face of investor protection. In the past, India has witnessed various corporate frauds, which reflect loopholes in the current framework of the corporate governance. The researcher would analyse whether good corporate governance practices have the potential to curb corporate frauds and thereby lead to protection of investors.The researcher would also throw some light on the corporate governance provisions in India under the Companies Bill, 2012. Clause 49 of the Listing Agreement is the basis of corporate governance framework in India and it focuses majorly on the aspect of disclosure by the Company. Apart from the Clause 49 of the Listing Agreement, the Companies Act, 1956 and various regulations of the SEBI reflect the importance of disclosures to the shareholders. The researcher shall examine the relation between corporate governance and investor protection. The manner in which Clause 49 of the Listing Agreement furthers corporate governance in India shall be highlighted. The Corporate Governance Voluntary Guidelines, 2009 provides a set of disclosures that shall be made to the shareholders. The researcher would analyze the role that these guidelines would play in protecting the interests of the investors. Investor protection may be seen as a manifestation of good Corporate Governance. If the company concerned makes the adequate disclosures to the Shareholders and ensures that the investors interest is protected, it would imply that the Company follows good governance practices encompassing investor protection. The Satyam Fiasco displayed that a companys inadequate corporate governance framework may defeat the interests of the investors. The Reebok Fraud Case brought the issue of the requirement of adequate corporate governance measures in the unlisted companies. The unlisted companies do not have any mandate to follow corporate governance practices and this may defy the interests of the investors. The researcher would scrutinize the Reebok Fraud case and the Satyam Fiasco in order to analyze the failure of corporate governance mechanisms. In unlisted companies, the shareholders have various rights such as proceeding against the company for oppression or mismanagement and proceeding towards winding up of the company, while they do not have any statutory right to mandate the company to make disclosures to them as required under the Corporate Governance mechanism. Thus, the inadequacy of the rights to the shareholders in unlisted companies shall be addressed only by formulating a legal framework in order to provide that the corporate governance shall be mandatorily followed by the unlisted companies. The issue of rights of minority shareholders shall also be examined with respect to the corporate governance mechanism in India. The Companies Act, 2013 has provided for class action suits and thus has taken a leap in protecting the interests of minority shareholders. The role of institutional investors in mandating the company to follow corporate governance practices has come to the fore in recent past. The institutional investors can play a significant role in influencing the company to follow good corporate governance practices. The concept of shareholder activism is also a significant issue in terms of corporate governance practices. Shareholder Activism entails that the shareholders shall take a proactive role in formulating a dialogue with the management of the company on a regular basis. The reforms in India which highlighted the aspect of shareholder activism have also been discussed. Corporate Governance in India is based on the maintenance of transparency in the company and the same leads to the protection of investors. The researcher would also bring out the need of shareholder activism in India in terms of corporate governance. The essence of the research shall be examining the adequacy of the legal and regulatory framework in India with regard to corporate governance in protecting the interest of the investors.

Chapter IILEGAL AND REGULATORY FRAMEWORK OF CORPORATE GOVERNANCE IN INDIACORPORATE GOVERNANCECorporations receive huge pool of capital from an investor base in domestic as well as international markets. Investment by the shareholders may thus be termed as an act reflecting faith of the investors in the ability of the management. The investors expect the management to act as trustees of the investment and earn a higher rate of return as compared to the cost of capital. Hence, the investors expect the management to adopt good corporate governance practices and act in the best interests of the investors. The Narayana Murthy Committee defined Corporate Governance as the acceptance by the corporation's management of the inalienable rights of the shareholders as the owners of the corporate entity and the role of the management as trustees of the investment of the shareholders. Hence, corporate governance is about conducting the business in an ethical manner, commitment towards values and drawing a distinction between personal and corporate funds in the management of a company.[footnoteRef:1] [1: Consultative Paper on Review of Corporate Governance Norms in India, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf]

Corporate Governance may be defined in terms of bringing the interests of the investors and managers into line and ensuring that the corporate entity functions in the best interests of the investors.[footnoteRef:2] It deals with the interrelationship of the internal governance of the corporation and corporate accountability towards the society.[footnoteRef:3] It lays down the procedures and processes in accordance with which a corporate entity may be directed and controlled. The structure of corporate governance defines the distribution of rights and responsibilities of the managers, stakeholders, shareholders and other participants and specifies the rules and procedure of decision making.[footnoteRef:4] [2: Colin Mayer, Corporate Governance, Competition, and Performance, Journal of Law and Society Volume 24, Issue 1, March 1997 available at http://onlinelibrary.wiley.com/doi/10.1111/1467-6478.00041] [3: Simon Deakin, Alan Hughes, Comparative Corporate Governance: An Interdisciplinary Agenda, Journal of Law and Society Volume 24, Issue 1, March 1997, available at http://heinonline.org/HOL/Page?handle=hein.journals/jlsocty24&div=2&g_sent=1&collection=journals] [4: ibid]

Promotion of corporate fairness, accountability and transparency is the aim of corporate governance.[footnoteRef:5] In simple terms Corporate Governance can be defined as a set of laws, rules, regulations, systems, principles, process by which a company is governed.[footnoteRef:6] [5: World Bank, Managing Development - The Governance Dimension, 1991, Washington available at http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2006/03/07/000090341_20060307104630/Rendered/PDF/34899.pdf] [6: Prabhash Dalei, Paridhi Tulsyan and Shikhar Maravi, Corporate Governance in India: A Legal Analysis, International Conference on Humanities, Economics and Geography (ICHEG'2012) March 17-18, 2012 Bangkok, available at http://psrcentre.org/images/extraimages/312018.pdf]

The need for corporate governance lies in the fact that every corporation should be fair and transparent in its dealings. Maintenance of transparency and an ethical conduct is essential for attracting and retaining capital investment from the stakeholders.[footnoteRef:7] [7: ibid]

Evolution of corporate governance in IndiaThe Securities and Exchange Board of India (SEBI) had set up a Committee in 2000 under the Chairmanship of Kumar Mangalam Birla to promote and raise standards of corporate governance. The Kumar Mangalam Birla Report was the first formal and comprehensive attempt to evolve a Code of Corporate Governance, considering the governance in Indian companies, as well as the state of capital markets at that time. The recommendations of the report led to the inclusion of Clause 49 in the Listing Agreement in the year 2000. These recommendations had the aim of improving the standards of corporate governance in India and were classified as mandatory and non-mandatory recommendations. These recommendations were made applicable to listed companies with paid up capital of Rs 3 crores and above or companies having a networth of Rs. 25 crores at any time. The responsibility of brining the recommendations into force lied with the Board of Directors of the Company[footnoteRef:8]. [8: Prabhash Dalei, Paridhi Tulsyan and Shikhar Maravi, Corporate Governance in India: A legal Analysis, available at http://psrcentre.org/images/extraimages/312018.pdf]

According to the report, the Board should have an optimum combination Executive and Non-Executive Directors and not less than 50 per cent of the Board should comprise of Non-Executive Directors. In case of the Chairman is a Non-Executive Director, one-third of the Board should compose of non-executive directors. The companies shall conduct Board Meetings at least four times in a year and a time gap of four months should exist between two meetings. A director should not be the member of more than 10 Committees or act as a Chairman of more than 10 Committees..[footnoteRef:9] [9: Santosh Pande and Kshama V Kaushik, Study on the State of Corporate Governance in India, http://www.iica.in/images/Evolution_of_Corporate_Governance_in_India.pdf]

The Report also recommended that the Companies shall set up an Audit Committee. The Report discussed the composition of the Committee, other aspects such as quorum, frequency of meeting, powers of audit committee and functions of the Committee. The Committee was to be composed of atleast three members, all being non-executive directors, and atleast one director shall have knowledge in finance and accounting. Also, the Committee shall be headed by an independent director. The functions of the audit committee include oversight of the companys financial reporting process and the disclosure of its financial information in order to ensure that the financial statements are credible and accurate. The committee can also recommend on aspects such as appointment and removal of external auditor, fixation of audit fee and approval for payment for any other services. The committee can also review the annual financial statements before submitting to the Board.The Remuneration Committee was another body which the Report recommended to be set up by the Company. This was a non-mandatory recommendation. The Committee was assigned the task of determining the remuneration of the non-executive director and the Annual Report shall make disclosures about the remuneration paid to the Directors. The Report also recommended that the Company should set up a Shareholders Grievance Committee to redress the issues of the shareholders[footnoteRef:10]. [10: ibid]

The Report also made recommendations pertaining to Disclosures. The details on non-compliances with regard to capital market related issues in the past three years and the penalties imposed shall be disclosed. Also, half-yearly report shall be sent to the shareholders and quarterly report shall be sent to the institutional investors. Various details which are vital for awareness of the shareholders shall be disclosed in the Annual Report. Auditors certificate on Corporate Governance shall also be annexed with the Annual Report. Companies shall also disclose the consolidated accounts of their subsidiary companies in which they hold atleast 51 per cent or more capital. Shareholders should use the General Meetings as a platform to ensure that the affairs of the company are being conducted in the best interests of the investors[footnoteRef:11]. The Half-yearly declaration of financial performance including the summary of important events in the past six months shall be disclosed to the shareholders. The Report also threw light on the role institutional investors in corporate governance. It was recommended that the institutional shareholders shall take active interests in composition of the Board; they shall be vigilant and maintain systematic and regular contact with the management to examine the performance and quality of management and also to ensure that the voting intentions are translated into practice[footnoteRef:12]. [11: Report of the Kumar Mangalam Birla Committee on Corporate Governance, available at http://www.sebi.gov.in/commreport/corpgov.html] [12: ibid]

In May 2000, the Department of Company Affairs formed a broad based study group under the Chairmanship of Dr. PL Sanjeev Reddy. The group was given the task of examining ways to operationalise the concept of corporate excellence on a sustainable basis so as to sharpen Indias Global competitive edge and to further develop corporate culture in the country. In November 2000, a Task Force on Corporate Excellence[footnoteRef:13] set up by the group came out with a report comprising of various recommendations for raising governance standards among all companies in India. It also suggested the setting up of a Centre for Corporate Excellence. One of the recommendations of the report was that there shall be higher delineation of independence criteria and the probability of conflict of interest shall be minimized. The commitment and accountability of the Directors shall be ensured by fewer and more focused board and committee membership. There shall be a meaningful and transparent accounting and reporting by disclosing various details in order to ensure informed participation by shareholders. Introduction of formal recognition of Corporate Social Responsibility was also recommended in the report.[footnoteRef:14] It was also recommended that there shall be a clear demarcation between policy making and oversight responsibilities. The Task Force on Corporate Excellence recommended that there shall be highest standards of corporate governance that shall be followed by the companies. [13: Report on Corporate Excellence on A Sustained Basis to Sharpen Indias Global Competitive Edge and to Further Develop Corporate Culture in the Country, available at http://www.acga-asia.org/public/files/IndiaReddyreport2000.doc.] [14: ibid]

The Naresh Chandra Committee was established in 2002. It is believed that the Committee was established by the Indian Government in response to the Enron debacle in 2000, various scams in the US involving the fall of various corporates like Xerox, WorldCom etc and the subsequent enactment of the Sarbanes Oxley Act, which is regarded as a stringent legislation. The Naresh Chandra Committee made various recommendations in line with international best practices[footnoteRef:15]. The recommendations stipulated that the audit assignments should be carried out in a transparent manner and thus there should not be any financial interest of the auditor in the company nor should the auditor and company have any personal relationship. Various aspects such as appointment of auditor, auditors disclosure of qualifications and of contingent liabilities, auditors annual certification of independence etc were discussed in the report; the focus of which was to ensure that the process of auditing is transparent. The report also recommended the setting up of Independent Quality Review Board, appointment of an independent director, the percentage of independent directors in the Board, minimum board size of listed companies etc.[footnoteRef:16] The aspect of disclosure of duration of board meetings, additional disclosure to directors, and appointment of independent director on the audit committee was also emphasized. Remuneration to the independent directors, exemption of independent directors from certain liabilities, training of independent directors were amongst some other recommendations. [15: http://finmin.nic.in/reports/chandra.pdf] [16: ibid]

In 2002, SEBI analyzed the statistics of compliance with the clause 49 of Listing Agreement by the listed companies and realized that there was a need to look beyond the mere systems and procedures if corporate governance was to be made effective in protecting the interests of the investors. Hence, SEBI constituted a Committee under the chairmanship of NR Narayana Murthy. The Narayana Murthy Committee was assigned the task of reviewing the implementation of corporate governance code by listed companies and for issue of revised clause 49 based on its recommendations. Clause 49 of the Listing Agreement forms the bedrock of corporate governance in India. Oecd principles on corporate governanceIn its endeavors to improve the governance practices, the Organization for Economic Co-operation and Development (OECD) had published its principles of corporate governance in 2002. The oecd principles on corporate governance are considered as a benchmark by policy makers, stakeholders, investors and corporations round the globe. These principles have advanced corporate governance agenda and act as guidelines for member and non-member countries with respect to legislative and regulatory framework on corporate governance[footnoteRef:17]. Following is an overview of the oecd principles on corporate governance: [17: Consultative Paper on Review of Corporate Governance Norms in India, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf]

Principle I of the OECD Principles on Corporate Governance stipulates that the basis of an effective corporate governance framework shall be ensured. The framework should lead to promotion of transparent and efficient markets. It should be consistent with the rule of law and shall articulate the division of responsibilities amongst the supervisory, regulatory and enforcement authorities. Principle II of the OECD Principles on Corporate Governance provides that the rights of the shareholders should be protected and exercise of shareholders rights should be facilitated. Principle III lays down that there should be equitable treatment of the shareholders and the shareholders should be given an opportunity to redress their grievances in terms of violation of shareholder's rights. Principle IV stipulates that the role of the stakeholders in corporate governance shall be recognized and co-operation between the stakeholders and corporations shall be encouraged. Principle V provides a mandate to the corporate entities to maintain disclosure and transparency. Timely and accurate disclosure shall be made with respect to governance of the company, financial position of the entity, performance of the corporate entity and particulars of ownership.

Principle VI enumerates the responsibilities of the Board and accountability to the shareholders. The Board should ensure strategic guidance of the company, the Board shall ensure effective monitoring of the management and the Board shall remain accountable to the company and shareholders. It may be observed that the Indian Corporate Governance Framework is in compliance with the Corporate Governance principles of OECD.LEGISLATIVE FRAMEWORK OF CORPORATE GOVERNANCE IN INDIA The Listing AgreementClause 19 of the Listing Agreement provides that a prior intimation shall be made to the Stock Exchange about the conducting the meeting in which the proposal for buy back of securities or declaration regarding rights issue shall be made. Under clause 20 of the Listing Agreement, the Board shall disclose matters such as payment of dividend, total turnover of the company, declaration regarding buyback of securities within 15 minutes of closure of the Board meeting. According to Clause 22 of the Listing Agreement, the particulars regarding increase of share capital by issue of bonus shares, reissue of forfeited shares, alteration of share capital and any such matter shall be disclosed to the stock exchange within 15 minutes of the closure of the Board Meeting. Clause 29 provides that any decision relating to change in nature of the business shall be disclosed to the stock exchange. Clause 30 of the Listing Agreement provides that the Board shall disclose issues relating to change in the director, auditor or secretary of a company to the Stock Exchange promptly. Clause 31 of the Listing Agreement provides that various documents such as the proceedings of the Annual or Extraordinary General meetings.[footnoteRef:18] Clause 32 provides that the Company shall circulate the Balance sheet, Profit and Loss Account, and Directors report to each shareholder. Clause 36 of the Listing Agreement provides that the Company shall keep the Exchange informed about strike, lockout and closure of accounts. Clause 41 of the Listing Agreement provides that the Company shall submit the quarterly and financial reports within 45 days from the end of each quarter.[footnoteRef:19] [18: http://www.sebi.gov.in/cms/sebi_data/pdffiles/21168_t.pdf] [19: ibid]

SEBI appointed the Committee on Corporate Governance under the Chairmanship of Kumar Mangalam Birla, to enhance the corporate governance standards in India. The objectives of establishing the Committee were to propose amendments to the Listing agreement, to draft a code containing the corporate governance international best practices and suggest safeguards against the insider trading practices. The Committee recognized that the major aspects of Corporate Governance include Transparency, Accountability and Equal Treatment of all stakeholders. The disclosure requirements under Clause 49 of the Listing Agreement include mandatory and non mandatory requirements. The mandatory and non mandatory disclosure requirements facilitate transparency in conduct of affairs of the management. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 The SEBI (ICDR) Regulations, 2009 provide that the issuer cannot make a public issue or rights issue unless a draft offer document with the requisite fee is submitted to the SEBI through a lead merchant banker, thirty day prior to registration of the prospectus. The Regulations also provide that the copies of the offer documents shall be at the disposal of the public. The offer documents shall contain all material disclosures that are true and adequate and enable the potential investors to make an informed decision. The Company shall make a pre-issue advertisement for public issue in one English daily, one Hindi national daily and one regional language newspaper. The issuer shall make advertisements in relation to the issue opening and closing for public issue. The lead merchant banker is responsible for submitting post issue reports to the SEBI. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011The SEBI recently came out with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011[footnoteRef:20], also known as the Takeover Code. Shareholders acquiring shares in the company are required to publicise their acquisitions so that their shareholding becomes transparent to the public[footnoteRef:21]. The Takeover Code requires persons crossing certain shareholding threshold limits to make a mandatory public offer to also acquire the shares from all public shareholders of the company on similar terms and conditions. Any acquirer crossing 25% shares (with voting rights) in the company must make a public offer; and any acquirer holding between 25% and the maximum permissible nonpublic shareholding in the company must make a public offer if it acquires more than 5% shares (with voting rights) in any financial year. Apart from mandatory offers, an acquirer may also make a voluntary or unsolicited offer to other shareholders through the procedure under the Takeover Code. [20: http://www.takeovercode.com/uploads/regulations/New%20Takeovercode_23092011.pdf] [21: Regulations 28-31 of the SEBI Takeover Code]

SEBI (Prohibition of Insider Trading Regulations) 1992The SEBI (Prohibition of Insider Trading Regulations), 1992 were amended in the year 2002. The Insider trading regulations facilitate the maintenance of transparency within the company; which is the basis of corporate governance.[footnoteRef:22] These Regulations provide for disclosure interest or holdings by the directors and officers and substantial shareholders in listing companies. These regulations also provide for disclosures on a continual basis and also emphasize on the disclosure by the company to the stock exchange. [22: http://www.sebi.gov.in/acts/insideregu.pdf]

The Companies Act, 2013The new Companies Bill has received President's assent that will make it into a law replacing the nearly six-decade old regulations that govern corporates in the country.[footnoteRef:23] The Companies Act, 2013 provides a framework of corporate governance in India. Under the Companies Act, 1956 there was no specific provision in relation to independent directors. Clause 49 of the listing agreement was considered as the basis of legal provision with respect to appointment of independent director in a Company. However, the Companies Act, 2013 deals extensively with the aspect of independent directors. Independent director is defined under Section 2(47) of the Companies Act, 2013. The Companies Act, 2013 makes a provision that every company to mandatorily appoint one-third of the total strength of the directors as independent directors.[footnoteRef:24] The qualities of an independent director are also laid down under the Act and such qualities include being a person of integrity, such person shall not be related to the promoters or directors of the Company, the independent director should not have any pecuniary interest in the Company, he should not have held the position of a key managerial in the company and many such qualities are enumerated under the Companies Act, 2013. The Act also lays down the manner of selection of independent directors in the Company. The Companies Act, 2013 specifically provides that the Board of Director's Report shall consist of separate section titled Corporate Governance, which shall be attached to the financial statement and include various aspects such elements of remuneration package such as salary, benefits, bonuses etc shall be disclosed. Details of performance linked incentives, stock option details and service contracts etc shall be included in this section. This is the first time that company legislation has included the aspect of Corporate Governance explicitly. The Companies Act, 2013 provides that related party transactions shall be approved by the Board of Directors and the Director's report shall contain justifications regarding the related party transactions. The shareholders are now empowered under the Companies Act, 2013 because various proposals that impact the shareholders such as issue of securities, granting if loans, taking over another company shall be approved by the shareholders. A special resolution needs to be passed in order to approve a loan to a director or associated parties. The Remuneration Committee shall be responsible for overseeing the remuneration policy of the company and the remuneration shall be disclosed to the shareholders. Under Section 177 of the Companies Act, 2013 the Company shall set up an audit committee to recommend the appointment of the auditor, review the independence of the auditors and examine the financial statements and reports of the auditors, review the inter corporate loans etc. Hence, it may be concluded that the Companies Act, 2013 has taken a great leap towards setting up a corporate governance framework in India.[footnoteRef:25] [23: http://www.indianexpress.com/news/companies-bill-2013-receives-presidents-assent/1162742/] [24: Section 149 of the Companies Act, 2013] [25: http://articles.economictimes.indiatimes.com/2013-02-01/news/36684552_1_independent-directors-corporate-governance-shareholders]

Chapter IIIROLE OF CORPORATE GOVERNANCE IN PROTECTION OF INVESTORSTHE interrelation between corporate governance and investor protectionA strong investor protection is associated with effective corporate governance. According to Fernando AC when an investor invests his hard earned money in the securities of a corporate entity, he has certain expectations of it performance of the organization and the corporate benefits that would accrue to him and the prospects of capital growth of securities he holds in the organization.[footnoteRef:26] Recent research has reflected that an essential feature of good corporate governance is strong investor protection.[footnoteRef:27] According to Rafael La Porta, corporate governance may be referred as a set of mechanisms through which the shareholders protect themselves against expropriation by insiders[footnoteRef:28]. Hence, the Management of an organization is entrusted with the duty of protecting the investors. There is a probability of a mismatch between the objectives of the shareholders and investors. However, the shareholders may use the mechanism of corporate governance to ensure that their interests are protected and the management of the organization does not indulge in abuse of their power. Corporate Governance can thus be termed as an instrument in the hands of the shareholders of a company to ensure checks and balances. [26: 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] [27: ibid] [28: 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]

Investor confidence can be achieved only in the basis of the standards of transparency and fairness maintained by the company and the organizations willingness to implement effective corporate governance mechanisms[footnoteRef:29]. The core substance of corporate governance lies in designing and putting in place the mechanism such as Disclosure, Monitoring, Oversight and Corrective action. Investor Protection is crucial because the expropriation of minority shareholders and creditors may take place at the hands of controlling shareholders. The phenomenon of insider trading poses greater threats to the interests of the shareholders[footnoteRef:30]. [29: 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] [30: ibid]

The investors confidence shall be rebuilt based on better transparency in the organization, market integrity and market efficiency, and undertaking measures to enhance investor protection.[footnoteRef:31] Corporate Governance mechanism depends on the general legal, contractual and enforcement processes in any jurisdiction and investor protection is directly affected by the quality of enforcement environment.[footnoteRef:32] The Committee opined that a separate legislation was not essential for the protection of investors and it was necessary to ensure safeguarding the interests of the investors through proper articulation of corporate governance in such a manner that transparency and accountability is ensured.[footnoteRef:33] [31: Recommendations on Capital Markets Governance & Investor Protection, available at http://www.icsi.edu/WebModules/LinksOfWeeks/CAPITAL%20MARKETS%20WEEK%20SUGGESTIONS.pdf] [32: Kshama Kaushik and Rewa Kamboj, Study on the State of Corporate Governnace in India-Gatekeepers of Coprorate Governance, http://www.iica.in/images/Prologue_Gatekeepers.pdf] [33: Investor Education and Protection, Report of the Expert Committee on Company Law, 2005, available at http://www.mca.gov.in/Ministry/chapter7.html]

It is also pertinent to examine the extent of relevance the Birla Committee Recommendations placed on the importance of corporate governance and investor protection in India. The Committee in its report observed that the strong Corporate Governance is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. 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.[footnoteRef:34] [34: 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]

It may thus be inferred that the aspect of protection of investors in terms of corporate governance is indispensible. Hence, investor protection is essentially the reflection of strong corporate governance practices in an organization. Shareholders rights under the company lawThe Companies Act, 1956 had granted various rights to the shareholders. The following rights are available to the shareholders:(1) Right to receive copies of the following documents from the company:(a) Abridged balance sheet and profit and loss account in the case of listed company and balance sheet and profit and loss account of the company otherwise.[footnoteRef:35] [35: Section 219 of the Companies Act, 1956]

(b) Report of the Cost Auditor, if so directed by the Government. (c) Contract for the appointment of managing director or manager.[footnoteRef:36] [36: Section 302 of the Companies Act, 1956]

(d) Notices of the general meetings of the Company[footnoteRef:37] [37: Sections 171 to 175 of the Companies Act]

(2) Right to inspect statutory registers/returns and get copies thereof on the payment of prescribed fee. The members have been given the right to inspect documents such as Debenture Trust Deed, Register of charges, shareholder Minutes Book etc. (3) The members have a right to attend the meetings of the shareholders and exercise voting rights of these meetings either personally or through proxy. (4) Apart from the aforementioned rights, the shareholders have the right to: Receive share certificates as title of their holdings. To transfer shares To resist and safeguard against increase in his liability without the written consent To have rights shares etcAnnual General Meeting In terms of Section 166, every company shall in each and every year hold in addition to any other meetings a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it, and not more than fifteen months shall elapse between the date of one annual general meeting and that of the next. The shareholders have the right to participate in the annual general meeting and cast their vote. Power and duty to acquire shares and shareholders dissenting from the scheme or contract approved by majority Where a scheme or contract involving the transfer of shares or its class, in a company has, within four months from after the making of the offer in that behalf by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved, the transferee company may, at any time within two months after the expiry of the said four months, give notice to any dissenting shareholder that it desires to acquire his shares; and when such a notice is given, the transferee company shall, unless on an application made by the dissenting shareholder within one month from the date on which the notice was given, unless the Company Law Boardthinks fit to order otherwise, be entitled and bound to acquire those shares. Application to Company Law Board for relief in case of oppression Any member of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members may apply to the Company Law Board for an order[footnoteRef:38]. Lack of probity and fair dealing on the part of the Company which causes prejudice to the members or which may be against public interest may amount to oppression[footnoteRef:39]. [38: Section 397 of the Companies Act, 1956] [39: Scottish Co-operative Whole Sale Society Ltd. v. Meyer(1958) 3 All ER 66 (HL)]

If the Company Law Board is of the opinion that the companys affairs are conducted in a manner prejudicial to public interest and or in any manner oppressive to any member or members; and that to wind up the company would unfairly prejudice such member or members but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up; Company Law Board may, with a view to bring to an end the matters complained of, make such orders as it thinks fit. Application to the Company Law Board for relief in cases of mismanagementAny member of a company who complains that the affairs of the company are being conducted in a manner prejudicial to the public interest of the company; or that a material change has taken place in the company, whether by alteration in its Board of Directors or managers or in the ownership of the companys shares, and that by reason of such a change it is likely that the affairs of the Company will be conducted in a manner prejudicial to the public interest or prejudicial to the interest of the company. Courts have also ruled that erosion of a companys substratum[footnoteRef:40], abuse of fiduciary duties[footnoteRef:41], and misuse of funds[footnoteRef:42] are all instances of mismanagement that come within the ambit of 398.In case the Company Law Board is satisfies about the existence of such circumstances, it may make an order as deem fit. [40: Asiatic Ltd. Re (1994) 3 Comp LJ 294 (CLB] [41: Hemant D. Vakil v. RDI Print and Publishing P. Ltd. (1995) 84 Com Cases 838] [42: Narain Das (K.) v. Bristol Grill (P.) Ltd. (1997) 90 Com Cases 79]

Winding upShareholders have the right to pass a resolution, resolving that the company would be wound up by the Tribunal. According to Section 484 of the Companies Act, 1956 the circumstances in which the company may be wound up voluntarily are as follows: When the period, if any fixed for the duration of the company by the articles of association has expired, or in the event, if any, has occurred, on the occurrence of which the articles provide that the company is to be dissolved, and the shareholders in general meeting pass a general resolution requiring the company to be wound up voluntarily. If the shareholder passes a special resolution that the company be wound up voluntarily.

INVESTOR PROTECTION AND CORPORATE GOVERNANCE VOLUTARY GUIDELINES, 2009: the corporategovernance framework for unlisted companiesThe Corporate Governance framework in India has been derived from its Anglo-American counterpart. However, in Anglo-American regime, the focus is disciplining the management, while in India; the focus of the corporate governance framework is protection of minority shareholders.[footnoteRef:43] [43: Corporate Governance Voluntary Guidelines: A New Beginning, February 3, 2011 available at http://www.business-standard.com/article/companies/corporate-governance-voluntary-guidelines-a-new-beginning-111020300106_1.html]

Good corporate governance practices are a sine qua non for sustainable business that aims at generating long term value to all its shareholders and other stakeholders.[footnoteRef:44] Sound and efficient corporate governance practices are the basis for stimulating the performance of companies, maximizing their operational efficiency, achieving sustained productivity as well as ensuring protection of shareholders interests.[footnoteRef:45] Good Corporate Governance practices enhance companies value and stakeholders trust resulting into robust development of capital market, the economy and also help in the evolution of a vibrant and constructive shareholders activism.[footnoteRef:46] The Corporate Governance Voluntary Guidelines 2009 apply to Companies in India and may also be interpreted as being applicable to unlisted companies. [44: Salman Khurshid, Foreword to Corporate Governance Voluntary Guidelines, available at http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf] [45: R. Bandyopadhyay, Preface to Corporate Governance Volunatry Guidelines, available at ibid] [46: Preamble of the Corporate Governance Voluntary Guidelines, 2009 available at http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf]

As per the Corporate Governance Voluntary Guidelines, the Companies shall disclose the reasons for not adopting the Corporate Governance Voluntary Guidelines, 2009 either wholly or partially.The Companies should issue formal letters of appointment to Non Executive Directors specifying the term of appointment and expectations of the Board from the Non Executive Director, the fiduciary duty, remuneration including sitting fee etc. Such formal letter of appointment shall be disclosed to the shareholders at the time of ratification of his/her appointment or reappointment. The Board of Directors shall formulate a policy reflecting the attributes expected of an independent director. Such attributes may include integrity, experience, expertise, foresight, managerial qualities and ability to read and understand financial statement etc. Such a policy shall be mandatorily approved by the shareholders. The policy so formulated shall be disclosed in the Board's Report and shall be circulated to the shareholders. The remuneration based on performance form significant portion of the total remuneration package to the directors and the same shall be decided in alignment with the shareholder's interests. The elements of remuneration payable to the Non Executive Directors may include Fixed Component, Variable Component and Additional Variable payments. The structure of compensation payable to the Non Executive directors shall be disclosed to the shareholders in the Annual Report.The Remuneration Committee has the duty to determine the principles, criteria and the basis of remuneration policy of the company. The remuneration policy of the company shall be disclosed to the shareholders and their suggestions shall be considered. In case there is any deviation from the remuneration policy, the same shall be adequately disclosed. The Remuneration Committee shall adequately disclose its role, authority delegated by the Board and terms of reference for the perusal of the shareholders. So as to protect the investors investment and companys assets, the Board shall conduct a review of the company's system and internal controls. The Board shall also intimate the shareholders about the conduct of such review. The review shall peruse all material controls and scrutinize the financial, operational and compliance controls and risk management systemsWhenever the Company conducts a Board meeting, the agenda of the Board meeting should be accompanied by an Impact Analysis on Minority Shareholders whereby it shall be proactively state the impact that the agenda of the Board meeting may have on the interests of the minority shareholders. The Independent directors shall also discuss the impact of the agenda of the Board meeting on the minority shareholders. The Company shall also conduct a secretarial audit in order to facilitate examination of the transparency, ethical and responsible governance of the company. The Board shall come out with a report and give its comments on the Secretarial audit, which shall be disclosed to the shareholders. The Corporate Governance-Voluntary Guidelines 2009 provides for partial participatory approach to address the contemporary corporate governance issues in India.[footnoteRef:47] The Guidelines provide a set of good governance practices, which would facilitate the companies to enhance their internal governance processes and may be voluntarily adopted by the Indian Public Companies.[footnoteRef:48] [47: ibid] [48: Consultative Paper on Review of Corporate Governance Norms in India, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf]

It is however, evident that the Corporate Governance Voluntary Guidelines are not mandatory to be adopted by the Companies, thus hindering the efficiency of the guidelines in the very first place. Moreover, a scrutiny of the Voluntary Guidelines places emphasis on the aspect of disclosure to the shareholders so as to ensure their protection. INVESTOR PROTECTION UNDER CLAUSE 49 OF THE LISTING AGREEMENTThe Emergence of Code of Best Corporate Governance practices all over the country were considered and in 1999 SEBI constituted a Committee on Corporate Governance under the chairmanship of Shri Kumar Mangalam Birla, with the aim of raising the standards of Corporate Governance in India with regard to the listed companies. SEBI's Board, held a meeting on February, 2000 for considering the recommendations of the Kumar Mangalam Birla Committee and incorporating them by inserting Clause 49 of the Listing Agreement. Subsequent to the Enron, WorldCom and other governance catastrophes, the SEBI realized the need to enhance the level of corporate governance standards in India and thus constituted another committee for reviewing the corporate governance in India chaired by Narayan Murthy. Clause 49 of the Listing Agreement was revised after considering the recommendations of Narayana Murthy Committee.[footnoteRef:49] [49: Consultative Paper on Review of Corporate Governance Norms in India, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf]

The objectives of the Listing agreement are to provide liquidity to securities, mobilize savings for economic development and protect the investors by ensuring disclosures by the organization.As per Clause 49 of Listing Agreement the following disclosures shall be made to the shareholders: Significant Related Party Transactions that may be in potential conflict with the interests of the company at large and the basis of the related party transaction shall be disclosed[footnoteRef:50]. [50: Clause 49IV(A)) of Listing Agreement]

Details of non-compliance by the company; penalties imposed by the SEBI or any statutory authority with respect to capital market matters. Whistle Blower Policy and an affirmation that no person has been denied access to the audit committee of the company. Details of compliance with mandatory requirements under Clause 49 of the Listing Agreement and implementation of the non-mandatory requirements.[footnoteRef:51] [51: ibid]

The disclosures that are to be made shall be discussed in detail. Disclosure regarding compensation to Non Executive DirectorThe fees or compensation payable to the Non-Executive Directors including the independent directors shall be determined after the previous approval of the shareholders in general meeting. The resolution of the shareholders should ascertain the maximum number of stock options that the Company can grant to the Non-Executive Director. The Chairman of the Audit committee shall be present in all the General Meetings to address the issues of shareholders.[footnoteRef:52] The pecuniary relationship of the independent director with the company shall be shall be disclosed in the Annual report of the Company.[footnoteRef:53] The disclosure of the remuneration should include all the elements of the remuneration should include all elements such as payment of fixed component and performance linked incentives, bonuses, benefits etc. [52: http://www.nseindia.com/getting_listed/content/clause_49.pdf] [53: Clause 49-IV(E) of the Listing Agreement]

Disclosure of Basis of Related Party TransactionsTransactions with the related party in the ordinary course of business shall be disclosed to the Audit Committee for reviews[footnoteRef:54]. The details of the transactions with the related parties which are not in the ordinary course of business shall also be disclosed to the audit committee for review. The Audit Committee has the discretion to decide the frequency of disclosure of the information relating to the related party transactions. Also, the Board shall be disclosed about the personal interest of any members of senior management in any particular transaction.[footnoteRef:55]There shall also be a disclosure to the Board regarding the relationships between the Board in the annual report of the Company, prospectus etc[footnoteRef:56] [54: Clause 49 IV (A) of Listing Agreement] [55: Clause 49 IV (F)(ii) of the Listing Agreement] [56: Clause 49 IV (G) (ia) of the Listing Agreement]

Disclosure of Accounting Treatment In case an accounting treatment followed for preparation of financial statements is distinct from the prescribed accounting standards, the same shall be duly disclosed and it shall contain an explanation of the directors for following a different accounting standard.[footnoteRef:57] [57: Clause 49 IV (B) of the Listing Agreement ]

Certification of the CEO/CFOThe CEO, i.e the Managing Director of the Company shall be under an obligation to certify to the Board that they have undertaken a review of the financial statements of the company and the financial statements do not contain any materially untrue statement and depict a fair view of the company. They shall also mention that the transactions undertaken by the company are not fraudulent or illegal. Circulation of Directors ReportA Directors report shall be circulated amongst the shareholders and it shall also comprise of a Management Discussion and Analysis report encompassing various aspects such as industry structure and developments, risks and concerns, opportunities and threat, performance in terms of segment and products, internal control system and its adequacy, discussion of financial performance etc. In case a new director is appointed or a director is reappointed, the shareholders shall be given information with regard to resume of the director, nature of his expertise, shareholding of non-executive director, names of the company in which he holds directorship.[footnoteRef:58] The Report on Corporate Governance shall also include details of the Shareholder Grievance Committee such as name of the non-executive director, name and designation of the compliance officer, number of shareholder complaints received, number of shareholder complaints that are pending and those complaints which have not been resolved to the satisfaction of shareholders.[footnoteRef:59] [58: ibid] [59: http://www.nseindia.com/getting_listed/content/clause_49.pdf]

Disclosure to Shareholders The disclosures to shareholders shall include the information relating to the appointment of the directors or reappointment of the director in terms a brief resume of the Director, nature of the directors experience, names of the companies in which he held directorship and the extent of shareholding of the director.[footnoteRef:60] [60: Clause 49 IV (G)(i) of the Listing Agreement]

Disclosure of proceeds from public issue, rights issue and preferential issueWhen the company raises funds through the public issue, rights issue and preferential issue; the particulars of application of these funds shall be disclosed to the audit committee for its review on a quarterly basis. A statement of the utilization of funds shall be disclosed in the offer document or the prospectus and such a statement shall receive the approval of the auditor.[footnoteRef:61] [61: Clause 49 IV (D) of Listing Agreement]

Compliance with the Corporate Governance Norms in IndiaThe Companies shall obtain a certificate regarding the compliances and the state of corporate governance in the Company. The certificate shall be obtained from an auditor or a practicing company secretary. The certificate shall be annexed with the directors report and circulated amongst the shareholders annually.[footnoteRef:62] [62: N K Jain, New Corporate Governance Norms: An Analysis of Revised Clause 49 of The Listing Agreement, available at: http://www.icsi.edu/docs/webmodules/Programmes/31NC/NEWCORPORATEGOVERNANCENORMS-NKJAIN.doc.]

The Shareholders should also be intimated the General Shareholder information such as the date, time and venue of the Annual General Meeting, financial year, date of book closure, market price data, listing of stock exchanges etc. A non-mandatory requirement of the Listing agreement is that a remuneration committee shall be set up to determine the company's policy of remuneration packages for executive directors. As per this non-mandatory requirement, the shareholders shall approve the said remuneration policy. Another non-mandatory requirement under Clause 49 of the Listing Agreement is that a half-yearly declaration of financial performance including an overview of the significant events in the past six months shall be sent to each shareholder.[footnoteRef:63] [63: Bhanumurthy, I. and Sawant Dessai, Dr. Sanjay, Corporate Governance in India Clause 49 of Listing Agreement (August 17, 2010). Available at SSRN: http://ssrn.com/abstract=1660285 or http://dx.doi.org/10.2139/ssrn.1660285]

Setting up of the Shareholder Grievance CommitteeClause 49 of the Listing Agreement provides for constitution of a board committee under the chairmanship of a non-executive director. The Committee shall be entrusted with the duty of redressing the shareholder grievances. The Committee would be required to look into complaints such as transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee shall be designated as the Shareholders/Investor Grievance Committee. The provision for setting up of Shareholder Grievance Committee is the most significant feature of Clause 49 of the Listing Agreement in direction of protection of the investors.Apart from Clause 49 of the Listing Agreement, the Listing Agreement provides for other vital disclosures that shall be made in order to protect the interests of the minority shareholders. These disclosures include disclosure of shareholding pattern, maintenance of minimum public shareholding, disclosure and publication of periodical results. Disclosure of price sensitive information; and open offer requirements under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011Protection of minority shareholders rightsThe corporate are characterized by the separation of ownership and control and this gives rise to the conflict of interest between the managers and the shareholders. In such context, it is important that the corporate governance mechanism shall lead to maximization of the shareholder's wealth by monitoring the management. However, in the Indian context, the issue of protection of the interests of the minority shareholders is also significant because the minority shareholders are prone to be expropriated by the majority shareholders. The law in India with regard to protection of the minority shareholders is inadequate as its effectiveness and enforcement is an issue. The corporate governance regulatory framework does not adequately address the issue of protection of interests of minority shareholders. The efficacy of corporate governance depends on how the shareholders in an organization are protected. According to an estimate shareholder and investors have lost not less than $2.8billion in the Satyam fiasco[footnoteRef:64]. In India, the conflict arises between the controlling shareholders and minority shareholders.[footnoteRef:65] [64: Varottil, Umakant., A Cautionary Tale of the Transplant Effect on Indian Corporate Governance, National Law School of India Review, Vol. 21, No. 1, 2010 available at papers.ssrn.com/sol3/papers.cfm?abstract_id=1331581] [65: Kumar Naveen and Singh JP, Corporate Governance in India: Case for Safeguarding Minority Shareholders Rights, International Journal of Management & Business Studies Vol. 2, Issue, June 2012, available at http://www.ijmbs.com/22/naveen.pdf]

In India, the minority shareholders may be expropriated by the dominant shareholders by diverting the resources of the firm through self-dealing transactions. The Satyam case is a typical example of the fact that the firms resources were attempted to be expropriated for the private benefits of the promoters. SEBI cancelled the IPOs of various firms for specifying misleading and untrue material in the offer document.[footnoteRef:66] Following is an account of various provisions of the Companies Act, 1956 which may not address the needs of the minority shareholders. [66: SEBIs Tough Stand Against IPO Cheats Sends Out Right Signals, Economic Times (2012), January 2, Available: http://articles.economictimes.indiatimes.com/2012-01-02/news/30587433_1_ipo-market-ipoprocess-merchant-bankers]

Issue of Equitable Treatment of the ShareholdersMinority shareholders have been proffered protection under Section 397 and 398 of the Companies Act, 1956. However the minority shareholders can approach the Company Law Board only if 100 shareholders or atleast holders of 10% of the shareholding of the Company are aggrieved and seek redressal. They may file an appeal to the High Court in case they are aggrieved by the decision of the Company Law Board. The protection of the minority shareholders is however not efficacious and adequate.[footnoteRef:67] The provisions of the Companies Act, 1956 come to the aid of the minority shareholders only in the event on extreme mismanagement or winding up.[footnoteRef:68] The redressal mechanism in India is also very time taking; this furthers hinders the protection of the minority shareholders. Clause 49 of the Listing Agreement provides for the Shareholder Grievance Committee. However, the efficacy of the Shareholder Grievance Committee may not be treated as efficacious enough because it may be hindered by the allegiance of the independent director. SEBI also is not prompt to take actions against companies which do not provide for effective grievance redressal.[footnoteRef:69] [67: Varottil, Umakant.,A Cautionary Tale of the Transplant Effect on Indian Corporate Governance, National Law School of India Review, Vol. 21, No. 1, 2010, referred in Kumar Naveen and Singh JP, Corporate Governance in India: Case for Safeguarding Minority Shareholders Rights, International Journal of Management & Business Studies Vol. 2, Issue, June 2012, available at http://www.ijmbs.com/22/naveen.pdf] [68: Varma, J.R.,Corporate Governance in India: Disciplining the Dominant Shareholder, IIMB Management Review, Vol. 9, No. 4, 1997 referred in Kumar Naveen and Singh JP, Corporate Governance in India: Case for Safeguarding Minority Shareholders Rights, International Journal of Management & Business Studies Vol. 2, Issue, June 2012, available at http://www.ijmbs.com/22/naveen.pdf] [69: World Bank, Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment: India, World Bank-IMF, Washington, DC, USA, 2004.]

Insider Trading and Self Abusive DealingsThe SEBI (Prohibition of Insider Trading) Regulations, 2002 deal with the aspect of insider trading in India. Clause 49 of the Listing Agreement provides that disclosures shall be made by the Board regarding all the material information in relation to related party transactions. Also, the directors are under an obligation to disclose their shareholdings in case it exceeds the threshold limit. In cases of takeovers, the dominant shareholders are involved in the practice of insider trading.[footnoteRef:70] [70: Supra, footnote number 44 ]

Disclosure of information relating to related party transactionsSection 297, 299 and 300 of the Companies Act, 1956 deals with the aspect of related party transaction, although these provisions have no teeth in terms of the protection of investors. Clause 49 of the Listing Agreement provides that the Audit Committee shall review the related party transactions. However, the Satyam-Maytas failed deal reflects that the related party transactions are still prevalent.[footnoteRef:71] [71: Sharma, J.P, Corporate Governance, Business Ethics and Corporate Social Responsibility, Ane Books, New Delhi, India, 2011]

An assessment of the Companies Act, 1956 provides that the minority shareholder protection is not adequate enough. However, the Corporate Governance mechanism attempts to fill the gap and safeguard the interests of the minority shareholders. ROLE OF INSTITUTIONAL INVESTORS IN CORPORATE GOVERNNACEThe institutional oversight by the institutional investors is necessary because the product, labor and corporate control market constraints shall be imposed on the management discretion.[footnoteRef:72] [72: Bernard S. Black, Shareholder Passivity Reexamined, 89 Mich. L. Rev. 520, 575-91 (1990) referred in lawreview.law.ucdavis.edu/issues/41/2/.../DavisVol41No2_Velasco.pdf ]

The Kumar Mangalam Birla Committee observed that the institutional investors have acquired a large stake in equity share capital of listed companies. In some of the listed companies they form the major shareholders and own shares on behalf of the retail investors. They have a significant responsibility as the retail investors expect the institutional investors to make positive use of their voting rights. As per the Committee recommendations, the institutional investors shall be at an arms length distance with the management of the Company[footnoteRef:73]. [73: Report of the Kumar Mangalam Birla Committee on Corporate Governance, http://www.sebi.gov.in/commreport/corpgov.html]

The institutional investors have a major influence on the management of the corporation as they are entitled to exercise their voting rights. The institutional investors can hugely impact the manner in which the company may function[footnoteRef:74]. The committee therefore recommended that the institutional investors shall play the following role in corporate governance: [74: ibid]

Take active interest in the aspect of composition of the Board of Directors, Act vigilantly Maintain contact at senior level for exchange of views on management, strategy performance and quality of management Ensure that the voting rights are exercised Evaluate Corporate Governance performance of the company The institutional investors should enter into a dialogue with the companies based on mutual understanding of objectives. In course of evaluating the corporate governance performance of the company, the institutional investors shall give due weightage to the aspects such as composition of Board Structures and other such aspects. The institutional investors are expected to make considerable use of their voting rights. The ICSI Recommendation 22 is that it should be made mandatory for the equity based mutual funds to make disclosure with respect to the corporate governance and voting policies and such disclosures shall be made in the websites of the mutual funds. They shall also disclose the procedure in deciding the voting rights. The records of their voting shall also be disclosed in the websites.[footnoteRef:75] The ICSI recommendation 24 is that a directive shall be issued to clarify the nature of the information that is can be exchanged at meetings between the institutional investors and companies in compliance with the Insider Trading Regulations of 1992 and its amendment in 2002. The directives shall specify that it does not condone the selective disclosure of information by companies to institutions and clearly set the principles of equality of treatment of all shareholders by corporations[footnoteRef:76]. [75: ICSI Recommendations to Strengthen Corporate Governance Framework, http://www.icsi.edu/docs/webmodules/LinksOfWeeks/Recommendations%20Book-MCA.pdf] [76: ibid]

Thus, the role of institutional investors has been recognized by the Kumar Mangalam Birla Committee India. The institutional investors role in terms of shareholder activism has also gained prominence. The institutional investors form a mechanism to oversee the corporate governance norms in India.INVESTOR PROTECTION UNDER THE COMPANIES ACT, 2013The Companies Act, 2013 provides for enhanced corporate governance norms, improved disclosures and transparency, facilitates responsible entrepreneurship, increases the accountability of a company management and auditors, protection of investors, provides for better shareholder democracy, Corporate Social Responsibility and stringent enforcement processes.[footnoteRef:77] The Companies Act, 2013 provides for a mechanism of protection of the investors. Following is an account of the important provisions which aim at protection of investors. [77: ICSI welcomes passage of Companies Bill, 2012 by Parliament, Aug 9, http://www.aninews.in/newsdetail3/story124934/icsi-welcomes-passage-of-companies-bill-2012-by-parliament.html]

According to Section 24 of the Companies Act, 2013 the SEBI is empowered to make regulations with regard to issue and transfer of securities and non-payment of dividend by listed company. Section 36 of the Companies Act, 2013 provides that the act of fraudulently inducing a person to make investment is punishable with imprisonment for a term which may extend to ten years and with fine which shall not be less than three times the amount involved in fraud.Section 37 of the Companies Act, 2013 provides that a suit may be filed by a person who was fraudulently induced to make investment in a corporate entity on account of the misleading statement in a prospectus or inclusion or omission of any material fact. The Companies Act also provides for class action suit. Such a provision has been included for the very first time. As per this provision, a specified number of members or depositors or any class of them may file an application before the Tribunal on behalf of the members or depositors on the basis that the management or control of the affairs of the company are prejudicial to the interests of the company or its members. In case the investors were defrauded on account of improper or misleading particulars of the company in the audit report, the liability would vest on the audit firm and class action suit can be brought against the audit firm. The Companies Act, 2013 defines fraud under Section 447 and provides that any person engaged in fraud shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. Where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.[footnoteRef:78] [78: Highlights of the Companies Bill (as passed by the Lok Sabha on 18.12.12 and by the Rajya Sabha on 08.08.13), available at http://www.icsi.edu/WebModules/Linksofweeks/Cos%20bill%20highlights.pdf]

Section 211 of the Companies Act provides for Serious Fraud Investigation Office (SFIO) and stipulates that the SFIOs report shall be treated as a report filed by a police officer and the SFIO has the power to arrest a person who is guilty of the offence of fraud as defined in the Companies Act, 2013. Section 195 of the Companies Act, 2013 deals with the prohibition of insider trading and Section 194 of the Companies Act, 2013 stipulates that the Directors and key managerial personnel of a company are prohibited from forward dealings in securities of the company.[footnoteRef:79] [79: ibid]

Further, the Companies Act, 2013 also provides for protection of whistle blowers who may bring the activities of the companies to the fore and ensuring that the whistle blowers are not victimized. In certain exceptional circumstances the whistle blower may be permitted to directly contact the Chairperson or Audit Committee. The promoters have an obligation to provide the dissenting shareholders with an exit opportunity in the event the Company proposes to change the terms of contract or objects of the prospectus. The Companies Act, 2013 provides for a mechanism wherein the shares of minority shareholders may be purchased in the event of acquisition of the Company in which the shares are held.[footnoteRef:80] Section 236 of the Companies Act, 2013 provides an option to the acquirers or the persons acting in concert holding 90% or more of the issued equity share capital to notify the company of their intention to squeeze out the remaining equity shareholders. It thus obligates the majority shareholders to notify their intention to purchase the shares of the company thereby preserving the right of the minority shareholders. The Companies Act, 2013 substantially empowers the investors and protects their interests.[footnoteRef:81] [80: Investor protection will get a big boost under new company law, December 19, 2012, http://www.business-standard.com/article/companies/investor-protection-will-get-a-big-boost-under-new-company-law-112121900046_1.html] [81: The Impact Areas of the new Companies Bill: A Primer, 10 August, 2013, http://www.livelaw.in/the-impact-areas-of-the-new-companies-bill-a-primer/]

A bare perusal of the aforementioned provisions of the Companies Act, 2013 reflects that investor protection has been given a specific emphasis under the new legislation. The rights of the minority shareholders have also been recognized under the Act. Hence, it may be inferred that the Companies Act, 2013 embodies various provisions which may go a long way in the protection of the investors.

CHAPTER IVANALYSIS OF CORPORATE FRAUDS AND UNFAIR PRACTICES IN INDIA: from the perspective of corporate governanceREEBOK INDIA FRAUD CASE: INDICATION OF THE NEED OF CORPORATE GOVERNANCE IN UNLISTED COMPANIESIn India, the unlisted companies are prone to corporate frauds and malpractices; further leading to exploitation of the investors. Reebok Fraud case is a glaring example of corporate fraud in India. The Reebok Fraud came to the fore in course of merger between Adidas India and Reebok India. Under Section 234 of the Companies Act, investigation was conducted by the Registrar of Companies and alleged irregularities were observed in the books of accounts of Reebok. An approximate of more that Rs 870 crores is estimated to have been involved in the scam. On account of the irregularities in the books of accounts, the Managing Director Subhinder Singh Prem and the Chief Operating Officer Vishnu Bhagat had been arrested and the matter was taken up by the Serious Fraud Investigation Officer. This corporate fraud would affect the shareholders of the Adidas India, the parent company of Reebok.[footnoteRef:82] [82: Sahil Arora and Utkarsh Soni, Investor Protection In The Aftermath of The Reebok Fraud Case: An Appraisal of the need for corporate governance in Non-Listed Companies, XI Capital Markets Conference (December 21 - 22, 2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263081]

It was alleged that the Company was indulged in over invoicing to the tune of Rs 147 Crore, it maintained four secret warehouses, to which the company's goods were diverted. It raised fake invoices to the tune of Rs 98 Crores[footnoteRef:83]. [83: An Update of Adidas India Euro 125 Million Fraud Story, 28 May, 2012, http://soniajaspal.wordpress.com/2012/05/28/an-update-of-adidas-india-euro-125-million-fraud-story/]

The authorities probing into the Reebok India Fraud case have observed that a systematic mismanagement paved way for the corporate fraud. There was mismanagement of the governance and operations of the company. The bills were not recorded correctly and were inflated; the Company falsified sales receipts, faked storage facilities, and circular trading. The guidelines laid down in the companies act were not followed properly and this also led to tax evasion[footnoteRef:84]. The SFIO played a significant role in dealing with the Reebok India Fraud case. The SFIO reported that Reebok India lacked corporate governance and has weak internal processes that facilitated the MD and COO of the Company to commit such a corporate fraud. The report confirmed that the company had falsified the accounts and inflated the sales.[footnoteRef:85] [84: Reebok 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-practises-reebok-india-gurgaon-police] [85: SFIO report finds Reebok guilty of fudging A/Cs: Sources, June 10, 2013 http://www.moneycontrol.com/news/cnbc-tv18-comments/sfio-report-finds-reebok-guiltyfudging-acs-sources_895198.html?utm_source=ref_article]

A perusal of the Reebok Fraud case reflects that there is a need for corporate governance mechanism in India so as to protect the investors.[footnoteRef:86] [86: Sahil Arora and Utkarsh Soni Investor Protection In The Aftermath of The Reebok Fraud Case: An Appraisal of the need for corporate governance in Non-Listed Companies, XI Capital Markets Conference (December 21 - 22, 2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263081]

An effective legal protection is necessary for good corporate governance.[footnoteRef:87] Various Committees were set up in India for making recommendations with regard to the corporate governance framework in India by reviewing the international best practices[footnoteRef:88], while none of these committees deal with the aspect of corporate governance for unlisted companies. Even Clause 49 of the Listing Agreement, which is the bedrock of corporate governance in India, regulates only the Listed Company. SFIO is a body that deals with corporate frauds in cases where complex investigation is involved, or when the case at hand may have international ramifications or involves public interest. However, it was felt that the SFIO does not have the necessary teeth to deal with the matters and lacks statutory recognition. With the enactment of the Companies Act, 2013 the SFIO has been embodied with the statutory recognition and the necessary powers.[footnoteRef:89] Corporate governance is based on the corporate ownership structure.[footnoteRef:90] Hence, the principles of best practices that are followed in the case of listed companies may not be applicable for unlisted companies. Also, the unlisted companies generally are sole proprietorships or private companies and may not have shareholders. [87: Shleifer, Andrei; Vishny, Robert W, A survey on Corporate Governance, 52 JOURNAL OF FINANCE 737-783 (1997) available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1997.tb04820.x/full] [88: India: An Overview of Corporate Governance of Non-Listed Companies, Corporate Governance of Non Listed Companies (OECD 2005), available at http://www.oecd.org/corporate/corporateaffairs/corporategovernanceprinciples/37190767.pdf] [89: India Seeks to Overhaul a Corporate World Rife With Fraud, http://dealbook.nytimes.com/2013/08/15/india-seeks-to-overhaul-a-corporate-world-rife-with-fraud/?_r=0] [90: Sahil Arora and Utkarsh Soni Investor Protection In The Aftermath of The Reebok Fraud Case: An Appraisal of the need for corporate governance in Non-Listed Companies, XI Capital Markets Conference (December 21 - 22, 2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263081 ]

However, corporate governance is not restricted to the aspect of protection of investors. Accountability and monitoring functions of the company is the essential tenet of corporate governance.[footnoteRef:91] The Reebok India fraud has reflected that the management of the company and the auditors may be involved in corporate scams. In light of such a revelation, it is extremely important to protect the stake holders of the unlisted company. And in cases such as the Reebok India Fraud case, the shareholders of the parent company may be affected. Hence, the legal and regulatory framework for listed companies in terms of corporate governance shall focus on the aspect of accountability and monitoring function of the Company so that corporate scams could be avoided in unlisted companies. [91: 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]

THE SATYAM FIASCO AND STATE OF CORPORATE GOVERNANCE IN INDIASatyam Computer Services Limited is a global information technology service provider. The Satyam scandal can be traced back to the announcement of the World Bank that a few employees of the Satyam has hacked the system and retrieved price sensitive information. Hence, World Bank did not renew its 5 year contract with Satyam and severed all the ties with the Company. Later, Ramalinga Raju announced that the the Company would acquire Maytas Infrastructure and Maytas Properties and an influx of $ 1.6 billion. However, on account of pressure from the shareholders, the Company had to withdraw the proposal of acquisition. The value of ADR of Satyam fell by 50% overnight. There was a pending complaint against Satyam by Upaid Sytems. The case was decided and Satyam was held responsible for an intellectual fraud and forgery and a claim $1 Billion was made against the Satyam. Ramalinga Raju then wrote a letter to the Board of Satyam and forwarded the same to the SEBI regarding the accounting fraud that was committed. he outlined that the companys balance sheet for the quarter ending on 30 September 2007 had inflated cash and bank balances of upto 50.4 billion rupees (AU $ 1.44 billion). With a quoted cash reserve of 53,610, the actual cash reserves stood at 3,210 million which is just about 5% of the declared value. The letter also stated that the financial statements consist of understated liabilities worth 12,300 million rupees and non-existent accrued income of 3,760 million rupees[footnoteRef:92]. Pricewaterhouse Coopers acted as the external auditor of the Company and they approved the balance sheets of the Company year after year. Ramalinga Raju was willing to cover up the gap between the actual accounts and the reported accounts by showcasing that an investment would be made in Maytas Infrastructure and Properties. However, the shareholders did not approve of the investment and raised a concern. [92: Shivanna, Manoj, The Satyam Fiasco - A Corporate Governance Disaster! (May 2010). Available at SSRN: http://ssrn.com/abstract=1616097 or http://dx.doi.org/10.2139/ssrn.1616097]

The failures on the front of corporate governance that paved the way for the corporate fraud of Satyam would be analyzed. The Decision regarding Acquisition of Maytas Infrastructure and Properties was not approved by the shareholders, while Ramalinga Raju held a meager 8.5% of shareholdings in the company. Maytas Infrastructure was a company in the name of the sons of Ramalinga Raju, acquisition of such a Company may be termed as a related party transaction in which the Chairman of the Company has a vested interest. However, the Board approved the decision and the Independent directors also did not raise objections to the decision. Item 16A of Form 20F which was submitted to the Securities Exchange Commission, Satyam Company admitted that noone in the Audit Committee had the qualifications of an Audit Committee Financial Expert as required by the Securities Exchange Commission. The Satyam did not compose of independent directors in the real sense. The shareholders have a right to know the credibility of the directors.[footnoteRef:93] [93: Lessons from Satyam fiasco that can help improve corporate governance in India, Jan 02 2009, http://www.livemint.com/Companies/OqLofvAsyiwHkEBlLJaoOL/Lessons-from-Satyam-fiasco-that-can-help-improve-corporate-g.html]

The independent directors of Satyam were serving as directors in the Board of Directors of eight other companies. The Board did not comprise of any person who was financially literate, that is one who could read and interpret the Financial statements of the Company. The Board of Satyam was not a well rounded Board. The Board of Directors did not have any independent Board leadership. Satyam did not have a Corporate Governance Committee, which is a deviance from international best practices of corporate governance. Ironically enough, Satyam was endowed with the with the Golden Peacock Award by the WCFG, which is the highest honor in Corporate Governance and Satyam was recognized as a Global Leader in the arena of Corporate Governance.[footnoteRef:94] [94: id]

First Global, a Mumbai Based brokerage house has estimated that the Indian shareholders have lost close to $2 billion since 2003 prior to the Satyam Scandal due to issues stemming out of Corporate Governance failures.[footnoteRef:95] [95: Shivanna, Manoj, The Satyam Fiasco - A Corporate Governance Disaster! (May 2010). Available at SSRN: http://ssrn.com/abstract=1616097 or http://dx.doi.org/10.2139/ssrn.1616097]

Insider trading as an unfair trade practice: an examination of the legal and regulatory framework and significant instances Section 12A of the Securities and Exchange Board of India, 1992 prohibits manipulative and deceptive devices, insider trading and substantial acquisition of shares. SEBI (Prohibition of Insider Trading) Regulations, 2002 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 also form a part of the legislative framework relating to Insider Trading in India.Insider trading in securities refers to dealing in securities by an insider who has the knowledge of material inside information which is not known to the general public. It may be pertinent to trace out the history and evolution of regulations relating to insider trading in India. In the year 1979, the Sachar Committee recommended that amendments shall be made to the Companies Act, 1956 in order to restrict the dealings in shares by the employees of the respective company so as to prevent insider trading. In 1986 the Patel Committee made a recommendation that the Securities Contract Act, 1956 should be amended so as to prevent unfair stock deals and prohibit insider trading[footnoteRef:96]. Abid Hussain Committee recommended that the SEBI shall formulate regulations and governing codes to prohibit insider trading. It also recommended that insider trading activities shall attract civil and criminal proceedings and penalties shall be imposed for insider trading. SEBI regulations on insider trading were introduced in 1992. These regulations were amended in 2002 and Chapter VA was inserted in the SEBI Act for stipulating the provisions regarding insider trading.[footnoteRef:97] [96: Deemed to be Insiders: Major players of Insider Trading, available at http://nmims.edu/wp-content/uploads/2012/p3/MPSTME/Insider%20%20Trading-Abhay%20Kumar.pdf] [97: ibid]

Regulation 2(e) of the SEBI (Prohibition of Insider Trading) Regulations, 2002[footnoteRef:98] defines an insider as a person who is connected with the company and may have access to unpublished price sensitive information or could receive the information from any person in the company. Regulation 2(h)(a) of The Regulations define price sensitive information as any information that is directly or indirectly connected with the company and has the potential of materially affecting the prices of the securities of the company in case such information is published. Regulation 3 of SEBI (Prohibition of Insider Trading) Regulations, 2002 prohibits an insider from dealing in the securities of a company when he is in possession of price sensitive information and he shall also not communicate such information to anyone either directly or indirectly. Regulation 4 of SEBI (Prohibition of Insider Trading) Regulations, 2002 stipulates that any person who deals in securities while in possession of unpublished price sensitive information shall be held guilty of insider trading. Regulation 4A of the aforesaid Regulations provides that the Board can make inquiries and conduct inspection in case it has formed a prima facie opinion that the regulations have been violated. Regulation 5 of SEBI (Prohibition of Insider Trading) Regulations, 2002[footnoteRef:99] provides for the power of SEBI to conduct an investigation with regard to breach of the insider trading regulations. The model code of conduct for prohibition of insider trading purports that a compliance officer shall be appointed by the company. Also, there shall be a pre-clearance of trade by the officer of designated employees. SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003[footnoteRef:100] is another set of regulations which prohibit unfair and fraudulent trade practices in the capital markets. According to Regulation 3 of the a prohibition of dealing directly or indirectly in dealing with securities in a fraudulent manner, no manipulative or deceptive devices shall be employed to contravene the SEBI Act or rules and regulations or employ any device to defraud the investors. Regulation 4 provides for prohibition of manipulative, fraudulent and unfair trade practices. The regulations also define fraud as any act, expression, omission or concealmentcommittedwhether in a deceitful manner or not by a person or by any