Analysis of the Rights of Minority Shareholders in India
The literal reading of the term minority shareholders points us to the fact that they are shareholders possessing the minimum shares in the company.[1] Such has to be ascertained as no definition is provided for the same under the Companies Act, 2013[2] (hereinafter referred to as ‘the 2013 Act’). Minority shareholders therefore is not a legislative term.[3] The term ‘small shareholders’ has been provided vide the Explanation under Section 151 of the 2013 Act[4] in which they would be shareholders holding shares of value of not more than twenty thousand rupees.
If we were to understand the term, reading many articles will point out two directions concerning minority shareholding. Some will say it is those who possess less than 50% while others say that it’s those who possess 10% of the shares. The subsequent definition makes more sense as if the legislative intent behind the Companies Act, 1956 (hereinafter referred to as ‘the 1956 Act’)[5] is looked at, the Bhabha Committee[6] had tried to define minority as those in the 10%.
Chapterisation
Chapter one: Minority Shareholders and their position in India
Defining Minority Shareholders
The 2013 Act does not define shareholders, much less Minority shareholders. A shareholder may be defined as a member of a company.[7] A member is defined under the 2013 Act vide Section 2(55)[8] to be anyone who holds shares of the company, i.e., a shareholder.
By just plain reading of the term majority shareholders, it can be seen that they are those who have a substantial number of shares in the company which also gives them enough power to make decisions singlehandedly pertaining to the company.
As for minority shareholders, they lack the authority, both legally and practically, to appoint or remove directors from the company’s board, a crucial aspect of exerting control. Minority shareholders typically refer to those individuals who hold a minimal portion of shares in the company.[9]
As previously mentioned, the lack of provision relating to minority shareholders means that the legislative intent behind both the Acts must be seen, in the instant case being the Bhabha Committee Report.[10]
Position of minority shareholders in India
At the very outset, the case of Foss v. Harbottle[11] lays down that the minority shareholders are bound to what decisions are taken by the majority shareholders. this case lays down the principle that the majority shareholders are supreme. Likewise, upon becoming a member of a company, it is inferred that the individual has consented to abide by the decisions made by the majority shareholders during the general meetings of the company.
The Courts also limit their interventions into company affairs as much as possible, only chiming in when the decision taken by the majority is ultra vires. In the case of Rajahmundry Electric Supply Corpn Ltd. V. Nageshwara Rao[12], it was noted that courts refrain from intervening in the internal management and control of a company, provided that directors act within the confines of the law and the powers granted to them by the Articles of Association. This was also stressed in the case of Bharat Insurance Co. Ltd v. Kanhaiya Lal.[13]
The legislature has formulated such regulations to safeguard minority shareholders within the framework of majority rule in companies. Over time, the judiciary has endeavored to establish a more equitable balance in corporate structures. The provision in the 2013 Act allowing complaints for minority protection and activism signifies that majority shareholders cannot lodge complaints, thereby enabling the court to scrutinize any biased behavior or unfair treatment that goes against public policy and interests in managing the company’s affairs.[14]
However, under similar circumstances, majority shareholders are obligated to afford fair and impartial treatment to minority shareholders as well. The court also oversees the equitable distribution of funds to ensure proper corporate governance. To maximize business profits, the rights of minority shareholders should not be disregarded; they should be granted equal representation in the company’s affairs and involved in every significant decision made by the board. A company cannot operate solely based on majority rule; rather, it must incorporate minority shareholders at every stage of its operations.[15]
Chapter Two: Rights of Minority Shareholders in India
The 2013 Act provides for any law relating to shareholders. Whilst by just the democratic system in place, it might appear that minority shareholders have no rights but they too are protected by this legislation.[16]
Rights of the minority shareholders as per J.J. Irani Committee Report
The Companies Act of 2013 outlines the rights afforded to minority shareholders. Enacted based on recommendations from the J.J. Irani Committee Report established in 2005[17], the Act aims to maintain a harmonious and conflict-free environment within companies. These rights include provisions such as allowing aggrieved shareholders to appeal to the Tribunal if the company refuses to register the transfer of shares[18], enabling a specified number of members to request the Central Government to appoint directors to safeguard the interests of oppressed minorities[19], granting contributors the right to petition the court for the winding up of the company on just and equitable grounds[20], empowering any member to obstruct the reconstruction or amalgamation of a company[21], and permitting the liquidator, creditor, or contributor to petition the tribunal to investigate the conduct of a negligent officer during the company’s winding-up process.[22]
Rights of minority shareholders with regards to the 2013 Act
- i) Representation of the minority shareholders
The Companies Act includes provisions for the representation of minority interests. Section 163[23] stipulates that the appointment of directors must adhere to the “principle of proportional representation,” whether through the single transferable vote method, a system of cumulative voting, or any other appropriate means. Such appointments may occur once every three years, and any casual vacancies of such directors shall be filled as outlined in subsection (4) of section 161.[24] But the basic stance in the Indian Courts are that minority shareholders do not have the right to claim equal representation as such provided to the small shareholders which was stated in the case of Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd & Ors.[25]
- ii) Rights of shareholders in cases of oppression and mismanagement
The 2013 Act contains ample provisions to mitigate oppression and mismanagement within companies. Minority shareholders, represented by a specified number of members or those holding a requisite percentage of equity capital, have the right to seek protection of their interests through courts or tribunals. These quasi-judicial bodies are empowered to enact various remedial measures to regulate the company’s conduct.
These measures may include facilitating the purchase of shares or interests by other members of the company, terminating, setting aside, or modifying agreements concerning managerial personnel, annulling transactions involving the transfer or delivery of goods, and addressing any other matters deemed necessary by the court or tribunal. Furthermore, the court or tribunal is authorized to appoint as many individuals as required to effectively safeguard the interests of the company.[26]
In the case of Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy and Ors[27], the Supreme Court clarified that under section 397 of the Companies Act 1956, any member of a company has the right to lodge a complaint if they believe that the company’s affairs are being conducted in a manner detrimental to public interest or unfairly prejudicial to any member or members. Such complaints can be made to the Company Law Board for appropriate orders. However, it was emphasized that minority activism does not infringe upon the democratic rights of majority shareholders.
In the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd[28], the Supreme court clarified that its power to intervene in corporate matters is limited. It stated that the court may only intervene when a scheme is found to be unjust, unfair, or prejudicial to the interests of shareholders. However, if a scheme is sanctioned by the majority of shareholders and is lawful, the court cannot interfere. Its role is restricted to examining whether the scheme complies with the requirements outlined in Section 391(2) of the Companies Act and was passed by the requisite majority. When a scheme approved by the majority is deemed just and fair and does not adversely affect minority interests, the individual concerns of minority shareholders hold little relevance unless they impact the collective interests of such shareholders as a class.
Author:- Prathyusha Prasad, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing.
[1] Javaid Talib and Aqa Raza, Right of Minority Shareholders Under the Companies Act, 2013: A Jurisprudential Analysis, 23 ALJ, 30 (2015).
[2] The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).
[3] Shashank Chaddha, Merger and Acquisition in India: Trends on Squeeze outs and the Rights of Minority Shareholders, 2 J. ON GOVERNANCE 42 (2017).
[4] The Companies Act, 2013, § 151.
[5] The Companies Act, 1956, No. 1, Acts of Parliament, 1956 (India).
[6] C H Bhabha, Report of the Company Law Committee, 1952 (1952).
[7] Taniya Bansal, Corporate Governance through the Eyes of a Minority Shareholder, 5 INT’l J.L. MGMT. & HUMAN. 816 (2022).
[8] The Companies Act, 2013, § 2(55).
[9] Dov Solomon, The Voice: The Minority Shareholder’s Perspective, 17 NEV. L.J. 739 (2017).
[10] C H Bhabha, Report of the Company Law Committee, 1952 (1952).
[11] Foss v. Harbottle, (1843) 67 ER 189.
[12] Rajahmundry Electric Supply Corpn Ltd. V. Nageshwara Rao, (1955) 2 SCR 1066.
[13] Bharat Insurance Co. Ltd v. Kanhaiya Lal, 2009 SCC OnLine CIC 753.
[14] Soma Singh, Rights of Minority Shareholders – A Tale of Neglected Owners, 5 INT’l J.L. MGMT. & HUMAN. 1847 (2022).
[15] Ibid.
[16] Javaid Talib and Aqa Raza, Right of Minority Shareholders Under the Companies Act, 2013: A Jurisprudential Analysis, 23 ALJ, 30 (2015).
[17] Dr. Jamshed J. Irani, Report on Company Law (2005).
[18] The Companies Act, 2013, § 58.
[19] The Companies Act, 2013, § 243.
[20] The Companies Act, 2013, § 272.
[21] The Companies Act, 2013, § 232.
[22] The Companies Act, 2013, § 340.
[23] The Companies Act, 2013, § 163.
[24] The Companies Act, 2013, § 161.
[25] Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd & Ors, 2019 SCC OnLine NCLAT 858.
[26] Manjeet Sahu, Rights of Minority Shareholders in India Under the Companies Act, 1956 (2013).
[27] Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy and Ors, AIR 1997 SC 2189.
[28] Miheer H. Mafatlal v. Mafatlal Industries Ltd, AIR 1997 SC 506.
