Scroll Top

THE RISE OF ACTIVIST INVESTORS: SHAKING UP INDIAN CORPORATE BOARDS

INTRODUCTION

With the advent of many new entities and body corporates every day, there coexists an equally growing link of investors who are ready to make investments. For such investors, their motive naturally rests solely on making investments into ever-growing companies so that the company grows throughout the years reaping rewards to the investor throughout its growing stage. But lately, there is a new term for a sect of particular investors in the field called ‘Activist Investors’. You may not have heard about it, but ‘Activist Investors’ is a term that refers to a person or a hedge fund that buys a significant stake in a publicly traded company to change how it is run and managed[1]. We all know that companies which are either private or public limited companies issue shares or other forms of securities to the public so that the subscribers can have a part ownership in the affairs of the company. So, the public is free to purchase such securities to avail small ownership benefits which benefit the company in the form of revenue. Such shareholders are not to be confused with activist investors since financial gains are not their motives, but their actual motive lies in changing the corporate structuring and affairs of the company, unlike mainstream shareholders.

TYPES OF ACTIVIST INVESTORS

Activist Investors who try to change the stake of a company’s management can be of different types such as –

  • Individual Investors- These kinds of Investors work alone to change the management stake of a company due to their wealth and influence. They aim to make strategic decisions for a company’s direction and can leverage their financial powers to guide a company.
  • Institutional Investors- The second type of investors includes private equity firms who take up the role of activist investors to change the majority stake of a business to protect their interests. They usually leverage their large capital for their gain i.e. either increase the value of their business or hijack the business to maintain market standing.
  • Hedge Funds- Lastly, there exists hedge funds, whereby a variety of investors team up with a common objective or goal to take control over a company. They are prominent due to their financial strength and ability to take up substantial roles in companies through their shared activism approach.

ROLE OF ACTIVIST INVESTORS

Activist Investors have the objective of changing the corporate structuring of a company to attain their activism-led agenda. They involve themselves by purchasing a substantial stake in the company’s equity, usually in the form of shares of a company[2]. This is done since shareholders are considered part owners of a company and have a say in the decision-making process of a company. By doing this, the activist investors try to dilute the ownership of the company by leveraging the major shares that were purchased. Moreover, they can garner the attention of the public by doing so thereby influencing the price of the shares by inducing panic and excitement to the public for the purchase and sale of shares for ownership purposes. Besides, such investors may have ideas about how a company’s management can use the assets better, improve its operations or enhance shareholder value[3]. These agendas are generally carried out by targeting an underperforming company that the investors feel has the potential to do well in the marketplace. Once the company is identified, the activist investors try to dilute the ownership pattern to make sure that their suggestions are heard and implemented by the company’s management by leveraging their huge ownership stake. Hence, the management accordingly tries to implement their suggestions since such investors are the company’s stakeholders after all and their opinions are bound to be heard.

EFFECTS ON BOARD STRUCTURES

Activist investors try to influence the management of a company so that their ideas or suggestions are often heard. This is not necessarily bad for a company since this activism-led agenda can be for the betterment of the company thereby letting both sides win in the long run. However, sudden changes in the management of a company do not guarantee success since stability is often compromised. If not for board restructuring, they would often demand strategic decisions such as mergers, acquisitions etc to exercise their level of influence. Oftentimes, it can be observed that such activist investors try to call out for operational improvements, such as pushing for efficiency and effectiveness of business operations. This is usually done by coitizing a company for improved cost-cutting measures, restructuring, greater transparency etc. Besides this, they may propose resolutions during Annual General Meetings (AGMs) seeking to change the board’s composition and increase the chances of such restructuring by engaging with shareholders. So, this tactic involves garnering the votes of all concerned stakeholders to fuel their agenda and fulfil their objective of changing the board composition by way of majority votes.

CASE-STUDIES OF COMPANIES

  1. Cairn Energy vs Vedanta: This case involved a dispute whereby Cairn India was acquired by Vedanta Group whereby a 58.7% majority stake was purchased for $8.67 billion[4]. Cairn Energy was the minority shareholder of Cairn India and hence protested to protect their interests against the acquisition. Though the acquisition was a success, it highlighted the role of activist investors going against major transactions.
  2. Unifi Capital Pvt Ltd and Alembic Ltd: In this case, Unifi Ltd (the minority shareholder along with other small shareholders) wanted to appoint a shareholder director under S.151 of the Companies Act, 2013. The minority firm’s request was denied stating that many shareholders requesting the proposition were newly announced shareholders at that time besides having connections to large shareholders[5].

CONCLUSION

With the increase of Investor Activism throughout the years, this phenomenon can be looked at both in a good and a bad way just like the 2 sides of a coin. While it has created a better standard of corporate governance within companies i.e.- listening to the ideas and feedback of a company’s stakeholders, other times it creates a sense of imbalance and instability within the company’s board composition. For a company’s long-standing success and achievement of its goals, it follows a uniform framework of its policies which are carried out by its MOA and AOA of the company. Further, the derivative decision-making process is carried out by experienced professionals who know the company’s ins and outs while keeping the interests of its stakeholders i.e.- activist investors in mind since after all, they too have a certain percentage of ownership rights in a company. Though Investor Activism has played a vital part in upgrading corporate governance mechanisms, there needs to be a balance between companies as well as activist investors in terms of better cooperation and agreements to expand the range of benefits that both of them could achieve in the playing field.

Author(s) Name: Shaan Vellanki (Symbiosis Law School, Nagpur)

Reference(s):

[1]Conmy, S. (2022) What is an activist investor?, The Corporate Governance Institute.<https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-an-activist-investor/>Accessed: 08 February 2024

[2]Conmy, S. (2022a) What is an activist investor?, The Corporate Governance Institute.

<https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-an-activist-investor/>  Accessed: 09 February 2024

[3]Curtis, G. (no date) Activist investors: A good or bad thing?, Investopedia. <https://www.investopedia.com/articles/stocks/09/activist-investors.asp>Accessed: 09 February 2024

[4]‘Vedanta Completes Cairn India Acquisition’ (8 December 2011) https://www.hindustantimes.com/business/vedanta-completes-cairn-india-acquisition/story-msqEdte8c1dqfGZNKPpuFK.html>  Accessed 10 February 2024

[5]Mehta, K. and Rathsharma, P. (2018) Shareholder activism in India – has it been successful? , ETCFO.com. <https://cfo.economictimes.indiatimes.com/news/shareholder-activism-in-india-has-it-been-successful/6371571>  Accessed: 10 February 2024