Judicial Interventions In Shareholder Inspection And Access Rights – Beyond Companies Act 2013

While recent judicial precedents have significantly expanded the scope of shareholder inspection and access rights (particularly in the context of activist shareholders, and oppression and mismanagement actions), the legislative framework for shareholder inspection rights under Indian Company Law remains largely ineffective and inadequate. The article demarcates the current legislative scope of the shareholder inspection rights and how recent judicial decisions have been able to expand the scope to provide some much-needed relief to aggrieved shareholders.

1. Background

Lack of corporate transparency and information symmetry remain persistent challenges in Indian corporate governance for minority shareholders, particularly in unlisted private entities. As we detail further, the statutory framework under the Companies Act, 2013 ("Companies Act") presents an interesting dichotomy – while certain inspection rights are broadly accessible without any qualifying thresholds, critical corporate documents remain outside the reach of the shareholders, regardless of shareholding.

2. What are Shareholder Inspection Rights?

Shareholder inspection and access rights form a part of the foundational corporate governance mechanism that enables shareholders to access non-public company information, broadly serving three critical functions:

• enhancing corporate monitoring capabilities (particularly for unlisted / private companies that are not governed by extensive securities market disclosure norms);
• facilitating evidence-based remedial actions against potential misconduct or mismanagement; and
• enabling accurate valuation assessment of shareholding interests.

These rights are particularly relevant for unlisted entities, which are not subject to the public disclosure norms. Indian listed companies must comply with Regulation 4 and Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR Regulations"), which mandates disclosure of material events to stock exchanges and also provides the general principles of disclosure to be made by listed companies. In unlisted entities, Companies Act mandates inspection rights providing minority shareholders with vital tools to protect their interests through informed decision-making regarding a company's affairs.

3. Statutory Framework: A Tale of Two Extremes

The inspection rights framework under the Companies Act presents an interesting contrast.

Inclusions under the scope of inspection:

The Companies Act demonstrates remarkable accessibility for shareholders – requiring no (i) minimum shareholding threshold, (ii) timeframe for exercise of inspection rights, or (iii) purpose requirement, to conduct inspection of some documents.

Some of these access rights available to shareholders are captured below:

Although seemingly expansive, most of these documents are also available on MCA's web portal and are of little operational relevance, particularly for a shareholder who holds a sizeable interest. Naturally, shareholders rarely exercise these statutory rights to inspect and access documents.

Exclusions from the scope of inspection:

The statutory framework excludes critical documents, such as board papers, agendas, notices and minutes of board meetings, books of accounts and other granular financial records from the ambit of shareholder inspection rights. The inspection and access rights do not differentiate based on a shareholder's 'holding' – theoretically, majority shareholders are treated on par with a shareholder holding a single share. While the law provides all shareholders with the same limited rights, majority shareholders typically circumvent these limits through board control:

• The majority shareholders exercise inspection and access rights through their nominee directors on a company's board. Through these board nominees, the majority shareholders maintain unrestricted information rights, including access to financial records and operational information that are not publicly available.³ This is further enabled by the fact that a director is entitled to the widest scope of inspection and access rights, over and above those available to shareholders. Leading to instances, where the lines between controlling shareholder group and 'company' gets blurred, particularly in the context of family-owned companies. Contrastingly, minority shareholders have limited statutory entitlement and must approach courts (with the associated uncertainty of outcome) to access non-public documents, as highlighted below.
• Assuming the absence of a negotiated shareholders' agreement incorporated in the articles of a company which specifically provides for inspection and information rights for a shareholder, a non-majority shareholder (i.e., any shareholding less than 50%) could be precluded from accessing any of the company's operational documents – being on par with a shareholder who may be holding a single share.
• In extreme scenarios, despite governance structures around conflict of interest and related party transactions, controlling shareholders often deliberately operate companies as private fiefdoms and restrict the rights of minority shareholders.
• This information asymmetry concern has recently gained regulatory attention. SEBI, the capital markets regulator, told the Hon'ble Bombay High Court that material information affecting a company's governance or control must be disclosed to all shareholders, stating that "non-disclosure creates information asymmetry"⁴ As part of proceedings where provisions of LODR Regulations have been challenged, SEBI iterated that shareholders must be informed of any pact that could affect a listed company's management, control, or business, whether the company is a party to it or not.

4. Judicial Intervention: Bridging the Gap

Judicial protection of minority rights is enabled through oppression and mismanagement petitions under Sections 241 and 242 of Companies Act. When minority shareholders seek company records beyond the statutory framework, they often get stuck in a circular loop: they must first present evidence of oppression or mismanagement to gain access to said documents, yet these documents are precisely what they need to substantiate their claims. While the law protects minority shareholders through Sections 241 and 242, such minority shareholders remain locked out of the very information they need to substantiate claims against oppressive majority shareholders, effectively nullifying their primary legal remedy.

Without initial access to corporate information, the protection intended to be accorded through the Indian inspection rights framework (and subsequently, by judicial intervention) somewhat fail.

However, certain recent judicial interventions have been able to bridge this imbalance of access rights between majority and minority shareholders by providing minority shareholders with access to documents beyond the statutory scope:

1. In Ashok Dayabhai Shah and Others v. Securities and Exchange Board of India [SEBI] and Others, the Hon'ble Bombay High Court ruled that 'minority shareholders', not akin to general 'public' vis-à-vis a company, have the right to access certain non-public documents – such as regulatory investigation reports that may be made available to a company.⁵ In this case:
   1. the minority shareholders of Bharat Nidhi Limited, a publicly listed entity, sought access to certain documents (i.e., SEBI's investigation report, show-cause notices and other order / communications) and information related to a settlement agreement between SEBI and Bharat Nidhi Limited, which were available with the company and its directors (in extension, to the majority shareholders).
   2. SEBI argued that confidentiality regulations, under Regulation 29 of the SEBI (Settlement Proceedings) Regulations, 2018, prevented disclosure of these documents to the petitioner minority shareholders (being classified as 'public', per SEBI).
   3. The Hon'ble Court, in allowing inspection access to the minority shareholders, noted that:
      1. the term "public" in Regulation 29 cannot be applied to shareholders of Bharat Nidhi Limited (including the petitioner minority shareholders), as shareholders have an "inextricable concern and interest" in company management. The court categorically recorded that minority shareholders, being part owners of the company, are integral to the company and have "an inextricable concern and interest in the functioning and management of the company". Accordingly, minority shareholders cannot be considered of a different class to majority shareholders.
      2. allowing the majority / controlling shareholders to use Regulation 29 to withhold information from other shareholders would create disharmony and damage company management, observing: "...It thus cannot be countenanced that some shareholders can take shelter under regulation 29 to plead confidentiality of settlement information, against a group of other shareholders, so as to bring about an effect that information in relation to settlement be not supplied to such persons of their own class who are similarly situated. No shareholder can take a position that he cannot disclose any information on the affairs of the company to other shareholders. This would bring about a situation of disharmony, distrust causing damage to the management and functioning of the company..." and concluded stating "Once it is the entitlement of the petitioners [shareholders] in law to receive such documents, unless furnishing of these documents would stand prohibited in law..."

2. Judicial interventions have allowed shareholders to exercise inspection rights to access the books of accounts of a company, particularly when allegations involve financial misconduct.⁶ This position was recently reinforced by a recent order of National Company Law Tribunal in Yogesh Patel v. Arzoo.com India Pvt. Ltd,⁷ in context of oppression and mismanagement proceedings and even observed that: "it is only with help of books of accounts that the
   matter can be investigated and the parties should in such a case be at liberty to look into books of accounts and substantiate their case".

3. Further, judicially recognized inspection rights (outside the borders of the statutory framework) include: (i) right to inspect company records through agents (who commit to disclose information only to their principals);⁸ and (ii) obtaining photocopies of examined documents.⁹ Any denial of inspection has to be evidenced by establishing that the shareholder's requisition for inspection is fraught with
   "corrupt purpose", by the company against whom the inspection rights have been sought.¹⁰

5. Conclusion

The current framework under the Companies Act, and fragmented judicial precedents pose significant challenges for minority shareholders seeking to access company records to substantiate their claims, particularly under petitions of oppression or mismanagement. Revisiting shareholder rights, as suggested by Prof. Umakanth Varottill, could provide a more balanced approach.¹¹ For instance, permitting shareholders with a 25% or more stake to access further documents, subject to confidentiality agreements, could enhance transparency while protecting sensitive information. This reform could align shareholder rights more closely with their financial stakes.

Footnotes

1 Private companies and unlisted public companies which are not required to maintain a website may be exempted.

<2 Not applicable to a private company.

3 For instance, Section 128 of the Companies Act grants directors unrestricted access to books of account, including the underlying transaction-level records, invoices, vouchers, and supporting documentation, during the day-to-day business hours, with the right to make copies. This is starkly different from shareholders' rights under Section 136 of the Companies Act, which are limited to audited financial statements provided once annually.

4 SEBI Disclosure Norms: SEBI Affidavit in Bombay High Court Kirloskar Family Settlement Case Livemint (Mumbai) https://www.livemint.com/companies/sebi-disclosure-norms-sebi-affidavit-bombay-high-court-kirloskar-family-settlement-case-sebi-vs-kirloskar-group-11757657058013.html.

5 2023 SCC Online Bom 2306.

6 Rajdhani Roller Flour Mills Pvt. Limited v. Mangilal Bagri (1991) 70 Comp Cas. 788 (Del)

7 MA 1329/2019 in CP 1306/2019. See also Hemant Khandelwal v. NIHO Construction Limited CP No. - 89/241/242/ND/2020, where the NCLT allowed the shareholders to inspect the books of account.

8 N.V. Vakharia (1948); Sugrabhai Alibhai ((1948) 18 Comp. Cas. 34 (Bom)) read with Sugrabhai Alibhai v. Amtee Properties (P.) Limited (1984) 55 Comp. Cas. 734 (Bom).

9 Sravya Finance and Investment P. Ltd. v. Kumar's Mettalurgical Corporation Ltd. (2006) 134 Comp. Cas. 818 (CLB).

10 Phillips Carbon Black Limited and Ors. v. Anil Kumar Poddar and Ors. (CS No. 67 of 2010) – Hon'ble Calcutta High Court observed: "The test is not, as the plaintiffs suggest, that the requisitionist must have a justification for making the request; the test is for the company to demonstrate that the request is for a corrupt purpose."

11 Varottil, Umakanth, Shareholder Inspection Rights in India: Restricted Scope and Diminished Effect (November 18, 2023). in Randall S. Thomas, Paolo Giudici & Umakanth Varottil (eds), Research Handbook on Shareholder Inspection Rights: A Comparative Perspective (Edward Elgar, 2023), Available at SSRN: https://ssrn.com/abstract=4636946 or http://dx.doi.org/10.2139/ssrn.4636946

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