Fostering socially responsible stewards: CSR and investment funds in India

ABSTRACT

In 2013, the Indian government mandated all companies to spend a portion of their profits on Corporate Social Responsibility (`CSR') activities but did not require companies to incorporate sustainability into their business, leading the statutory provision mandating CSR to become a box-ticking exercise. This approach of tick-box compliance with the CSR mandate is now being questioned by various investment funds that are actively pushing for the incorporation of Environmental, Social and Governance (`ESG') concerns into the business practices of their portfolio companies. While the Stewardship Codes promulgated by the various Indian regulators expressly mandate investment funds to monitor the ESG risks of their portfolio companies, there are no sanctions for non-compliance. This paper suggests the introduction of a market-based enforcement mechanism for the Stewardship Codes to enhance their effectiveness and practical relevance in the Indian legal framework.

KEYWORDS:

• Corporate Social Responsibility (CSR)
• India
• ESG activism
• stewardship
• reputational sanctions

Acknowledgements

The author is thankful to Prof. Neha Pathakji for her inputs at various stages of the paper and to Prof. Umakanth Varottil, Prof. Alan Koh and Rudresh Mandal for their comments on earlier drafts. The opinions expressed in this article are personal and do not reflect the views of Shardul Amarchand Mangaldas & Co. or any of its partners.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

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3 Adolf A. Berle, ‘Corporate Powers as Powers in Trust?’ (1931) 44 Harvard Law Review 1049; ME Dodd, ‘For whom are corporate managers trustees?’ (1932) 45 Harvard Law Review 1365; Michael C. Jensen and William H. Meckling, ‘The Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’ (1976) 3 Journal of Financial Economics 305; Stephen M. Bainbridge, ‘In Defence of the Shareholder Wealth Maximization Norm: A Reply to Professor Green’ (1993) 50 Washington & Lee Law Review 1423; Lynn M. Stout, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public (Berrett-Koehler Publishers 2012).

4 Business RoundTable, Statement on the Purpose of a Corporation (2019) https://s3.amazonaws.com/brt.org/BRT-StatementonthePurposeofaCorporationJuly2021.pdf

5 Business RoundTable, Statement on Corporate Governance (1997) http://www.ralphgomory.com/wp-content/uploads/2018/05/Business-Roundtable-1997.pdf

6 Principle 1, Board Leadership and Company Purpose, UK Corporate Governance Code (2018).

7 Archie B. Carroll and Jill A. Brown, ‘Corporate Social Responsibility: A Review of Current Concepts, Research and Issues’ in Corporate Social Responsibility, Volume 2 (Business and Society 360, Emerald Publishing, 2018); Gerlinde Berger-Walliser and Inara Scott, ‘Redefining Corporate Social Responsibility in an Era of Globalization and Regulatory Hardening’ (2018) 55(1) American Business Law Journal 167.

8 John Elkington, Cannibals with Forks: The Triple Bottom Line of 21st Century Business (Capstone 1999) 3–4.

9 HC Wallich and JJ McGowan, ‘Stockholder interest and the corporation’s role in social policy’ in WJ Baumol, R Likert, HC Wallich and JJ McGowan (eds.), A New Rationale for Corporate Social Policy (Committee for Economic Development, New York, 1970)

10 Manuela Weber, ‘The Business Case for Corporate Social Responsibility: A Company-Level Measurement Approach for CSR’ (2008) 26(4) European Management Journal 247; Philip L. Cochran and Robert A. Wood, ‘Corporate Social Responsibility and Financial Performance’ (1984) The Academy of Management Journal 42.

11 David A. Katz and Laura A. McIntosh, ‘Activism and Board Diversity’, Harvard Law School Forum on Corporate Governance, September 29, 2017 https://corpgov.law.harvard.edu/2017/09/29/activism-and-board-diversity/

12 Bill Kibben, ‘Citing climate change, BlackRock will move away from Fossil Fuels’, The New Yorker (January 16, 2020) https://www.newyorker.com/news/daily-comment/citing-climate-change-blackrock-will-start-moving-away-from-fossil-fuels. Whether Blackrock has lived up to its claims, however, remains questionable. See Jasper Jolly, ‘BlackRock holds $85bn in coal despite pledge to sell fossil fuel shares’, The Guardian (January 13, 2021) https://www.theguardian.com/business/2021/jan/13/blackrock-holds-85bn-in-coal-despite-pledge-to-sell-fossil-fuel-shares

13 Michal Barzuza, Quinn Curtis and David H. Webber, ‘Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance’ (2020) 93 Southern California Law Review 1243 (Hereinafter ‘Barzuza et al’); Quinn Curtis, Jill E. Fisch and Adriana Z. Robertson, ‘Do ESG Mutual Funds Deliver on their Promises?’ (2021) European Corporate Governance Institute – Law Working Paper No. 586/2021 (Hereinafter ‘Curtis et al’)

14 Arjya B. Majumdar, ‘India’s Journey with Corporate Social Responsibility – What Next?’ (2015) 33(2) Journal of Law and Commerce 165.

15 Companies Act (2013), s135. Despite the express preference for a stakeholder approach in the Companies Act, the practical realization of stakeholder rights remains elusive. See Devarshi Mukhopadhyay and Rudresh Mandal, ‘The End of Shareholder Primacy in Indian Corporate Governance? Says Who?!’ (2020) 46(4) Commonwealth Law Bulletin 595.

16 Panchali Guha, ‘Why comply with an unenforced policy? The Case of Mandated Corporate Social Responsibility in India’ (2020) 3:1 Policy Design and Practice 58; Afra Afsharipour, ‘Lesson’s from India’s struggles with Corporate Purpose’ in Elizabeth Pollman and Robert Thompson (eds.), Research Handbook on Corporate Purpose and Personhood (Edward Elgar 2021).

17 Sukanya Roy, ‘How Indian Companies are contributing to the war against coronavirus’ Business Standard (April 3, 2020) https://www.business-standard.com/podcast/current-affairs/how-indian-companies-are-contributing-to-the-war-against-coronavirus-120033001663_1.html

18 Invesco Developing Markets Fund v Zee Entertainment Enterprises Ltd. and Anr., 2022 SCC OnLine 630.

19 Suresh P. Iyengar, ‘How Shareholder Activism has Hit a High in India’ Hindu Business Line (September 18, 2021) https://www.thehindubusinessline.com/companies/how-shareholder-activism-has-hit-a-high-in-india/article36540272.ece

20 PTI, ‘Maruti-Suzuki deal: Institutional Investors Approach SEBI’ Business Today (March 13, 2014).

21 Umakanth Varottil, ‘Shareholder Stewardship in India – The Desiderata’ (2020) NUS Law Working Paper No. 2020/005 (Hereinafter ‘Desiderata’)

22 Sivanath Ramachandran and Mohan Kumar Babu, ‘A peek inside Indian ESG funds’ Economic Times (February 6, 2022).

23 IRDAI, Guidelines on Stewardship code for Insurers in India (2017).

24 PFRDA, Common Stewardship Code, PFRDA/2018/PF/01, May 4, 2018.

25 SEBI, Stewardship Code for all Mutual Funds of all categories of AIFs, in relation to their investment in listed entities, Circular No: CIR/CFD/CMD1/ 168 /2019, December 24, 2019.

26 PFRDA Stewardship Code, Principle 3; SEBI Stewardship Code, Principle 3, paragraph 2(e); IRDAI Stewardship Code, Principle 3.

27 Mallika Tamvada, ‘The dynamics of CSR, mandatory CSR laws and corporate social performance in India’ in Onyeka Osuji, Franklin N. Ngwu and Dima Jamali (eds.), Corporate Social Responsibility in Developing and Emerging Markets (Cambridge University Press, 2019); Dhammika Dharmapala and Vikramaditya Khanna, ‘The Impact of mandated corporate social responsibility: Evidence from India’s Companies Act 2013’ (2018) 56 International Review of Law and Economics 93; Umakanth Varottil, ‘Analysing the CSR spending requirements Under Indian company law’ in Jean du Plessis, Umakanth Varottil and Joel Veldman (eds.), Globalisation of Corporate Social Responsibility and its impact on Corporate Governance (Springer, 2018).

28 CA Harwell Wells, ‘The Cycles of Corporate Social Responsibility: A Historical Retrospective of the Twenty-First Century’ (2012) 51 University of Kansas Law Review 77, 77–80; (n 3) above.

29 Lynn A. Stout, ‘The Toxic Side Effects of Shareholder Primacy’ (2013) 161 University of Pennsylvania Law Review 2013.

30 Jill E. Fisch, ‘The “Bad Man” goes to Washington: The Effect of Political Influence on Corporate Duty’ (2006) 75 Fordham Law Review 1593; David G. Yosifon, ‘The Public Choice Problem in Corporate Law: Corporate Social Responsibility After Citizens United’ (2011) 89 North Carolina Law Review 1197.

31 See for instance, section 166(2) of the Companies Act, India (2013) which requires directors to act ‘in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.’ See also Lisa M. Fairfax, ‘Easier said than done: A Corporate Law Theory for Actualizing Corporate Social Responsibility Rhetoric’ (2007) 59 Flanders Law Review 771, 818.

32 Janicke L. Rasmussen and Morten Huse, ‘Corporate Governance in Norway: Women and Employee-Elected Board Members’ in Christine A. Malin (ed.), Handbook on International Corporate Governance: Country Analyses (2^nd ed., Edward Elgar, 2011); J. Haskell Murray, ‘Adopting Stakeholder Advisory Boards’ (2017) 54 American Business Law Journal 61.

33 Raghuram G. Rajan, ‘What should corporations do?’ ProMarket (October 6, 2020) https://www.project-syndicate.org/commentary/what-are-corporations-for-stakeholders-or-shareholders-by-raghuram-rajan-2020-10 (‘If all stakeholders are essential, then none are’); Stephen M. Bainbridge, ‘Director Primacy: The Means and Ends of Corporate Governance (2003) 97 Northwestern University Law Review 547, 581.

34 Lucian A. Bebchuk and Roberto Tallarita, ‘The Illusory Promise of Stakeholder Governance’ (2020) 106 Cornell Law Review 91.

35 Id; Rebecca Burton and Peter Kim, ‘Board Pay under the Microscope’, Harvard Law School Forum on Corporate Governance (November 17, 2019) https://corpgov.law.harvard.edu/2019/11/17/board-pay-under-the-microscope/

36 Cathy Hwang and Yaron Nili, ‘Shareholder-Driven Stakeholderism’, University of Chicago Law Review Online (2020) https://lawreviewblog.uchicago.edu/2020/04/15/shareholder-driven-stakeholderism-hwang-nili/. See also Lisa M. Fairfax, ‘The shareholder-stakeholder alliance: exposing the link between shareholder power and the rise of a corporate social purpose’ in Elizabeth Pollman and Robert B. Thompson (eds.), Research Handbook on Corporate Purpose and Personhood (Edward Elgar, 2021).

37 There is a large volume of literature arguing that an increase in shareholder power leads to the exploitation of other stakeholders. For instance, see Lynn A. Stout, ‘The Shareholder Value Myth’ (2013) Cornell Law Faculty Library Paper No. 771; Joel Slawotsky, ‘Hedge Fund Activism in an Age of Global Collaboration and Financial Innovation: The Need for a Regulatory Update of United States Disclosure Rules’ (2015) 35 Journal of Banking and Finance Law 332–3.

38 Dionysia Katelouzou and Alice Klettner, ‘Sustainable Finance and Stewardship: Unlocking Stewardship’s Sustainability Potential’ (2020) European Corporate Governance Institute Law Working Paper No. 521/2020.

39 Fairfax (n 37).

40 Ann M. Lipton, ‘ESG Investing, or if you can’t beat ‘em, join ‘em’ in Elizabeth Pollman and Robert B. Thompson (eds.), Research Handbook or Corporate Purpose and Personhood (Edward Elgar, 2021)

41 Tensie Whelan, Ulrich Atz, Tracy van Holt and Casey Clark CFA, ‘ESG and Financial Performance: Uncovering the Relationship by Aggravating Evidence from 1000 Plus Studies published between 2015–2020’, NYU Stern Center for Sustainable Business & Rockefeller Asset Management (2021) https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021%20Rev_0.pdf

42 Akihiro Omura, Eduardo Roca and Miwa Nakai, ‘Does responsible investing pay during economic downturns?: Evidence from the Covid-19 pandemic’ (2021) 42 Finance Research Letters 101914; Juhee Hwang, Hyuna Kim and Dongjin Jung, ‘The Effect of ESG Activities on Financial Performance during the Covid-19 pandemic – Evidence from Korea’ (2021) 13 Sustainability 11362.

43 Elizabeth Pollman, ‘Corporate Social Responsibility, ESG and Compliance’ in Benjamin van Rooij and D. Daniel Sokol (eds.), The Cambridge Handbook on Compliance (Cambridge University Press 2021).

44 Scott Jeffrey, Stuart Rosenberg and Brianna McCabe, ‘Corporate Social Responsibility Behaviors and Corporate Reputation’ (2019) 15 Social Responsibility Journal 395; GH Jones, BH Jones and P Little, ‘Reputation as a Reservoir: Buffering Against Loss in times of Economic Crisis’ (2000) 3 Corporate Reputation Review 21–29.

45 Graham Steele, ‘Confronting the “Climate Lehman Moment”: The Case for Macroprudential Climate Regulation’ (2020) 30 Cornell Journal of Law and Public Policy 109.

46 Madison Condon, ‘Externalities and the Common Owner’ (2020) 95 Washington Law Review 1.

47 Jim Hawley and Jon Lukomnik, ‘The Long and the Short of it: Are We Asking the Right Questions?’ (2018) 41 Seattle University Law Review 441.

48 Ernst & Young, ‘Sustainable Investing: The Millennial Investor’ (2017) 1 (‘Demand for sustainable investments is being driven, in part, by millennials who prefer to invest in alignment with personal values’); Caleb Griffin, ‘Humanizing Corporate Governance’ (2023) 75 Florida Law Review 689; Barzuza et al (n 13)

49 Barzuza et al (n 13)

50 Leo E. Strine Jr., ‘Fiduciary Blind Spot: The Failure of Institutional Investors to Prevent the Illegitimate Use of Working Americans’ Savings for Corporate Political Spending’ (2020) 97 Washington University Law Review 1007, 1022 (‘Worker Investors derive most of their income and most of their ability to accumulate wealth from their status as laborers, not as capitalists.’)

51 Nathan Atkinson, ‘If not the Index Funds, then who?’ (2020) 17 Berkeley Business Law Journal 44.

52 Paul Brest, Ronald J. Gilson and Mark A. Wolfson. ‘How Investors Can (and Can’t) Create Social Value’ (2018) 44 Journal of Corporate Law 205, 217.

53 Mathew J. Mallow and Jasmin Sethi, ‘Engagement: The Missing Middle in the Bebchuk-Strine debate’ (2016) 12 NYU Journal of Law and Business 385, 392.

54 For instance, see Justin Bayer, ‘State Street votes against 400 companies citing gender diversity’, Wall Street Journal, July 25, 2017 https://www.wsj.com/articles/state-street-votes-against-400-companies-citing-gender-diversity-1501029490. Also see Declan Harty, ‘BlackRock voted against management at 53 companies over climate change concerns’ S&P Global Market Intelligence (14 July 2020) https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/blackrock-voted-against-management-at-53-companies-over-climate-concerns-59426142.

55 Fairfax (n 37) 125–29.

56 Dionysia Katelouzou, ‘Shareholder Stewardship: A Case of (Re)Embedding Institutional Investors and the Corporation?’ in Beate Sjafell and Christopher M. Bruner (eds.), The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability (Cambridge University Press, 2019).

57 Arjya Majumdar (n 14).

58 Voluntary Guidelines on Corporate Social Responsibility 2009, Ministry of Corporate Affairs, Government of India.

59 For the evolution of the CSR regime in India, see Anik Bhaduri, ‘CSR Non-Compliance: Will Criminal Sanctions Help?’ (2020) 31 International Company and Commercial Law Review 381; Sandeep Gopalan and Akshaya Kamalnath, ‘Mandatory Corporate Social Responsibility as a Vehicle for Reducing Inequality: An Indian Solution for Piketty and the Millenials’ (2015) 10 Northwestern Journal of Law and Social Policy 34.

60 Companies Act (2013), s 135(5).

61 Companies Act (2013), s 135(5).

62 Id, s134((3)(o) & s134(8).

63 Id, Schedule VII.

64 Section 135(5)

65 Section 135(6)

66 ibid.

67 Section 135(7).

68 Section 135(5).

69 Rajeev Jayaswal, ‘CSR offences by firms now a “civil wrong” not a crime’ Hindustan Times (January 23, 2021) https://www.hindustantimes.com/business/csr-offences-by-firms-now-a-civil-wrong-not-a-crime-101611359619876.html

70 Akshaya Kamalnath, ‘A Post-Pandemic Analysis of CSR in India’ (2021) 16 Journal of Comparative Law 714.

71 Ministry of Corporate Affairs, Standing Committee on Finance, Companies Bill 2011, Fifty-Seventh Report (2011–12) 99, 106. Numerous academic commentators have also argued that CSR should reflect the developmental obligations of the state. See Neha Pathakji, Corporations and Disability: Bridging the Digital Divide (OUP 2018) 110 (arguing that the responsibilities of states under international law ‘has a mirror effect on corporation duties.’).

72 Companies Act (2014) s166; Mihir Naniwadekar and Umakanth Varottil, ‘The Stakeholder Approach towards Director’s Duties under Indian Company Law: A Comparative Analysis (2016) NUS Law Working Paper 2016/006.

73 Rule 4(5), CSR Rules, 2014.

74 Rules 4(1) and 2(c), CSR Rules, 2014.

75 Ivan Montiel, ‘Corporate Social Responsibility and Corporate Sustainability: Separate Pasts, Common Futures’ (2008) 21(3) Organization and Environment 245; M. Ashrafi, M. Adams, TR Walker and G Magnan, ‘How corporate social responsibility can be integrated into corporate sustainability: a theoretical review of their relationships’ (2018) 25 International Journal of Sustainability and World Ecology 672.

76 Companies (CSR Policy) Amendment Rules 2021.

77 KPMG, India’s CSR Reporting Survey 2019 https://home.kpmg/in/en/home/insights/2020/02/india-s-csr-reporting-survey-2019.html#:~:text=the%20prescribed%20format.-,India's%20CSR%20reporting%20survey%202019%20analyses%20and%20brings%20together%20findings,of%20the%20Companies%20Act%2C%202013.

78 Afra Afsharipour, ‘Corporate Social Responsibility and the Corporate Board: Assessing the Indian Experiment’ in Umakanth Varottil and Jeroen Veldman (eds.), Globalization of Corporate Social Responsibility and its impact on corporate governance (2018); Akanksha Jumde, ‘The law on CSR in India: an analysis of its compliance by companies through corporate disclosures’ (2021) 21 Journal of Corporate Law Studies 253; Akshaya Kamalnath (n 70)

79 One million Indian rupees are approximately 12,000 US dollars (based on the exchange rate as on 16 December 2023).

80 KPMG (n 77); Lola Nayar, ‘CSR has not translated into real benefit for the poor’ Outlook (December 14, 2018) https://www.outlookindia.com/magazine/story/warm-up-to-responsibility/300982

81 NP Bang, Sougata Ray, Kavil Ramachandran and Anierudh Vishwanathan, Family Businesses: Promoters’ Skin in the Game 2001–2017 (2018) White Paper, Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business.

82 Akanksha Jumde and Jean du Plessis, ‘Legislated Corporate Social Responsibility (CSR) in India: The Law and Practicalities of its Compliance’ (2020) Statute Law Review https://doi.org/10.1093/slr/hmaa004

83 Rudresh Mandal and Ashwin Murthy, ‘CSR Investment in the post pandemic era: the dual promise of ESG investment and investor stewardship’ (2021) 5(2) Indian Law Review 229.

84 Arjya Majumdar (n 14)

85 Jumde and du Plessis (n 81).

86 Unless a substantial number of shareholders actively engage with the management through voting or otherwise, the discretion of the management remains unchallenged. A small number of shareholders, with limited shareholding and voting power, cannot bring effectively challenge the decisions of the management. See Umakanth Varottil, ‘The Advent of Shareholder Activism in India’ (2012) 6 Journal on Governance 582.

87 Companies Act (2013) s 135(1).

88 Umakanth Varottil, ‘Evolution and Effectiveness of Independent Directors in Indian Corporate Governance’ (2010) 6 Hastings Business Law Journal 281. (Arguing that since the election of independent directors rests in the hands of the shareholders, independent directors interests’ are often aligned with those of the majority).

89 CP Bhambhri, ‘Linkages between politics and business’ Economic Times (February 13, 2010) https://economictimes.indiatimes.com/opinion/et-commentary/linkages-between-politics-and-business/articleshow/5566878.cms

90 In the 2014–2019 Parliament, more than 20% of the Members of Parliament were directly involved in business activities. See Aseema Sinha, ‘India’s Porous State: Blurred Boundaries and the Evolving Business-State Relationship’ in Christophe Jaffrelot, Atul Kohli and Kanta Murali (eds.) Business and Politics in India (Oxford University Press 2019).

91 Companies Act (2013), s 135(5).

92 Damien Krichewsky, ‘CSR Public Policies In India’s Democracy: Ambiguities In The Political Regulation Of Corporate Conduct’ (2017) 19(3) Business and Politics 1.

93 Aseema Sinha (n 91).

94 Pushpa Sundar, ‘Using CSR funds for political gain’ The Wire (December 22, 2018) https://thewire.in/business/modi-government-csr-political-gain

95 The Wire, ‘UP Government Wants to Use CSR Funds for 100-Metre Ram Statue’ The Wire (March 29, 2018) https://thewire.in/politics/up-government-wants-to-use-corporate-funds-for-100-metre-ram-statue

96 Comptroller and Auditor General of India, Report No. 18 of 2018 – Compliance Audit on General Purpose Financial Reports of Central Public Sector Enterprises of the Union Government (Commercial), August 7, 2018 https://cag.gov.in/en/audit-report/details/46202

97 Pushpa Sundar (n 95).

98 Piyush Pandey, ‘Coronavirus| Anand Mahindra offers to convert Mahindra resorts to temporary care facilities’ The Hindu (March 22, 2022) https://www.thehindu.com/news/national/coronavirus-anand-mahindra-offers-to-convert-mahindra-resorts-to-temporary-care-facilities/article31134490.ece

99 Anil Bhardwaj, ‘The need for innovative CSR models in the post-pandemic world’ Economic Times (October 30, 2021) https://economictimes.indiatimes.com/small-biz/sme-sector/the-need-for-innovative-csr-models-in-post-pandemic-world/articleshow/87390378.cms

100 General Circular No. 10/2020, Ministry of Corporate Affairs (23 March 2020) https://www.mca.gov.in/Ministry/pdf/Covid_23032020.pdf

101 Gireesh Chandra Prasad, ‘Pandemic spurs Indian firms to boost CSR spending, compliance’ Mint (8 April 2023) https://www.livemint.com/companies/news/pandemic-spurs-indian-firms-to-boost-csr-spending-compliance-11680891508872.html

102 Samrat Sharma, ‘PSUs outshine private firms as India Inc pushes CSR funds to fight coronavirus; check top contributors’ Financial Express (10 June 2020) https://www.financialexpress.com/economy/psus-outshine-private-firms-as-india-inc-pushes-csr-funds-to-fight-coronavirus-check-top-contributors/1986974/

103 Sulekha Nair, ‘COVID-19 impact is massive, but other social causes need CSR funding too, say NGOs’ First Post (5 August 2020) https://www.firstpost.com/india/covid-19-impact-is-massive-but-other-social-causes-need-csr-funding-too-say-ngos-8673811.html

104 Staff Reporter, ‘PM-CARES Fund 'Not a Public Authority', Doesn't Fall Under RTI Act: PMO’ The Wire (31 May 2020) https://thewire.in/government/pm-cares-fund-not-a-public-authority-rti-act-pmo

105 Adolf A. Berle and Gardiner Means, The Modern Corporation and Private Property (1^st ed., Transaction publishers, 1932); Reinier R Kraakman, Paul Davies and Henry Hansmann, The Anatomy of Corporate Governance (OUP 2004) 21.

106 Edward B. Rock, ‘Institutional Investors in Corporate Governance’ in Jeoffrey N. Gordon and Wolf-Georg Ringe eds., The Oxford Handbook of Corporate Law and Governance (OUP 2018).

107 Brian R. Cheffins, ‘The Rise and Fall(?) of the Berle-Means Corporation’ (2019) 42 Seattle University Law Review 445; Assaf Hamdani and Sharon Hannes, ‘Institutional investors, activist funds and ownership structure’ in Afra Afsharipour and Martin Gelter (eds.), Comparative Corporate Governance (2021).

108 Barzuza et al (n 13); Lipton (n 41).

109 Lucian Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy’ (2019) 119 Columbia Law Review 2029; Curtis et al (n 13)

110 Jill Fisch, Assaf Hamdani and Steven Davidoff Solomon, ‘The New Titans of Wall Street: A Theoretical Framework for Passive Investors’ (2019) 168 University of Pennsylvania Law Review 17.

111 Umakanth Varottil, ‘The Advent of Shareholder Activism in India’ (2012) 6 Journal on Governance 582.

112 Securities and Exchange Board of India, Circular for Mutual Funds, SEBI/IMD/CIR No 18/198647/2010 (15 March 2010).

113 Companies Act (2013), s108.

114 IRDAI, Guidelines on Stewardship code for Insurers in India (2017).

115 PFRDA, Common Stewardship Code, PFRDA/2018/PF/01, May 4, 2018.

116 SEBI, Stewardship Code for all Mutual Funds of all categories of AIFs, in relation to their investment in listed entities, Circular No: CIR/CFD/CMD1/ 168 /2019, December 24, 2019.

117 The three India-based proxy firms are InGovern, Institutional Investor Advisory Services and Stakeholders Empowerment Services.

118 For instance, see Glass Lewis, Guidelines: An Overview of the Glass Lewis Approach to Proxy Advice – India, 2020 https://www.glasslewis.com/wp-content/uploads/2016/12/Guidelines_India.pdf; Institutional Shareholder Services, India: Proxy Voting Guidelines – Benchmark Policy Recommendations, December 13, 2021 https://www.issgovernance.com/file/policy/active/asiapacific/India-Voting-Guidelines.pdf

119 Umakanth Varottil, Desiderata (n 22).

120 Mahesh Vyas, ‘Beyond Promoter Power’ Financial Express (February 2, 2009) https://www.financialexpress.com/archive/beyond-promoter-power/417788/

121 Institutional Investor Advisory Services, How Shareholders voted on the NIFTY 500 companies in 2020–21, December 9, 2021 https://www.iiasadvisory.com/institutional-eye/voting-outcomes-for-nifty-500-companies-for-fy-20-21

122 ibid.

123 Suresh P. Iyengar, ‘How Shareholder Activism has hit a high in India’ Business Line (September 18, 2021) https://www.thehindubusinessline.com/companies/how-shareholder-activism-has-hit-a-high-in-india/article36540272.ece

124 Invesco Developing Markets Fund v Zee Entertainment Enterprises Ltd. and Anr., 2022 SCC OnLine 630.

125 Institutional Investor Advisory Services, Shareholder Activism: What India Inc. can expect, 18 October 2022.

126 Ashley Coutinho, ‘India ESG assets up 4.7 times in two years to Rs. 12,300, shows data’ Business Standard (December 19, 2021) https://www.business-standard.com/article/markets/india-esg-assets-up-4-7-times-in-two-years-to-rs-12-300-crore-shows-data-121121900670_1.html#:~:text=The%20assets%20under%20management%20(AUM,2%2C630%20crore%2C%20in%20November%202019.

127 ibid.

128 Special Correspondent, ‘Tyagi laments lack of disclosures by listed firms’, The Hindu (July 28, 2021) https://www.thehindu.com/business/tyagi-laments-lack-of-disclosures-by-listed-firms/article35595166.ece

129 Ministry of Corporate Affairs, National Action Plan for Business and Human Rights, December 2018 https://www.mca.gov.in/Ministry/pdf/ZeroDraft_11032020.pdf

130 ibid 4.

131 PTI, ‘Top 1000 listed firms must prepare annual biz responsibility report: SEBI’ Business Standard (November 20, 2019) https://www.business-standard.com/article/pti-stories/business-responsibility-reports-mandatory-for-top-1-000-listed-companies-sebi-119112001457_1.html

132 SEBI, ‘SEBI issues Circular on “Business Responsibility and Sustainability Reporting”, SEBI Press Release PR No. 18/2021.

133 ibid.

134 ibid.

135 National Stock Exchange, ESG Analysis on 50 listed companies in India: Baby steps by India Inc towards sustainability https://www.sesgovernance.com/pdf/home-reports/1594458276_ESG-Analysis-on-50-Listed-Companies-in-India_2020.pdf

136 Alexandre Garel and Arthur Petit-Romec, ‘Investors Reward Environmental Responsibility’ (2020) 33(1) Covid Economics (2020); Wenzhi Ding, Ross Levine, Chen Lin and Wensi Xie, ‘Corporate Immunity to the COVID-19 Pandemic’ (2021) NBER Working Paper No. 27055. For an opposite view, see Elizabeth Demers, Julian Hendrikse, Philip Joos and Baruch Lev, ‘ESG did not immunize stocks during the Covid-19 crisis, but investments in intangible assets did’ (2021) 48 Journal of Business Finance and Accounting 433.

137 (n 45) above; Gunnar Friede, Timo Busch and Alexander Bassen, ‘ESG and financial performance: aggregated evidence from more than 2000 empirical studies’ (2015) 5(4) Journal of Sustainable Finance & Investment 210.

138 Hemlata Chelawat and Indra Vardhan Trivedi, ‘The Business Value of ESG Performance: the Indian Context’ (2016) 5(1) Asian Journal of Business Ethics 1, 1–16.

139 NSE, ‘Gaining exposure to large cap companies with superior ESG risk management’ October 2020 https://www1.nseindia.com/content/indices/Whitepaper_Nifty100_ESG_Sector_Leaders.pdf

140 Kiran Kabatta Somvanshi, ‘Investing in indices and funds with ESG funds can pay off’ Economic Times (8 January 2020) https://economictimes.indiatimes.com/mf/analysis/investing-in-indices-and-funds-with-esg-focus-can-pay-off/articleshow/73149213.cms?from=mdr

141 Ministry of Corporate Affairs, Report of the Committee on Business Responsibility Reporting (2020) 18.

142 Umakanth Varottil, ‘Shareholder activism is growing in India but it faces some hurdles’ Indian Express (November 2, 2021) https://indianexpress.com/article/opinion/columns/shareholder-activism-is-growing-in-india-but-it-faces-some-hurdles-7601033/

143 Umakanth Varottil, Desiderata (n 22).

144 Edward B Rock, ‘The Logic and (Uncertain) Significance of Institutional Investor Activism’ (1991) 79 Georgetown Law Journal 445; Stephen M. Bainbridge, ‘Shareholder Activism and Institutional Investors’ (2005) UCLA School of Law, Law School Research Paper No. 05-20.

145 Mandal and Murthy (n 83).

146 Principle 3 of each Stewardship Code imposes a duty on institutional investors to monitor various aspects relating to the business operations of their portfolio companies, including their ESG risks.

147 IRDAI, Guidelines on Stewardship Code for Insurers in India (introductory letter accompanying the Guidelines).

148 PFRDA, Common Stewardship Code (introductory letter accompanying the Stewardship Code, para. 3); SEBI, Stewardship Code for all Mutual Funds and all categories of AIFs, in relation to their investment in listed equities (introductory letter accompanying the Stewardship Code, para. 4).

149 Umakanth Varottil, Desiderata (n 22).

150 Umakanth Varottil, ‘Corporate Governance in India: The Transition from Code to Statute’ in Jean du Plessis and Chee Keong Low (eds.), Corporate Governance Codes for the 21st century: International Perspectives and Critical Analyses (Springer 2017).

151 M Krishnamoorthy and VR Ramakrishnan, ‘Are MFs serious about SEBI’s Stewardship Code?’ Hindu Business Line (February 27, 2022) https://www.thehindubusinessline.com/opinion/are-mfs-serious-about-sebis-stewardship-code/article65084621.ece

152 Dionysia Katelouzou and Konstantinos Sergakis, ‘Shareholder Stewardship Enforcement’ European Corporate Governance Institute - Law Working Paper No. 514/2020.

153 ibid; Hanne S. Birkmose and Konstantinos Sergakis, ‘Introduction’ in Hanne S. Birkmose and Konstantinos Sergakis (eds.), Enforcing Shareholders Duties (Edward Elgar 2019).

154 Katelouzou and Sergakis (n 153).

155 Konstantinos Sergakis, ‘Legal versus Social Enforcement’ in Hanne S. Birkmose and Konstantinos Sergakis (eds.), Enforcing Shareholders’ Duties (Edward Elgar 2019).

156 Mark Fenwick and Erik PM Vermeulen, ‘Institutional Investor Engagement: How to Create a ‘Stewardship Culture’, Lex Research Topics in Corporate Law and Economics Working Paper No. 2018-1, TILEC Discussion Paper No. 2018-006 (arguing that threatening non-compliance with sanctions may hinder the emergence of a stewardship culture since sanctions force most investment funds into ‘reactive engagement’ with a view to avoiding the penal consequences.)

157 Umakanth Varottil, ‘Securities Markets’ in Devesh Kapur and Madhav Khosla (eds.), Regulation in India: Design, Capacity, Performance (Hart Publishing, 2019).

158 Id; Shruti Rajan, ‘Procedural Fairness in Securities Enforcement’ (2021) NLS Business Law Review https://www.nlsblr.com/procedural-fairness-in-securities-enforcement

159 R Chakrabarti, ‘Financial Development in India: Status and Challenges’ in M. Kawai and ES Prasad (eds.), Asian Perspectives on Financial Sector Reforms and Regulation (Asian Development Bank Institute, 2011).

160 For instance, see the Scheme Information Document of Quantum India ESG Equity Fund 20–22 https://www.quantumamc.com/scheme-information-document-forms/quantum-india-esg-equity-fund/form-352

161 S 74. Also section 17 of the Indian Contracts Act provides for fraud as a ground that renders a contract voidable.

162 Christopher Van der Elst, ‘Shareholder engagement duties: The European move beyond stewardship’ in HS Birkmose and Konstantinos Sergakis (eds.), Enforcing Shareholder Duties 60,79 (Edward Elgar, 2019).

163 Brian T. Fitzpatrick and Randall Thomas, ‘The Indian Securities Fraud Class Action: Is Class Arbitration the Answer?’ (2020) 40 Northwestern Journal of International Law and Business 203 (observing that Indian courts frequently adjourn proceedings on frivolous grounds ‘that would not be tolerated in any other country’); Nick Robinson, ‘Structure Matters: The Impact of Court Structure on the Indian and the US Supreme Courts’ (2013) 61 American Journal of Comparative Law 173. (observing that Indian lawyers charge ‘by appearance’ which gives them an incentive to drag the cases on for years).

164 Iris H.-Y. Chiu and Dionysia Katelouzou, ‘Making a Case for Regulating Institutional Shareholders’ Corporate Governance Roles’ (2018) Journal of Business Law 67, 79.

165 Konstantinos Sergakis, ‘Legal vs social enforcement of shareholder duties’ in Hanne S. Birkmose and Konstantinos Sergakis (eds.), Enforcing Shareholders’ Duties (Edward Elgar, 2019); Konstantinos Sergakis and Dionysia Katelouzou, ‘Shareholder Stewardship Enforcement’ in Dionysia Katelouzou and Dan W. Puchniak (eds.), Global Shareholder Stewardship (Cambridge University Press, 2022).

166 ibid.

167 Financial Reporting Council, Tiering of Signatories to the Stewardship Code, 14 November 2016 https://www.frc.org.uk/news/november-2016/tiering-of-signatories-to-the-stewardship-code

168 Financial Reporting Council, FRC encouraged by investors embracing the spirit of the UK Stewardship Code, 10 March 2022 https://www.frc.org.uk/news/march-2022-(1)/frc-encouraged-by-investors-embracing-the-spirit-o

169 Robert M. Baldwin, Martin Cave and Martin Lodge, Understanding Regulation (2nd ed., OUP, 2011) 151–52 (observing that regulatory strategies relying on third parties or the regulatees themselves to enforce corporate regulations are cost-efficient).

170 Sergakis (n 166).

171 Sharon Yadin. ‘Regulatory Shaming’ (2019) 49(2) Environmental Law 407.

172 Judith van Erp, ‘Shaming and Compliance’ in Benjamin van Rooij and D. Daniel Sokol (eds.), The Cambridge Handbook on Compliance (Cambridge University Press 2021).

173 Paul Davies, ‘The UK Stewardship Code 2010–2020: From Saving the Company to Saving the Planet?’ (2020) European Corporate Governance Institute – Law Working Paper No. 506/2020.

174 For an overview of the socio-legal and institutional structures that hinder the success of transplanted corporate laws in India, see Umakanth Varottil, ‘A Cautionary Tale of the Transplant Effect on Indian Corporate Governance’ (2009) 21(1) National Law School of India Review 1.

175 Anand K. Rathi, ‘Why financial literacy is key for millennials’ Mint (December 7, 2021) https://www.livemint.com/money/personal-finance/why-financial-literacy-is-key-for-millennials-11638811574912.html

176 Chandril Chattopadhyay, ‘Importance of New ESG Rules in India’ BW Legal World (14 September 2022) http://bwlegalworld.businessworld.in/article/Importance-Of-New-ESG-Rules-In-India/14-09-2022-446622/

177 Asian Development Bank, In India, Financial Literacy Programs are Lifting Families out of Debt and Fueling New Prosperity, 8 March 2022 https://www.adb.org/results/india-financial-literacy-programs-lifting-families-out-debt-fueling-new-prosperity

178 Chakrabarti (n 163); Pavan Burugula, ‘SEBI disgorgement orders hit SAT wall’ Mint (13 August 2023) https://www.livemint.com/market/sebi-disgorgement-orders-hit-sat-wall-11691949021069.html#:~:text=In%20FY23%2C%2053.6%25%20of%20appeals,in%20SAT%20during%20the%20year.m

179 The public tiering of investment funds is an administrative act and is not appealable before the Securities Appellate Tribunal, which is empowered to hear appeals only in relation to quasi-judicial acts of the SEBI. However, allegations of procedural impropriety and violation of due process may be raised before constitutional courts under their writ jurisdictions. See National Securities Depositories Limited v SEBI (2017) 5 SCC 517.

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Anik Bhaduri

Anik Bhaduri is a 2022 graduate of NALSAR University of Law and currently an associate with the competition law practice at Shardul Amarchand Mangaldas & Co. The author regularly writes on competition law and corporate law issues with a focus on India and other developing economies.