NUS - Centre for Law & Business Working Paper No. 16/03
24 Pages Posted: 14 Aug 2016 Last revised: 10 Sep 2016
Date Written: August 11, 2016
Recognizing that common law does not cast any general duty upon directors towards non-shareholder constituencies, legislatures have sought to formulate a tolerable solution to what they perceive as a gap in existing common law. The British Parliament engaged in one such legislative intervention by adopting the “enlightened shareholder value” (“ESV”) model through section 172 of the UK Companies Act 2006 (the “2006 Act”). This requires directors to have regard to non-shareholder interests as a means of enhancing shareholder value over the long term. Another approach was taken by the Indian Parliament through section 166(2) of the Companies Act, 2013 (the “2013 Act”), which appears at first glance to cast a duty on directors to treat non-shareholder interests as an end in itself. In other words, section 166(2) follows the pluralist approach by placing all interests (whether of shareholders or other stakeholders) on par without creating any hierarchy and as being valid in their own right.
In this article, we examine the nature and content of the duty cast under section 166(2) of the 2013 Act in India. In doing so, we also draw on the experiences from similar debates in other jurisdictions, principally the United Kingdom (UK). Our principal thesis is that while section 166(2) of the 2013 Act at a superficial level extensively encompasses the interests of non-shareholder constituencies in the context of directors’ duties and textually adheres to the pluralist approach, a detailed analysis based on an interpretation of the section and the possible difficulties that may arise in its implementation substantially restrict the rights of stakeholders in Indian companies. This makes the Indian situation not altogether different from the ESV model followed in the UK.
Keywords: Directors' Duties, Company Law, Shareholders, Stakeholders, Enlightened Shareholder Value, India, United Kingdom
Suggested Citation: Suggested Citation
Naniwadekar, Mihir and Varottil, Umakanth, The Stakeholder Approach Towards Directors’ Duties Under Indian Company Law: A Comparative Analysis (August 11, 2016). NUS - Centre for Law & Business Working Paper No. 16/03; NUS Law Working Paper No. 2016/006. Available at SSRN: https://ssrn.com/abstract=2822109