Paper on Directors’ Duties and Stakeholder Interests

Mihir Naniwadekar and I have a working paper on SSRN
titled “The
Stakeholder Approach Towards Directors’ Duties Under Indian Company Law: A
Comparative Analysis
”, the abstract of which is as follows:
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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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