Shareholder Activism in India

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The genesis of shareholder activism in India can be traced back to early 2010 when SEBI came up with a mandatory requirement for domestic mutual funds to disclose their voting policies as well as voting actions at their investee companies, on an annual basis. InGovern Research Services saw this as an opportunity and started as India’s first proxy advisory services company in June 2010. A proxy advisory firm offers voting recommendations to institutional investors like mutual funds, insurance companies, foreign institutional investors, private wealth management firms, etc. on shareholder meeting resolutions of their investee companies.

Indian institutional investors were initially concerned largely with non-routine corporate actions such as M&As and company restructurings. When domestic mutual funds made voting disclosures for the first time in 2011, the data was telling that the funds were not actively engaged with companies on routine businesses such as director appointments, director remuneration, auditor appointments, equity and debt fundraisings, related party transactions, sale of business assets, role of independent directors, director tenures, etc.

The Akzo-Nobel and Sesa-Sterlite

Although proxy advisory firms found many contentious issues in routine and non-routine company proposals, the first case of institutional activism was evident in the Akzo Nobel merger case in early 2012 and then in Sesa-Sterlite merger in mid-2012.

In the Akzo Nobel case, the Board proposed to merge three promoter-held unlisted entities with Akzo Nobel at seemingly high valuations. InGovern issued recommendations against the proposal based on which a few prominent domestic institutions voted against the merger. However, the merger went through as it received sufficient percentage of votes.

Similarly, the Boards of Sesa Goa and Sterlite India approved a merger of the two companies along with Vedanta Aluminium Limited (VAL). Proxy firms highlighted the facts that VAL had heavily leveraged balance sheet and a number of human rights issues. Acting on it, many institutional investors voted against the merger, but like Akzo-Nobel, the proposal passed through getting sufficient votes.

The Indian Hotels and Jindal Steel

Tata Group owned Indian Hotels classified Mr. Shapoor Mistry as an independent director in its annual report of 2012. Such a classification was wrong since Mr. Mistry is from the family that has a major shareholding in the Tata Sons and is the brother of Mr. Cyrus Mistry. Proxy firms recommended that investors raise this issue following which the company correctly classified him as a non-independent director in the annual report of 2013.

Jindal Steel and Power (JSPL) proposed a resolution in 2012 to hand over authority to its CMD to set the remuneration of Executive Directors. Once again, due to activism by proxy firms and shareholders, the company withdrew the proposal.

Tata Motors, United Spirits and Siemens

In 2014, Tata Motors’ proposal of payment of remuneration to two of its Executive Directors and the Managing Director in event of inadequate profits was rejected by public shareholders. This was the first instance of a routine proposal by a prominent Indian company failing to approval by the shareholders.

Similarly, in late 2014, many proposals of United Spirits to enter into related party transactions with its promoter Diageo Plc and other related entities were rejected by its shareholders.

Siemens’ proposal for selling the metals technologies business to a 100% subsidiary of Siemens AG, the German parent company, was rejected by shareholders.

All the three companies have re-proposed their resolutions with enhanced disclosures and explanations that are more informative.

Activism by Foreign Investors

The proxy advisory firms and domestic investors were not the only ones to take a proactive stance on activism; a few foreign investors too started taking keen interest in their Indian investee companies. In 2012, The Children’s Investment Fund (TCI), a UK based hedge fund with AUM of more than $5 billion, initiated a legal action against Coal India’s directors and the Govt. of India over under pricing of coal resulting in lesser profits by Coal India. TCI, at that time, held 1% of Coal India’s shares which accounted for 10% of the total outstanding shares held by the public.

In 2014, Knight Assets, another UK based fund, engaged with Tata Motors to list the A-shares in the American bourses. The investor believed the DVRs were undervalued in Indian markets and listing in US could enhance shareholder value.

What has aided shareholder activism

Shareholder activism can only take shape in an environment where the regulators demand that minority shareholder interests be protected. The new Companies Act 2013, subsequent revisions to Clause 49 of the Listing Agreement and other regulatory changes by SEBI have ushered in many changes that enhance the corporate governance landscape in India. The requirements for greater degree of disclosures by companies aided shareholders to analyze particular actions and make better-informed decisions. E-voting was made mandatory in 2013 which resulted in greater investor participation as it made voting process painless and independent of the location of the investor. Provisions like class action suits against companies and directors, which are in the offing, can also give minority investors the confidence to raise voice against companies whenever the need arises. However, some of the recent changes proposed in the Companies Act can be considered as dilution of minority rights.

The road ahead

Indian companies need to give due importance to minority investors and realize that shareholder activism is here to stay. More institutional investors, including the public sector institutional investors, should engage actively with companies on routine and non-routine proposals. Regulators need to create an environment that fosters greater activism that ensures efficient management of companies and increased capital productivity in India.

The article can be downloaded from here: Shareholder activism in India