India Proxy Season 2020 – An Analysis
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On June 15, 2020, InGovern celebrated 10 years of pioneering proxy advisory services in India. In these 10 years, the corporate governance scenario in India has evolved by leaps and bounds. India adopted a new Companies Act in the year 2014 and listed companies were regulated by a new code by the Securities and Exchange Board of India (SEBI) based on the Kotak committee recommendations.
In these 10 years, InGovern noticed that shareholders moved beyond Vote Recommendations into seeking Shareholder Activism services to bring about positive change in companies. Minority shareholders are increasingly becoming aggressive in asserting their rights and demanding that companies not be prejudicial to their interests. Shareholders, both institutional and retail, are voting actively and objectively.
Shareholders voted not against convoluted capital structure changes, mergers, and acquisitions, but also against director appointments, director compensations and related party transactions. As many investors started asserting their rights, many companies no longer bring proposals that they believe would get defeated by shareholders.
As India’s first proxy advisory firm, InGovern offers services in corporate governance advisory and shareholder activism in India. Since 2010, we have advised investors and Indian companies on governance matters, including on enhancing shareholder value through better corporate governance practices. Some high impact assignments we have executed in recent years are:
Shareholder activism and value creation for investors of a Rs.200 crore (now Rs.700 crore) marcap company listed on the BSE.
Constructive activism – value enhancement engagement for USD 300 million investment by a UK-based activist fund in a leading automobile company.
Shareholder activism at MRO-TEK Realty Limited, a Bangalore-based listed company with embedded real estate value.
Corporate governance diagnostic and action plan advisory for a Rs.10,000 crore marcap Ahmedabad-based listed company.
Corporate governance diagnostic and action plan advisory for Rs.12,000 crore marcap Delhi-based listed company.
Unlocking of listed holding investment company discount with respect to the underlying operating listed company.
2020 Proxy Season
In the 2020 proxy season, we noticed the following prominent issues:
a) Waiver of excess remuneration paid due to inadequacy of profits – due to the pandemic-related lockdown, and degrowth in business, many leading companies had inadequate profits and would have had to claw back compensation paid to executive directors.
b) Raising of capital by banks and non-banking finance companies due to the loan moratoriums and the stress caused to loan portfolios due to the pandemic.
c) When the markets crashed in March 2020, a few companies – Vedanta, Hexaware, etc – came out with proposals for delisting from the stock exchanges. The Hexaware delisting was successfully executed by the promoter, Barings Private Equity. On the other hand, the delisting of Vedanta failed as shareholders, including the institutional shareholder – LIC of India, tendered their shares at high prices forcing the promoters to withdraw the offer. The failure of the Vedanta delisting shows how shareholders are no longer mute spectators but asserting their rights.
d) One high profile director who was voted out by shareholders was Puneet Bhatia, the nominee of TPG on the board of Shriram Transport Finance Corporation Ltd, due to lack of sufficient attendance.
In 2020, InGovern collated over 9000 proposals for over 1000 shareholder meetings. In 2020, shareholders increasingly participated in AGMs over audio and video meetings. There was a restriction of 1000 shareholders with institutional shareholders and directors being allowed for meetings. Many companies are getting used to deploying technology for shareholder meetings. E-voting has been in vogue since 2014, however, 2020 saw increased adoption of e-voting as that was the only means of voting.
Good Governance and Investor Expectations
Most companies and Boards still think good governance is about compliance and fail to recognise that good governance is about simplicity, transparency, and fairness to all stakeholders. Public market investors expect directors to increasingly perform and contribute to Board meetings. Directors can no longer not attend board meetings and be on multi boards that they are unable to devote enough time. InGovern votes against directors who attend less than 75% of meetings. InGovern recommends that tenure of independent directors should be less than 10 years. Director compensations are under increasing scrutiny and should be justifiable in comparison to peers and should be in line with performance of the companies.
Business owners need to pay attention to corporate governance as wealth is in market capitalization and not in cash taken out from business. More than 80% of listed companies do not generate free cashflows and the pandemic has meant that companies need to think of ways to generate free cashflows. Promoters should realise that the business case for better corporate governance is lower cost of capital due to enhanced reputation and credit ratings and increased investor interest. Companies with diverse boards where views of individual directors are relevant can manage risks better while also handling growth. These factors explain why only a few companies that are good governed have high P/E multiples, like Asian Paints, Titan, Pidilite, HDFC Bank, Infosys, etc. with lots of investor interest. Abusive related party transactions and off-balance transactions which masquerade as arms-length relationships are used by promoters to take value away from companies and complex holding structures, obscure promoter holdings, etc lead to low confidence in the companies, like recent cases of Vedanta, UPL, Zee, etc show.
Of course, there are various hues of investors. But long-term patient capital is more interested in companies where there is emphasis on sustainable growth, the reason why succession planning and Environment, social and governance (ESG) take predominance. Succession planning is about ensuring continued culture and practices of the company without disruption. ESG concerns are slowing taking root among investors and companies in India. Companies that adopt embrace good ESG practices are held in higher esteem by investors.
As 2020 proved, going digital was the way forward for companies and investors. Investor engagement took on a different note – with virtual meetings, online webinars, and conferences. The suspension of the Insolvency and Bankruptcy Code meant that companies could not be dragged into insolvency proceedings by operational and financial creditors. Financial stress is likely to show up in 2021 and beyond.
2021 and beyond promises to be more interesting as India marches onto becoming a USD 5 trillion-dollar economy and the depth and breadth of Indian capital markets increases and investors have more choice.