Corporate board rooms are becoming more considerate of shareholder impact than ever before, with Indian equity shareholders becoming proactive in their engagement with companies. Investors are being vocal about their opinions and casting their vote, rather than exiting their shareholding at the first whiff of a disagreement with management decisions. A few recent instances point to this change:
- United Spirits investors were concerned about related party transactions and the complete opacity around resolutions seeking approval around the time the company was unable to present its accounts. Nine of the 12 resolutions, put to shareholders were rejected by them. This included related-party transactions under which the cash-strapped UB Group, controlled by Vijay Mallya, stood to earn an estimated Rs 800 crore in revenues over the next few years, from United Spirits.
- The board of Siemens India proposed to sell its metals technology business at a valuation of Rs 853 crore to its German parent, Siemens AG, as a part of a global transaction. This valuation was lower than the value at which Siemens AG had transferred/sold the business to Siemens India, three years earlier. The sale proposal was rejected by a majority of the minority shareholders, forcing the Siemens India board to revise the offer to Rs 1,023 crore.
- Last January, Maruti announced that Suzuki, its parent, will set up a wholly-owned subsidiary in Gujarat to manufacture and sell vehicles to Maruti, who in turn will sell these in the Indian market. The formal protest by shareholders, led to over 20 months of dialogue and very substantial revisions in the proposed terms, after which the shareholders approved it.
First, this change has been strongly supported by changes in regulation. The Companies Act, 2013, focuses on governance and a board structure that fosters good behaviour. The Act also introduced regulation requiring obtaining approval by majority of minority shareholders for related party transactions. Further, the Act has made e-voting mandatory, the real implication of which is in the manner in which the votes are counted. E-voting counts one vote per share held, which dramatically changes the counting from the show-of-hands method (of counting one vote per hand, prevalent till then). This not only increases the shareholders' ability to vote but each vote now also counts. Equally important, the implementation of e-voting means that all resolutions, even those which are presented only at shareholder meetings (and not just via postal ballot), have to be polled.
Keeping step with the new Act, the Securities and Exchange Board of India (Sebi), too, has developed a tighter corporate governance framework. But, it was an innocuous circular Sebi issued in March 2010, with corporate governance being only one of the six agenda items, which suggested that the mutual funds play 'a greater role in the better governance of listed companies,' that got mutual funds to focus on voting. It asked funds to have a voting policy and a process to vote their shareholding. With time, Sebi asked for greater disclosure, including providing the rationale for their pick, forcing investors to be far more thoughtful about their choices.
The second reason for this change is the ownership of companies. For long, retail investors were large holders in equity, the promoters held just enough to get themselves re-elected to continue running their business. Domestic institutions, largely government-owned, supported the status quo. While 'promoters' have spent the last decade shoring up their shareholding, the retail has given way to foreign institutional investors and domestic mutual funds, accountable in turn to their unit-holders. Anecdotal evidence from other geographies suggests that once institutions approach 30 per cent ownership, their engagement with companies deepens. Institutional holdings in India are now at this level.
Finally, voting or proxy advisory firms in India have become a catalyst for shareholder engagement. Institutional Investor Advisory Services India (IiAS) was established in 2010, followed by others in quick succession. These firms provide commentary and analysis on shareholder resolutions, which are being picked up by the media and disseminated in a larger community. Bilateral dialogue is giving way to a broader public debate between the companies, shareholders, media and the regulators.
Shareholders are waking up to the realities of their power. If the Indian equity markets are to see higher levels of participation, then shareholders and board must create an environment of active communication and predictability of behaviour. In the next decade, we expect the engagement between shareholders and company boards will be driven less by regulation and more as good governance practice.
Amit Tandon is the founder and managing director of Institutional Investor Advisory Services India (IiAS)
