 "Proxy warriors")
IIAS is one of the three proxy advisory firms in the country; the other two are InGovern and Stakeholders' Empowerment Services, or SES. Simply put, they provide voting solutions to shareholders on important issues. They go through corporate announcements, analyse them threadbare and then take a view on it. In the post-Satyam soul searching by regulators, one of the issues that came up was the apathy towards voting activity by institutional shareholders, which typically hold considerable stake in large companies. Many mutual funds never voted. Then, Securities & Exchange Board of India, or Sebi, said in March 2010 that all institutions would have to disclose how they vote on various resolutions. Funds and institutions had hundreds of companies in their portfolio. Their grouse was that if they started analysing every resolution and took a voting decision on these, they would be left with little time for managing money. This triggered the birth of proxy advisory firms.
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Shriram Subramanian, who was formerly with Infosys Consulting, founded InGovern, India's first proxy advisory firm, in mid-2010. "In every Die Hard movie, there's a scene where Bruce Willis's side-kick asks him, 'But why are you doing this?' And he says, 'Because there's no one else.' Here, I'm Bruce Willis," says he. InGovern's eight employees, who are either MBAs or have a background in commerce, track S&P CNX 500 and the BSE 500 companies, which becomes an amalgam of 585 stocks. Every proposal by any of these companies to the stock exchange requiring an AGM, EGM, postal vote or court-convened meeting is analysed and the team arrives at a decision "usually around this table" says Subramanian, 43, gesturing to the one we are seated across at the firm's first-floor office in HSR Layout in Bangalore. Apart from Subramanian, the only other investor in InGovern is Mohandas Pai, former CFO and HR head of Infosys. "The more I observe corporate governance practices in India, the more disheartened I get," Subramanian says.
InGovern caught public attention in September 2011 when it had asked investors to vote against the re-appointment of three Hindalco directors - M M Bhagat, S S Kothari and C M Maniar - because they had been on the board for 15, 23 and 29 years, respectively. This, InGovern said, could have affected their independence; Kothari also had a poor record of attending board meetings. The directors got re-appointed (Kothari died in November that year while serving on the Hindalco board; he was 90) but it set a trend as several such instances were dug out. It even finds an echo in the Companies Bill, 2012, which has suggested that independent directors cannot continue beyond two consecutive terms of five years each. Last month, InGovern recommended that shareholders vote against the proposal to demerge the fashion business of Pantaloon Retail and Future Ventures into a new company called Future Lifestyle Fashion because the shares with lesser voting rights were priced the same as normal shares. Pantaloon countered the allegations and said the economic interests were the same for the two categories of shares and there was hence no need to price them differently.
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Arjun Gupta answers the doorbell of his office in a middle-class housing complex of Malad in suburban Mumbai. This is where SES operates from. How did the housing society let an office operate out of a home, you begin to wonder. "We are running a non-profit organisation," says Gupta, 27, "We are doing something for the social good; so they are fine." The living room has been converted into an office with six workstations and a narrow passageway in between. The walls of the flat have been painted orange. There are Ganesha portraits on one wall, on another sit reports prepared by SES. The pride of the place goes to the one on Jindal Steel and Power.
Armed with this report, institutional shareholders of the company opposed a resolution authorising the chairman and managing director, Naveen Jindal, to revise the remuneration of the whole-time directors. (Jindal was the country's highest-paid executive with a package of Rs 73.42 crore for 2011-12.) In the 33rd annual general meeting held in Hisar, Haryana, on September 26, 101.41 million institutional votes, or 97 per cent, were polled against the resolution, a communication from the company to the stock exchanges said. In another advisory issued in August last year, SES asked shareholders of Apollo Hospitals Enterprise to vote against the company's proposal to pay Chairman Prathap Reddy 5 per cent of its annual net profit as compensation for the next five years. Multi-year guaranteed bonus/commission, SES argued, "removes the link between the company's performance and director's remuneration" and is "poor corporate governance practice". The company, on its part, said Reddy's remuneration was well within the prescribed regulatory limits, was "approved by the remuneration committee of the board and was in line with the company's performance and growth in profits." The resolution was passed by the shareholders.
Most of the SES reports were conceived in the bedroom of the flat that has been converted into a meeting room. Amarendra Singh, 27, Gupta's partner, sits here with his laptop on a low table with a glass top. "This is our meeting room, strategy room and board room," says Singh. "There is no fixed role. Everyone does everything." He was working with Deutsche Bank, but was happy to join SES. "We define what we do," says he. "We have done what we could not have even imagined in our previous jobs."
The idea of SES came to the duo over a year ago when Gupta's father, Jitendra Nath Gupta, a former Sebi officer, asked his son to proof-read a concept paper he had prepared on such an advisory firm. "I thought why don't we do it ourselves? Over the next few months we put in place a business plan, and by June 2012 our first report was out," Gupta recalls. One side of the room's wall has several white boards. Some have legal provisions listed on them, while some others have the hiring (read growth) plans. This season SES plans to cover about 400 companies. It has six employees at present, and plans to hire two more graduates from IIT Kanpur. (The senior Gupta, JN to friends, is also from IIT Kanpur, making it an informal IIT Kanpur alumni association.) Why do they need an IIT graduate for what looks more like legalese and intense paperwork? What do engineering and mathematics have to do with corporate governance? "Logical reasoning," Singh says. "You need to connect the dots. The IIT guys are good at it."
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Some 30 km away, in downtown Mumbai, Amit Tandon sits in his 15th floor office in PJ Towers that houses BSE (formerly Bombay Stock Exchange). His office has a view of the harbour and the iconic Gateway of India on one side and that of the University Oval Ground on the other. Tandon, who headed Fitch India before he launched IIAS in 2011, says he used to often wonder, while analysing companies that come up for rating, why would shareholders approve something that was harmful to them? He realised there was space in the market to give investors a clear picture of what is put in front of them in incomprehensible resolutions. Another man who reached a similar conclusion was Anil Singhvi, the former CFO of Gujarat Ambuja. Apart from Tandon and Singhvi, IIAS's investors include BSE, Axis Bank, HDFC, ICICI Prudential Life, Tata Investment Corporation and Deven Sharma, the former chief of Standard & Poor's.
A team of 15 goes through all announcements by large companies that constitute indices such as Sensex, Nifty and BSE 200 and are on the futures & options list. The team has been handpicked by Tandon from across the financial services spectrum: there are IIM graduates, research analysts, wealth management professionals and even a former Sebi official. All issues are discussed thoroughly before an advisory is issued. For example, in the run-up to the IIAS recommendation against appointment of Sudarshan Venu on the TVS board, there was a passionate internal debate. "Is this right?" "How is it different from a Mark Zuckerburg?" were the questions that were asked and answered.
One of the earliest cases IIAS took up was AkzoNobel's proposal to merge some privately-owned companies with itself. Led by IIAS, institutional investors such as ICICI Prudential Life, LIC and UTI expressed their discomfiture with the deal as the private companies were valued steeply and this would've led to the promoter's stake going up in the listed entity after the merger. Though the company maintained that the deal added value, investors held their ground. InGovern also supported the move. Eventually, three days before a court-convened meeting of the shareholders, the company announced a buyback proposal to allow an exit option to shareholders. Still, the special resolution to approve the merger barely scraped through.
In June last year, IIAS had taken on Infosys, the model of corporate governance, when it recommended a change in the company's auditor. According to IIAS, an auditor should be rotated every six years to ensure transparency. But BSR and Co had been "Infosys' statutory auditor for 14 years and the audit partner has been the signing partner for six years". The company said, "We expect our shareholders to exercise their judgment." While the auditor said it was unfair to pick a particular firm and the issue had to be addressed in totality, IIAS report also expressed reservations over one independent director, Omkar Goswami, having stayed on the board for too long. "In Infosys, generally non-executive directors serve up to nine years or the retirement age, whichever is earlier. However, Goswami has been on the board for 12 years. IIAS classifies him as 'non-independent' director," it said. Goswami said a view was taken by the company that the nine years would be counted from the date when clause 49 of the listing agreement (with the stock exchange) came into being (December 31, 2005). "I am 55 now. So, the retirement age will not be applicable to me. My nine-year tenure will end in 2013-14. After that, I'll be off."
In December, IIAS published a report on royalty paid by Indian arms of multinational corporations, which showed that such payments were enriching the overseas parents at the cost of local minority shareholders. The research highlighted that though royalties increased substantially (more than two-fold) since 2007-08, growth in EBITDA margins (36.4 per cent) and dividend payouts (1.3 times) was lower. The report suggested that commercial arrangements such as royalty should be voted upon by shareholders. The report created quite a stir. Multinationals such as Hindustan Unilever and Holcim altered their royalty agreements following this.
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As more and more companies find themselves under attack, some have highlighted the unilateral style of the proxy firms' advocacies. "They don't check with us. You should get back to us before getting anything printed. On occasions, proxy firms take extreme positions. Sometimes these are even incorrect positions. In that case, you are not guiding, but misleading investors," says a senior executive of one of the companies targeted by the proxy firms.
In the US, says Subramanian of InGovern, proxy advisory firms are so powerful that companies tried to lobby Washington to rein them in, in a manner of speaking. There, companies inform proxy advisory firms of proposals the same time they tell the bourses because it is in the companies' interest to be acknowledged by the advisory firms. Institutional investors there also use the auto voting facility, where they will automatically go with the recommendation made by the proxy advisory firm. India of course is a far cry from this. "If the US is at 100, we are at 1," says Subramanian. But a beginning has been made.