Imported laws that do not take into account ground realities, weak enforcement by both regulators and shareholders and 'friendly' sell-side analysts have abetted management apathy towards minority investor issues in India. While the recent steps taken by British hedge fund, The Children’s Investment Fund (TCI), to protect its interests in an investee company have brought into focus the government’s role as the dominant shareholder in Coal India, analysts say the family promoter groups do not offer any better treatment to their minority counter parts. In many cases, they are much worse than the government, reflecting in bad performance parameters.
“The central challenge in India is making the dominant/controlling shareholder (Government of India, promoter family, or MNC) accountable to minority shareholders. India’s corporate governance framework has improved in recent years, however, the problem is that 1) much of the framework draws heavily on the Anglo-American approach, which doesn’t adequately address India’s shareholder conflict and 2) enforcement of governance remains weak (both through public legal 2channels and private channels),” Foreign brokerage Espirito Santo Securities said in a report on Monday.
It said the problem is even deeper in the private sector with worst performer being family-promoter groups with the dominant shareholder controlling 76 per cent or more.
| BIG vs SMALL Enforcement actions for minority shareholders |
Source: Espirito Santo Investment Bank Research |
“Family-promoter groups underperformed significantly and within the promoter group categories, we identify that the sub-segment with the promoter holding of more than 76 per cent is the worst performing group by a distance,” Espirito Santo said.
According to the report, 463 BSE 500 companies have a ‘dominant’ shareholder owning of over 26 per cent. Public sector firms are actually better than most private firms. The index representing 60 PSUs gave a ten year returns of a healthy 30 per cent, whereas the index representing family-promoter groups gave a return of 21.7 per cent.
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Multinationals index returned 18.2 per cent.
Analysts feel the governance framework has been too heavily influenced by Anglo-American governance such as the Cadbury report in the UK, Sarbanes-Oxley in the US etc. “I think best practices from across the globe have been absorbed in terms of corporate governance. But globally, there is a separation of ownership and management. In India that is not the case. Therefore, these rules will less efficient in a situation where the shareholding is concentrated,” said Girish Nadkarni, executive director, Avendus Capital.
"Wherever the shareholding concentration is high, the promoters get their way done. To prevent this, in case of related-party transactions, majority shareholders should recuse themselves from voting or as a law their vote shouldn't be counted," said Shriram Subramanian, founder and managing director, InGovern Research Services, a Bangalore-based proxy advisory and corporate governance research firm."Also, the current board structures need lot to be desired. Independent directors should take a stand on what is just and fair for all shareholders," he added.
Nadkarni of Avendus felt there is not much scope for adding more safeguards, “It can become restrictive,” he said.
Even analysts themselves are part of the problem, “Companies don’t feel enough pressure from the market, as most sell-side analysts and fund managers don’t speak out against governance failures, and shareholder voting and meeting attendance is only slowly improving. They fear being shut out of the communication flow or impairing the value of their holdings if they take a public stand. This is why TCI’s case is important and to be welcomed – there is strong signalling that activist investors will attempt enforcement for perceived breaches of governance norms,” the Espirito Santo report said.