Lessons from HDFC

Widely-held shareholding is not the ideal solution

Last week’s voting on a special resolution seeking the reappointment of a few directors at HDFC has turned the spotlight on the risk in programmed voting by custodians who act on behalf of foreign portfolio investors and depend entirely on the recommendations of a handful of proxy advisory firms based overseas. Two senior directors of HDFC, former Reserve Bank of India Governor Bimal Jalan and chartered accountant Bansi Mehta, who had offered themselves for reappointment, resigned just before the annual general meeting after two proxy firms asked investors to vote against them. The third, Deepak Parekh, barely managed to get the required votes. The need for this vote arose after the Securities and Exchange Board of India mandated in March this year that any director above the age of 75 seeking reappointment must do so via a special resolution. In company law, a special resolution requires 75 per cent of the votes cast in favour of the resolution.

The substance of the position taken by the proxy firms in the case of Mr Jalan and Mr Mehta — the age factor, record of attendance, etc — is hard to question. The guidelines of these firms, available publicly, are clear: They will generally vote for the election of directors unless certain conditions are not met. But there are several issues here that go beyond a standard template. The fact is that such advisory firms, operating from a distance, may not give due weight to local factors. For example, no one in India would argue that Mr Parekh’s continuing chairmanship of HDFC is a negative for the firm that he built. Also, one of the reasons why the proxy firms advised voting against Mr Parekh was that he is on the board of several other companies. But HDFC is hardly run by Mr Parekh on a day-to-day basis; so, to vote against him purely on technical grounds can be meaningless.

The question that has also arisen is whether these advisory firms should become regulated entities in India. But that can be a difficult solution as these entities cannot be forced to register with Sebi and are free to operate in other countries and give their opinion. Besides, foreign investors are not obliged to follow their view; they do so voluntarily. The underlying issue is one of shareholding. Many of the leading private banks are foreign-majority owned, yet they are considered Indian banks. Given the realities of the capital market, it is impossible to force Indianisation of their ownership. The larger issue is that the Reserve Bank of India should not have policies that encourage even more foreign ownership, which would be the inevitable result of insisting on diluting Indian bank promoter holding in favour of widely-held shareholding. While technically the dilution of promoter holding will result in more broadbased shareholding, the fact that FIIs follow the lead of a couple of advisory firms means that some of them will vote in a coordinated fashion, as has happened with HDFC. This takes away the perceived advantage of broadbased shareholding. Further, FIIs voting in such coordinated fashion would be operating outside of the 15 per cent voting cap on a single shareholder. As a result, the end result would be counter-productive.

Besides, after the experience with ICICI Bank, it cannot automatically be assumed that widely-held shareholding necessarily implies better corporate governance. The counter-argument could equally apply, that better governance might result if the controlling interest has greater 'skin in the game'. It is probably a good time to examine whether the ownership rules relating to private banks need to be changed or tweaked.

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