No due diligence

India's institutional investors have been sleeping on their job

In contesting the decision of Suzuki Motor Corporation of Japan to wholly own the proposed factory in Gujarat instead of allowing its subsidiary Maruti Suzuki to set it up as mooted earlier, mutual funds and the state-owned Life Insurance Corporation have taken the path less travelled by domestic institutional investors. Seldom have they questioned decisions that could adversely impact the non-promoter shareholders. A study by InGovern, a proxy advisory firm, shows that in 2013 mutual funds abstained from voting on 51.5 per cent of the 28,290 board resolutions, favoured 47 per cent and voted against only 1.5 per cent. The last time they had kicked up a storm was in late 2008 when Satyam Computer Services announced that it would merge Maytas Infra and Maytas Properties into itself. It was their opposition that led the company to abandon the plan. Satyam imploded less than a month later. There have been a few more instances - for example, the mutual funds recently raised their voice against the price paid by Siemens of Germany to buy shares in its Indian subsidiary - but such interventions have been infrequent and often half-hearted.

Mutual funds say they have hundreds of companies in their portfolios; if they start analysing each and every board resolution, they will be left with no resources to manage their money. But the argument is weak. Compare this with the United States, where every move is analysed threadbare by institutional investors. Even large and successful companies, such as Walmart and Microsoft, have to answer uncomfortable questions raised by institutional investors. One reason for such a state of affairs in India is that investor activism is not in the country's DNA. In the past, all financial institutions and most large banks were owned by the government. Their nominees on the boards of firms were all silent spectators. The only time these institutions were stirred to action was when the government decided to "fix" some errant promoter or a potential acquirer. At all other times, they let promoters have their way. Private mutual funds are of recent vintage in the country. And their share of stock market value is only 1.5 per cent, much smaller than that in the US (19 per cent). They have, therefore, never been vocal about their views on governance. They have also been hamstrung by the fact that the Companies Act (of 1956) had no provision for class action suits, where smaller shareholders can get together and claim damages from the company.

Some of these issues have been addressed in the new companies law. It provides board representation for minority shareholders, class action suits and even exit options. For instance, if the company wants to use the funds raised in a public issue for a purpose different from the one disclosed to investors, the dissenting shareholders have to be provided the option to sell their stock. The Securities and Exchange Board of India (Sebi) too has been active in this field. In March 2010, the stock market regulator said that all institutions would have to disclose how they vote on various resolutions. Sebi is now known to be exploring the possibility of creating a platform where minority shareholders can raise their concerns. The ecosystem has also been helped by the rise of a handful of shareholder advisory firms in the last few years. The recent issues they have raised include the appointment of a member of the promoter's family on the board of TVS Motor Company, the reappointment of three long-serving directors on the Hindalco board, remuneration paid to Jindal Steel and Power Chairman and Managing Director Naveen Jindal, rotation of the Infosys auditor, etc. It is for the country's institutional investors to take the next step of contesting such resolutions.